Options for a wealth tax in Ireland

[Brendan Burgess]

I attended a paper by Tom McDonnell of TASC on options for introducing a wealth tax. It followed a paper by the Nevin Research Institute, doggedly repeating that the top 10% of households in Ireland pay an effective tax rate of 22.5%, so I was expecting more nonsense.

But it was a very well thought out paper which you can find here.

[broken link removed]

It sets out the pros and cons, almost in a Civil Service type briefing. It also sets out the features which a wealth tax should have. It gives a good account of wealth taxes in Ireland and other countries.

ABSTRACT
This paper considers the advantages and disadvantages of introducing a net wealth tax intheRepublic ofIreland. The implications for vertical and horizontal equity are discussed, as are theimplications for economic efficiency, growth, savings and potential capital flight. There areother major questions. Are there administrative barriers to its introduction? How should debtbe treated? Who
should pay the tax? How does the tax relate to other taxes? How should assetsbe valued?

The key objectives of a net wealth tax are to raise a meaningful amount of revenuefor the exchequer and improve horizontal and vertical equity while at the same timeminimisingadministration and compliance costs, minimising economic distortions, and minimising the riskof capital flight. The tax structure most compatible with these policy objectives is one witheither zero or very few exemptions and reliefs, a high threshold of liability, and a flat marginal
rate that is set at a low level.


Nevertheless, for practical reasons it would be necessary to exempt
certain asset classes, for example human capital. There is a general lack of good data on thedistribution of wealth in Ireland and the potential revenue yield from a net wealth tax is highlydependent on the degree to which wealth is concentrated in the right hand tail of thepopulation.Even so, ayield of
at least 0.1 per cent of GDP appearsvery much compatible with a
threshold of liability for net wealth set at €1 million and a wealth tax rate set at 0.6 per cent. .Such a yield is attainableeven under very conservative assumptions of aggregate wealth and thedistribution of wealth in Ir
eland. Less conservative assumptions of the degree to which wealth
is concentrated in the top 1to 2 per cent of the population generate substantially higher estimated yields

Some stuff I took from it:

We already have wealth taxes in Ireland

• CGT - €413m in 2012 (down from €3b in 2007)
• CAT - €283m in 2012
• the Local Property Tax

But CAT is not fit for purpose



The trend in other countries is to abolish wealth taxes



It won't raise very much money. A rate of 0.6% on wealth above €1m would yield €150m



Wealth taxes tend to be poorly designed and tend to have a high administration cost - up to 25% of the tax raised


Wealth data in Ireland is poor, so it's difficult to forecast the yield

The family home is probably the biggest component of wealth

Summary of arguments in favour of a wealth tax

1. [FONT=&quot]There is a potential revenue for the exchequer (which means we could either reduce taxes elsewhere or we can increase public spending – at least once the deficit is closed)[/FONT]
2. [FONT=&quot] [/FONT][FONT=&quot]Supports vertical equity (the social solidarity argument i.e. it redistributes wealth – wealth tends to be much more unequally distributed than income)[/FONT]
3. [FONT=&quot]Supports horizontal equity (horizontal equity is the principle that two people with the same taxable capacity should pay the same amount of tax – income and wealth both provide taxable capacity)[/FONT]
4. [FONT=&quot][/FONT][FONT=&quot]Helps with administrative efficiency (helps detect and discourage evasion of other capital taxes by providing data that can then be cross-checked with other tax returns)[/FONT]
5. [FONT=&quot][/FONT][FONT=&quot]Helps the fight against tax evasion (provides evidence of assets that might otherwise go undisclosed or undeclared)[/FONT]
6. [FONT=&quot]Encourage more productive use of assets (e.g. land lying waste or being used unproductively)[/FONT]

[FONT=&quot]
[/FONT]Summary of arguments against

• It's a double or triple taxation - we are taxed when we earn it; when we spend it and now when we save it prudently
• It may affect savings and capital accumulation
• There is a big risk of capital outflow
• It will be evaded as capital transfers abroad are very easy
• It is expensive to collect
• Progressive income tax is preferable

Features of a fair wealth tax

• All assets - no exemptions e.g. farmland should not be exempted
• Maybe exempt pension funds
• Net assets after borrowing
• A high threshold e.g. €1m of net assets
• A flat low rate e.g. 0.6%

No exemption for farmland
If the threshold of liability is set at a sufficiently high value; Relief is appropriate if the threshold is set at a low value; income related ceiling provisions may be appropriate as a counter-cyclical alternative to reliefs.

 

[Brendan Burgess]

My initial views - they are fairly random at this stage.

A lot of wealth was generated during the Celtic Tiger and subjected to very low taxes. It would be fair to have a wealth tax on this. My preference would be for a one off, rather than a recurring tax.

It would probably be better to reform CAT and CGT extensively. Remove the death exemption from CGT. Increase the CAT rates extensively.


We had a massive negative wealth tax in Ireland in terms of the bail-out of depositors in Anglo Irish Bank and Irish Nationwide, and, to a lesser extent, AIB and EBS.

Farmland is a particular problem. Farming is in uneconomic activity. The annual yield on residential investment property would be far higher than the annualy yield on farmland. It would not be fair for them to pay the same wealth tax.

While I would be prepared to pay a one off wealth tax towards paying down the national debt, I don't want to pay a recurring wealth tax to feed high social welfare payments and wasteful government expenditure.

 

[Conan]

Brendan,
At least they would exempt "human capital". Otherwise how would they compare the human capital value of say Vincent Browne or Mary Lou versus the capital value of Michael O'Leary or Denis O'Brien?

 

[Setanta12]

Taxes on capital of this type (note, not taxes on capital gains) are going out of fashion - IIRC, France and Singapore still have them ?

 

[DerKaiser]

The pensions levy will collect over €0.6bn next year, it's a wealth tax
The household tax will collect another €0.5bn, it's a wealth tax.

When interest rates return to some kind of long term norm, DIRT tax of 41% + 4% PRSI on deposit interest will yield over €1bn per annum. That's also a wealth tax as it erodes the real value of savings, it's just not obvious in the current low interest / low inflation / low growth environment.

That covers all the main sources of wealth, generating €1.5bn to €2bn in tax revenue. And somebody feels the need to produce a rambling report, implying we have no wealth taxes, the purpose of which is to propose a convoluted means of raising an additional €0.15bn??? Seems like someone has missed something here!

 

[Brendan Burgess]

And somebody feels the need to produce a rambling report, implying we have no wealth taxes, the purpose of which is to propose a convoluted means of raising an additional €0.15bn??? Seems like someone has missed something here!

I take it so, that you have not read the report?

He specifically classifies CGT, CAT and the Local Property Tax as wealth taxes.

He also quantifies their yield.

The 0.75% Pensions Levy may raise a lot next year, but it will raise very little after that.

The report is well worth reading, whether you agree or not with a further wealth tax.

Brendan

 

[DerKaiser]

Just glanced through it earlier, focused on the section detailing net household wealth. Maybe it's a good read in itself, but was a bit put off in the bit I read by the effort it took to arrive at an estimate of household wealth (starting some time in the 60s).

If I've missed something fundamental by skimming through it I'll hold my hand up, I just assumed the purpose was to highlight a fair, lucrative and untapped source of revenue for the state. My conclusion is still that we do tax wealth, and what's being proposed here doesn't really ultimately offer much in the way of a material suggestion at closing the deficit.


I'm sure the research is interesting.

 

[Brendan Burgess]

Hi Kaiser

As I said in my opening post, I was expecting nonsense, as the Nevin Research Instiute have some involvement in it. But it's a very good paper.

As the abstract says

This paper considers the advantages and disadvantages of introducing a net wealth tax intheRepublic ofIreland. The implications for vertical and horizontal equity are discussed, as are theimplications for economic efficiency, growth, savings and potential capital flight. There areother major questions. Are there administrative barriers to its introduction? How should debtbe treated? Who should pay the tax? How does the tax relate to other taxes? How should assets be valued?

Later on he outlines the existing taxes:

1. Taxes on wealth transfers. Estate tax, inheritance tax, and gift tax are all taxes on wealth transfers. Most OECD countries employ capital transfer taxes in at least one form. Ireland taxes inheritances and gifts through Capital Acquisition Tax (CAT). CAT was originally introduced in Ireland in 1976 as a replacement for estate duty.

2. Taxes on capital appreciation. Capital appreciation is partially taxed in Ireland through Capital Gains Tax (CGT). CGT was originally introduced in Ireland in 1975
and has been altered many times since. Most countries have CGT on sales. CGT on gifts or transfers on death are less common.

3. Taxes on wealth holdings. A net wealth tax is a recurrent tax on the capital value of assets less liabilities. France, Norway and Switzerland all have recurrent wealth taxes, while Spain and Iceland have introduced recurrent wealth taxes on a temporary basis. Ireland operated a net wealth tax between 1975 and 1978. A recurrent wealth tax typically refers to an annual tax on the stock of net wealth – i.e., a tax on the value of gross assets minus liabilities. Such taxes may be applied to individuals, to Discretionary Trusts, or to businesses.

 

[DerKaiser]

On reflection, I did miss the fact that it is very fair, balanced and objective. I don't think the paper will generate much enthusiasm for wealth taxes, but it's probably done a good service towards the debate.

So marks our of 10?
9 for setting out all the necessary elements for an informed debate on wealth taxes
3 for making a case for introducing them

 

[Brendan Burgess]

So marks our of 10?
9 for setting out all the necessary elements for an informed debate on wealth taxes
3 for making a case for introducing them

Definitely agree with the 9/10 for informing the debate.

They make the case for and the case against. It is not the usual paper which calls for something and then puts forward the argument for it, while ignoring all the arguments against.