John FitzGerald: How increasing property tax will make Ireland a fairer society

While income is unevenly distributed, wealth is even more so, according to the latest European Union data. This is despite the fact that wealth is notoriously difficult to capture comprehensively, with the very wealthy the least likely to be counted. That means the true picture of wealth distribution is probably even more unequal than statistics show.

Thomas Piketty's major 2014 study showed how the distribution of wealth has become more unequal over time, a trend that continues to this day. The share of national income obtained by those who own capital has been increasing, with the share going to wage earners falling.

Other studies in the United States and in France have shown that long-term increases in the value of housing stock have been an important contributor to the growing levels of wealth inequality, in particular between housing “haves” and housing “have-nots”.

Publicpolicy.ie has also suggested that property tax should be levied on people's net equity in their homes, rather than the total value

A recent study by think-tank publicpolicy.ie has shown that housing constitutes about two-thirds of Ireland's gross household wealth. And almost two-thirds of that wealth belongs to people aged over 55.

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That’s not surprising. Most retired people have paid off their mortgages, while others over 55 have only small amounts of mortgage debt outstanding. This contrasts with those in their late 30s or 40s, who bought at Celtic Tiger prices and have heavy mortgage debts with little – or even negative – equity in their homes.

And many of the under-40s haven’t yet managed to buy a home and are renting, and so have zero housing wealth.

The effects of the Celtic Tiger housing boom and bust, followed by today’s housing shortage and escalating home prices, have resulted in a more unequal distribution of wealth in the form of housing ownership.

Tax exemptions

While Ireland’s tax and welfare system is one of the most successful in the EU in terms of reducing inequalities in market incomes, it does relatively little to even out the distribution of wealth. The scale of tax exemptions for family members allows a lot of intergenerational wealth transfers to be made tax-free.

Sophisticated tax planning through webs of companies and trusts, as seen in some high-profile bankruptcy cases, enables the super-wealthy transfer on their fortunes.

Property tax (although only mildly redistributive in terms of income, according to ESRI research) can play an important role in addressing wealth inequality, given that housing is the principal component of household wealth.

The housing valuations used for property tax purposes have been frozen at their 2013 level, even though average house prices have risen by almost two-thirds since then. The effect of the valuation freeze has been that property tax bills have changed very little over the period, except where individual local authorities have chosen to reduce rates, as they can, by up to 15 per cent.

When valuations are frozen for a prolonged period, an increasing number of anomalies will creep in. An extreme example was rateable valuation, where rental values of the 1860s were the core of the system behind household rates, abolished in the 1970s.

For property tax today, rather than freezing values at 2013 levels, a better and fairer way would be to revalue houses at market rates, and reduce the tax rate to hold the tax yield constant. That approach would redistribute gains made where house prices grew more rapidly than average.

Net equity

Publicpolicy.ie has also suggested that property tax should be levied on people’s net equity in their homes, rather than the total value. That would reduce the tax for those servicing big mortgages.

However, such an approach would require those who own their homes outright to pay significantly higher property tax bills – maybe up to 30 per cent more – if revenues were to be maintained.

Because people cannot move valuable houses abroad, there is no escaping a property tax. When the government in the 1970s tried introducing a wealth tax covering financial assets, there was massive protest from the truly tiny number of people potentially affected. While such protests might be less effective today, it is now much easier to move financial assets abroad, so that legal avoidance and actual evasion of such a tax would be a real problem.

If we are concerned at Ireland’s uneven wealth distribution, one of the most effective ways to even things out would be to levy a higher rate of property tax. At a time when homelessness is a big problem, it seems appropriate that those who are well housed should pay a bit more to help local authorities fund better provision for those in serious housing need.