The problem with a wealth tax? There are not enough rich people

IMF report urges Government to raise more tax for public investment, but who will pay?

It’s edifying to think that a wealth tax or a solidarity tax on the super-rich could raise revenue for investment in public services. But it won’t. A study by the Economic and Social Research Institute (ESRI) back in 2016 estimated that imposing a French-style wealth tax – applied to assets exceeding €1.45 million – on Ireland’s financial elite would net the exchequer here a paltry €22 million per annum. Adopting a Swiss-style wealth tax, however, could generate €1.3 billion in additional revenue, the ESRI found. But there’s a sting in the tail. The burden of Swiss wealth taxes, which differ depending on the canton, fall on low and middle-income earners as well as the very wealthy. In the Swiss region of Schywz, for example, a wealth tax is applied to all individuals with assets, including income and property, exceeding €49,824.

Maybe there’s a better way to extract more tax from the rich but the Swiss example bears out an essential truth about taxes – they have to be broad-based to generate significant revenue. Unfortunately that means hitting a wide pool of people. That’s why tax is so politically divisive: everyone thinks everyone else should pay.

Politicians might play something of a slippery game in this department – promising one thing, doing another – former US president George Bush snr famously stated "read my lips, no new taxes" when running for election before presiding over a spate of them. But the electorate is equally guilty of berating government for the poor state of public services while punishing the politicians that seek to raise taxes to improve them.

Within hours of the International Monetary Fund (IMF) releasing its latest assessment on the Irish economy last week, which said Ireland needed to raise more taxes to fund public investment once the pandemic has abated, Tánaiste Leo Varadkar was reported to be telling Fine Gael colleagues there would be no income tax hikes. He was merely repeating what's laid down in the Programme for Government, namely a pledge not to touch income tax or USC rates.


Capacity constraints

Fine Gael has, for five years, promised to alleviate the so-called squeezed middle – those creeping into the higher 40 per cent rate on relatively low incomes – but surely the window for that came and went when the exchequer was awash with bumper corporation tax receipts a few years ago.

The IMF was merely highlighting a self-evident truth about the Irish economy, namely that – after 10 years of solid growth – it has begun to hit capacity constraints in several areas – education, transport, housing, water – and that future growth, combined with the shift to a carbon neutral society, requires Biden-esque public investment.

Between 2014 and 2020, the economy here grew by more than 50 per cent, largely as a result of a spike in investment and employment almost exclusively in the private sector. The surge created more than 400,000 jobs – 25 in the private sector for every one in the public sector.

The additional demand on public services has, however, resulted in bottlenecks across the economy. Everywhere you look there are waiting lists, supply shortfalls, congestion. If we don’t act we’ll have what US economist JK Galbraith referred to as “private affluence and public squalor”.

Borrowing to pay for additional investment is no longer an option in the wake of the high level of debt built up in recent months while the dividend from the economic growth is needed just to stand still, in other words to pay for age-related and demographic changes.

Tax options

Hence the renewed focus on tax. While there is a consensus that the tax base needs to be broadened, there is little agreement on how this should be done.

The recently established Commission on Taxation and Welfare, which will publish its findings next year, may shed light on the matter. In the interim, the conversation has centred on water charges, carbon taxes, the scaling back of certain tax reliefs relating to pensions and inheritance, and property tax.

Water charges, if we reverse back into them, would merely pay for the water utility and the upgrade of its creaking infrastructure while higher carbon taxes can’t be relied on if the economy is shifting against carbon usage. Environmental taxes are deployed to alter consumer behaviour so when they work the revenue falls.

A more extensive property tax regime is another route. A recent Central Bank study shows 90 per cent of household wealth here is held in the form of property, and that's true even for the wealthiest 20 per cent. By postponing the revaluation of the current local property tax (LPT) – repeatedly since 2016 – the Government has backed itself into a corner on the issue and seems loathe to push deeper into this potential source of revenue. Properties built after 2013 are still outside the loop.

The unfortunate truth for Government is that income tax – the area it has promised not to touch – is far and away the easiest place to garner more revenue.

That could involve bringing more low-paid workers into the net – we’re out of kilter internationally on having so many outside it – and/or changing the rates. According to Revenue, raising both income rates by one percentage point would generate an additional €1 billion for the public purse. This would require a major political backtrack and a public outcry but unless we broaden the base another way, this is what looms on the horizon.