Wealth Based Taxes Not Doing Their Job
The French Economist Thomas Piketty has weighed in on the fairness of Ireland’s Property Tax (as reported by TheJournal.ie). Although he has said he is in favour of wealth based taxes such as the property tax, he pointed out their main aims are to target the wealthy most acutely.
Unfortunately across much of Ireland today, many homeowners in relatively expensive properties are no longer always “wealthy”. Up to their eyes in debt, many are unable to pay just as much as any other homeowner in the country in a lower value home.
Piketty makes a broad case that it is unfair on these indebted homeowners:
Some people even have a higher mortgage than their property is worth. It seems to me that you should not pay the same property tax as someone without a mortgage.
However, detractors will say that it is the homeowners own fault for encumbering themselves with such a big property and oversized mortgage. Many would call that unfair – the Property Tax wasn’t introduced until after the boom and bust, plus everyone was in the same boat when prices took a turn. Certainly the government won’t publicly agree as they begrudgingly accept a level of responsibility for the whole situation (rightly or wrongly). And no government will want to open up the possibility of further relief which would reduce all important tax revenues.
Is the Property Tax Unfair?
In many other countries, homeowners pay local taxes to maintain the roads and local services. Ireland has long gone without one, relying on major income, business and consumer taxes to all add to the government coffers, to later be shared out to local councils. However, this is arguably unfair on residents in rural areas or anyone outside Dublin essentially. A working property based tax should be a fairer assessment of the right payment for local services in your area. Once the tax is properly ring-fenced it should be a fair system to raise much needed income for local councils.
However, the property crisis has made this less simple. Hard-up homeowners already struggling to make hefty mortgage repayments are now having to pay an extra €200 t0 over €1,000 per year. But in all reality, the grand total of this tax is barely a drop in the bucket when compared to the amount of tax individuals pay in income tax and PRSI/USC, plus VAT on purchases. The average person in Ireland pays between €6,000 to €10,000 per annum in combined income taxes and VAT. The richest 40% can pay between €15,000 and over €60,000 per annum.
These figures come from Ronan Lyons’ excellent article in 2012 where he considered the €100 Household Charge (now replaced by the Property Tax) as “simple but not fair“. In that case it was a flat rate charge levied against all homeowners no matter their income or value of their property. This was unfair on lower income families of smaller homes, and a joke for multi-millionaire property owners. He makes a good point that:
If a tax is simple and fair, it will be popular (or at least as accepted – when was a tax ever popular?!).
The Property Tax is somewhat simple but it is certainly fair – because it is based on present values – albeit the valuation and banding system could be improved. It is exactly the same an income tax based directly on income. It would be unfair for everyone to be charged a flat rate income tax whether they earned €10,000 or €100,000. Progressive taxes need to be means tested and the Property Tax in it’s current format is the best way of doing that so far.
Should Homeowners in Negative Equity be Exempt?
This would be a huge relief for some but completely unmanageable. There are massive differences in the scale and breath of mortgage debt in this country. But also every household is different.
We can take a look at an example of a typical family household who were unfortunate to buy near the peak of the boom with a large mortgage. 7 years on they may be sitting on a property worth between 50% and 70% less than what they paid, and therefore a mortgage of perhaps 120% to 150% of it’s current value.
- One family might have taken a large mortgage but affordable for their income and means. They’ve continued in the same job, fortunate to be in a recession-proof industry, and are earning a fair income more than 7 years ago. They are comfortably paying off their mortgage each month and are able to pay their Property Tax.
- The next family might not have been so lucky. Hit by the recession, lost jobs and reduced income. Maybe had more children so mounting childcare costs or one is out of work. They may have diligently struggled to keep up with their mortgage repayments but the extra tax is the straw that broke the camel’s back.
However, crucially both of these families might have exactly the same level of negative equity, or a house that had lost the same value. One is obviously capable of repaying – the other less so. And lets not forget the other type of property owner – those so underwater that they stopped paying their mortgage repayments years ago and have ducked all possible taxes – who are in so much negative equity it’s not worth bothering to pay a few measly €1,000s here.
So if the government were to allow exemptions or relief, how to they decide? It may not just have to be on negative equity but a whole host of means-tested criteria. It will cost the government double the exemption just to manage the system for who repays what!