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Dublin: 17 °C Saturday 20 September, 2014

Column: The property tax shows our leaders are banking on another bubble

Our Government appears to be depending on another round of runaway price inflation, writes Aaron McKenna – but where does that leave us?

Aaron McKenna

IN BUDGET 2013, the worst option for the country’s economic wellbeing is to hit people with more taxes. The worst option for the ordinary person is a tax that will lead to government attempting to jack up house prices for its own good. And the cherry on top would be if the government managed to introduce this tax in such a way as to create yet more uncertainty in consumers’ minds, discouraging them from spending job-creating cash in the last months of the year.

Paddy Power isn’t bothering to give odds on which options our government is going for.

The big-ticket item in Budget 2013 will likely be the introduction of a property tax. Fresh from the skirmish over the €100 household charge, our intrepid government is having a pre-show dinner row with the IMF over the scale of the tax, as a warm up to the theatrics that will come when they introduce it to the Irish people.

The course the government is steering on the property tax is devoid of any original thinking, and ties neatly back into the crushing need of policy makers to will our property market back into a boom. In introducing a value-based tax our leaders are banking on an increase in house prices that will deliver more and more revenue to their coffers.

It was a perverse desire to see more and more property being sold at higher and higher prices that pushed Fianna Fáil to pour petrol all over our last boom. The current government inherited the Fianna Fáil thinking that ties the success – and the long term cost – of our banking bailouts and NAMA to a forthcoming property price boom.

Leave of their senses

The value-based property tax is yet another cog in our economy that will hinge on Irish people taking leave of their senses in the coming decade or two. This government is just as incentivised to push Irish people to overpay for property as the one that came before it.

Any tax increase at this time is a bad idea. Ministers like Leo Varadkar have pointed this out, saying that this tax was coming “at the worst possible time” for people before shrugging his shoulders and, essentially, telling us plebs “tough”. It shouldn’t surprise us that our government is too feeble-willed to take decisive action against another job-killing tax by perhaps making some choices on spending; but it was surprising to see Michael Noonan stand up and directly contradict the IMF.

Our bailout masters want us to introduce a tax of 0.5 per cent on homes. Noonan said no, we’ll go for 0.25 per cent or so; and his minion Brian Hayes has continued the softening-up by saying that we’ll only have the tax for half the year in 2013. Much as this might be good politics, it’s poor economics; and once again the government is taking political expediency over certainty.

We have a known target of €1.25 billion in tax increases due in budget 2013. A 0.5 per cent property tax would deliver €1 billion or so, a 0.25 per cent tax €500 million; and a half year of it only €250 million.

At the very least the government could have delivered some certainty to Irish consumers by telling us that we’ll get a 0.5 per cent property tax and then some other small measures to make up the €250m owed.

Instead, now we have an additional €1 billion in new taxes the government will have to make up. Most likely they will once again leave us on tenterhooks as to whether it is our incomes, our cars, our water or something else we’ll be getting new bills for, introducing consumer uncertainty in what’s supposed to be the most profligate time of year. If we’re to get a rake of new taxes in 2013, we should at least be given the courtesy of a long runway to consider how it will impact our finances. This might mitigate the impact by leaving taxpayers the confidence to spend some money and create some economic growth.

Efficient use

A better property tax (or at least a less bad one) would be a site value based tax, such as that economist Ronan Lyons has been calling for. This tax would be based on the value of the land a building is on, not the building itself.

There are a myriad of reasons why a site value tax would be better.

A tax on the value of your property is a disincentive to many efficient things you could do with that building: For example, if you were to spend money to make your house more energy-efficient it would increase the value and, therefore, your annual tax bill.

A tax on the value of the land the building sits on incentivises more efficient use of that land. For example if you have a derelict site in a town or city you will pay the same tax for owning a wreck as you would for opening a shop or building an apartment complex. In the property value based tax system you will pay more tax if you do something efficient with the land.

A site value-based tax would also provide a disincentive to the speculative zoning of land – for example from farming to residential – because you’ll still pay the increased taxes on the land even if you’re doing nothing with it.

Any tax is going to have to contain a raft of offsetting exemptions and rules for those in negative equity, the poor, rural dwellers, and so on. There is no advantage or disadvantage to a site value tax when constructing these rules. But the for the government, the main upside in a property value tax is that they will get a windfall from a property boom.

That’s not very advantageous to you and I, Joe Citizens who really don’t need the government egging on higher home prices. And it’s not at all good for society that the property tax should discourage people from making the most efficient use of their land.

Aaron McKenna is a businessman and a columnist for TheJournal.ie. You can find out more about him at aaronmckenna.com or follow him on Twitter @aaronmckenna.

Read: More columns from Aaron McKenna on TheJournal.ie>

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