A €4bn Budget day suggestion – just how much could an Irish property tax raise?

Yesterday, the latest daft.ie report was released. More details here, but the overall gist is that asking prices fell 4.2% in the first few months of the year. Coupled with the falls in 2007 and 2008, this means that asking prices are now down 18% in two years. On the face of it, this may not have much to do the Budget being released today, which has to deal with more pressing issues of the public finances, unemployment and the banking crisis. However, to say that Ireland’s stock of wealth tied up in residential property should have no role in plugging Ireland’s E25bn public finances gap is myopic in the extreme, particularly given Irish wealth-holding tendencies. Even if we rule out a property tax, we should at least know how much we’re throwing away in potential tax revenues, and this blog post hopes to establish approximately this potential is.

No harm, first, to recap the fiscal crisis Ireland faces, outlined in the chart below. In 2007, the Irish government expected that in 2009, tax receipts would be in the region of €56bn. By last week, the expected revenues for the year had slid down to €34bn. This €22bn gaping hole is staggering, as it represents a collapse of 40% in revenues. Any organisation with a 40% collapse in revenues has to re-examine its entire business model and Ireland is no different. Fixing the €20bn-plus gap between income and expenditure will require taking more money in and spending less. My contribution on the debate about spending less is for another day – you can probably get some inkling of what I think here – but on raising more, we have to look again at property. Property taxes in Ireland are based on transactions – we now know, and probably deep down knew all along, that the huge amounts the government was taking in over the past few years were totally unsustainable.

Government estimates of Ireland's 2009 tax take over time

Government estimates of Ireland's 2009 tax take over time

If we don’t tax property transactions, how will we tax property? And what contribution to plugging our €20bn gap can property make? Recent articles by the Sunday Independent and the Irish News of the World have discussed the scale of how much has been wiped off Ireland’s property market, while the combined report by stockbrokers Davy, Goodbody and NCB mentioned the potential revenues that could be earned by introducing a property tax in Ireland. So just how big is Ireland’s property market? The answer is about €460bn, as is shown in the graph below. The graph uses 2006 Census data on the number of households in each county, Dept of the Environment figures on new houses built in each county since 2006 and daft.ie quarterly average house prices by county.

The value of Ireland's residential property, 2007-2009

The value of Ireland's residential property, 2007-2009

The graph also shows that the total value of Ireland’s residential property is about E100bn less than what it would be were no crash to have occurred. A similar amount has also been wiped off Ireland’s stock exchange, which is plotted on the same scale to allow comparison but whose remaining value is €30bn, compared to the €460bn still in Ireland’s homes.

Supposing the housing crash continues so that Ireland’s 1.6 million homes are worth perhaps E400bn by the time they bottom out. While well below the €600bn or so that it “could” have been, this still represents a huge potential stock of wealth that is largely untaxed. Simple maths says that a property tax that averages 1% could raise €4bn per annum. Assuming that the government will be aiming for a three-year correction to 2012 that lifts tax receipts by €10bn a year, while it cuts spending by €10bn a year over the same period, a property tax could solve 40% of Ireland’s tax woes. The average household’s annual tax bill would be less than €3,000 – or about €50 a week.

How would a property tax work? There are of course some significant issues that Ireland would have to iron out first, before a property tax could come in. For example:

  • Politically, older citizens have proved sensitive to the idea that the government might have access to some of the wealth stored in their homes, even if it’s to pay for their healthcare. The illiquidity of houses raises the prospect of retirees having to downsize to avoid tax bills. While this is normal in many places, particularly in the US, it would require a change in mindset here. Put more bluntly, the idea that people should be entitled to have any wealth stored away in property, as opposed to other forms of wealth, untouched by the government is out of date.
  • Recent purchasers would have to be given property tax credits, so that double-taxation through stamp duty and then the property tax would be avoided. Those who made particular purchases based on stamp duty arrangements that existed at the time may also feel hard done by.
  • Measurement of house prices would become even more important, as it would have tax implications. In this day and age, though, accurately measuring house prices should not be an arcane task. Measures such as the daft.ie and ESRI/ptsb series are both based on well established hedonic price methods, which could easily be adapted to official Revenue Commissioners data, if these data were made available as they are in most other countries.
  • An instant extra tax burden is probably not what the economy needs now. Phasing it in gradually over the coming 3/4 years would be advisable as it would allow adjustment to a new system, while also showing medium-term planning on the part of the government.

Nonetheless, there are significant advantages to a property tax:

  • It gives the government a steady generally acyclical revenue stream and has an automatic stabilizer effect – i.e. the tax burden households face goes down when prices slump and more than likely their confidence slumps too.
  • There is lots of potential in a property tax to achieve other goals as well as revenue-raising. (Indeed, for the purists, taxes should only be introduced when other aims will be served.) For example, the average of 1% could hide differences, if the government wanted to incentivize, for example, energy efficiency. Houses achieving carbon neutrality or some top level of energy efficiency could be exempt from property tax, or perhaps pay a minimal rate of 0.25%, while homes that incur a significant burden on the rest of society might have to pay signficantly more. (This would require significantly more planning and guidelines for consistent rating than the recent BER scheme.)

Given that we’re talking billions – perhaps even twice as much as the joint report by the main stockbrokers suggested – this should definitely be explored in more detail over the coming months.

Growth, inflation and investment: hot topics in emerging markets

Having recently discovered the fantastic word-cloud abilities of wordle.net, I decided to play around with it. I took the top 500 stories on Google News, for the term ‘Emerging Markets’, from June 2008. I had to make quite a few adjustments to take out names of newspapers etc., and the cleaning still isn’t complete, but nonetheless, this kind of thing will probably become a lot more common as we try and develop ways of managing the flood of information out there.

Perhaps no surprises in the word cloud, but I still found it very interesting. Growth, inflation and investment/investors are the major news topics online for emerging markets. Oil and demand are also important. I find it interesting that global is so large – presumably that’s the online news world coming to terms with the ever greater importance of emerging markets in the global economy. Previously ‘hot topics’ such as development or sustainability don’t really register, while emerging topics such as diversification or decoupling are not taking centre stage yet.

Economist likes sociologist’s book – Shocker

As everyone knows, economists and sociologists are the faculty equivalent of cats and dogs. As an economist, I’m more or less brought up to think that sociologists are a bit funny, really, and their models and ways of explaining the world around them good cannon fodder.
Cover of \'Before European Hegemony\'
Imagine my surprise, then, when I opened this book recently – it having been part of a bulk Amazon order of titles that sounded more or less up my street – and read up on the author… a sociologist! Not only that, the book was twenty years old! Many people will stop now having learnt what I thought would be the only lesson to be learnt from this entire episode: always find out a little bit more about a book before you part money for it. In fact, I think there’s an old English saying along those lines… don’t cover a book with a judge, or something similar.

Anyway, where was I? Oh yes, the book. I decided to do as a Baz would want me to and do one thing that particular day that scared me. Besides, not knowing an awful lot about non-European economic history during the period A.D. 1250-1350 year dot-2008, surely I’d learn something, right?

Sure enough, once I got past the fact that I’d picked out a textbook for a sociology course from the 1980s, I never looked back. The writing is structured, with chapters organised around each on of the 9 spheres of economic activity identified. The paucity of non-European data – which has indeed blinkered somewhat economic historians and cliometricians writing recently – is tackled head-on, rather than ignored. In the style of a true economic historian, she goes on the hunt for proxies to inform the scale and scope of international trade between, for example, the Indian east coast and the South-East straits.

There are a few annoying habits throughout the book – a bit of name-dropping or over-indulgence in highly theoretical or fringe debates, particularly in the notes – but this is an excellent introduction to a fascinating period in world history. Particular points of interest include:

  • the analysis of China and its technological advances and wealth of records
  • the Middle East, the fascinating Genizah haul from medieval Cairo, and how the ban on usury was overcome by Muslim traders
  • and the emergence of Europe from its Roman imperial shadow and taking its place among the world system (before, ahem, re-making the entire system in its own image)

So, while cats and dogs may still not be on best terms, a few more books like this will put paid to Disney’s plans to release ‘Economists and Sociologists’!