Here’s a heresy for you: taxes in Ireland are too low. My guess is that most readers didn’t agree with that sentence. But, while it may jar with our sense of reality, it is undeniably true. Take income tax. The 2017 “Taxing Wages” report by the OECD compares the average tax paid by the same kinds of households in different countries.
Take a family, with one earner on the average wage and two children. In Ireland, once tax credits and cash benefits are accounted for, such a family pays just 8.3% of its income in tax (and USC). In the boom times, we actually had the crazy situation where such a family was a net recipient from the tax system. Things have improved since then, although only a bit.
As you can imagine, this is not how other countries operate. Across the OECD group of high-income countries, 27% of income is paid in tax by the average-earning family. Ireland’s low figure is nothing to do with a Boston vs. Berlin view of the world. There is a gap between these models, but it’s at a much higher level. In the US, the average-earning family pays 21% of its income in tax, while in the UK it’s 26%. In Germany, it’s 34% and in France it’s 40%.
How can that be, you might ask – particularly if you regularly read that Ireland has some of the highest marginal rates of taxation in the EU. Well, the key is the difference between average and marginal. Ireland’s very high marginal rates of taxation – you pay roughly half of your last euro over in tax, if you earn €35,000 a year – are needed to compensate for very generous tax credits.
What’s this got to do with property? There are three types of tax: income taxes, consumption taxes (like VAT) and wealth tax. Income tax, when done well, are very progressive – everyone pays something but richer households pay a bigger fraction.
Consumption taxes such as VAT are extremely regressive: they hit poorer households hardest. And Ireland’s VAT rate is one of the highest in the world.
When it comes to the last category – wealth tax – Ireland once again sticks out. By far the single biggest chunk of wealth in the economy, at least €400bn and probably closer to €500bn, is residential property. And, until recently, Ireland didn’t tax this at all!
Since 2013, though, Ireland has an annual Local Property Tax. This is set at a rate of 0.18% of the value of the property, although local authorities have some discretion and can vary it from 0.15% to 0.21%. Many authorities have already taken the chance to lower the rate as much as possible.
This week, Fine Gael leadership frontrunner – and thus, very likely Ireland’s next Taoiseach – Leo Varadkar proposed allowing local authorities to cut property tax further. To be fair, he couched it in terms of giving them greater freedom to set the rate.
However, the implication was clear – greater freedom for local authorities means greater freedom to lower property taxes. Unfortunately, this is precisely the wrong thing to do, if we want “strong and stable” local authorities, to borrow a phrase from across the water.
Compared to pretty much every other high-income country – including far smaller ones, like Cyprus and Malta – Ireland has the weakest local authorities. They lack financial autonomy and are thus hugely dependent on handouts from central government, who then dictate the terms.
In order to enable them to stand on their own two feet financially, Irish local authorities need to build up a far longer track record of a number of revenue source, with property tax chief among them. As it stands, the temptation will be far too great for local authorities to cut and wait for national government to fund a service instead.
In most other countries, property tax is at least four or five times the rate it is in Ireland. Having a property tax of 1% of the value of a home not only provides funds for local authorities, it also places a cap on property values – an in-built stabiliser on house prices.
It is obvious that Leo has one eye on 2019, when property tax bills are set to change as properties are revalued. They are currently frozen at 2013 values, almost exactly the bottom of the market, and market values have risen by 50% or more in and near Dublin, Cork and Galway cities.
This shows the obvious drawback to freezing tax bills – it creates an incentive to keep them frozen. The other drawback is that property tax can’t act as the brake on prices as it does in other countries. Dangling the carrot of lowering property tax runs the risk of 1970s auction politics, where various bits of government revenues are sold off.
We need to broaden and deepen the tax base – in particular when it comes to residential property, which makes up so much of all private wealth.
I am under no illusions that a “Tax Is Too Damn Low” Party will take off any time soon. But we as a country need to understand where our tax system is deficient and as a result both why our local authorities don’t have the funds they need and why our housing market will continue to swing more than most.
An edited version of this post was originally published in my column in the Sunday Independent.