Debates about wealth taxes tend to mushroom up after big crises. We had them post 2008. On paper, they offer a solution to the two things that financial emergencies leave in their wake: depleted public resources and greater inequality. The anvil of Covid has fallen disproportionately on lower-paid workers, while those on higher incomes with remote-working options have been insulated, illustrated by the increased level of savings. The recent surge in house prices and rents also favours the wealthy. You can see how a wealth tax might be presented as a corrective to these trends.
The UK's Wealth Tax Commission has proposed a one-off wealth tax to pay for the country's Covid bill. The tax would be based on the value of all assets: homes, businesses, investments, pensions, savings – everything an individual owns or jointly owns apart from low-value items such as computers. In terms of rates and thresholds, it gave several examples. One involved a tax of 5 per cent on an individual's wealth in excess of £500,000. This could raise £260 billion (€305 billion) provided the valuation date is set prior to any announcement to reduce the scope for avoidance and the payment spread over five years to ease liquidity concerns.
Proponents argue that the once-off nature of the tax – as opposed to a recurring levy – was less likely to see rich people moving their assets offshore, a reason often cited against wealth taxes. The UK proposal has reportedly been discussed by the Commission on Taxation and Welfare here, and its chairwoman, Niamh Moloney, has confirmed that the commission would examine wealth taxes as a solution to Ireland's funding problems.
We have very little research in the area. One study by the Economic and Social Research Institute in 2016 suggested a 1 per cent tax on net wealth in Ireland with a low threshold (applying to wealth above €125,000, double if married), and with no exemptions, could raise €2 billion.
Smaller Irish outlay
Alternatively, the same levy with a high wealth threshold (applying to wealth above €1 million, double if married) and with large exemptions (for the main residence, farms, business and pension wealth) – similar to the one adopted in France in 2016, which triggered an exodus of extremely wealthy people – would net the exchequer just €53 million.
The UK proposal is viewed by advocates as a way of paying the country’s Covid bill (some £372 billion and counting). Ireland’s pandemic outlay has been considerably smaller, even on a per-capita basis (€28 billion). Our public finances have also been cushioned by stronger-than-expected tax receipts. Our debt servicing costs also look likely to remain lower for longer, due to the maturity profile of government debt. This appears to negate the need for a new tax to pay for the crisis.
Ireland’s financial problem is different. We need to raise revenue sustainably into the long run to pay for a bigger and better-run State – one that has adequate levels of social housing, better transport systems, better health and water infrastructure and one that can pay for the cost of an ageing population.
A once-off wealth tax wouldn’t deliver revenue over the long term while a recurring wealth tax – similar to what Sinn Féin advocates – runs the risk of having people with mobile wealth avoiding it.
The problem with wealth taxes is they don’t tend to generate what proponents expect primarily because wealthy people use loopholes, valuation schemes, trusts and other structures to lower their liability or avoid the tax altogether.
Because most wealth in Ireland is tied up in property – about 90 per cent, according to the Central Bank of Ireland – you could argue that the local property tax (LPT) is a de facto wealth tax. The pension levy imposed in the wake of the financial crisis also meets the criteria. The term "wealth tax" tends to elicit a more emotive response, so governments tend to shy away from using it.
Long-term problems
Squaring the circle of Ireland’s funding issues is now a key question. In a report earlier this year, the ESRI highlighted the potential for raising revenue by abolishing certain tax reliefs linked to pensions and capital gains tax, some of which, it said, had “questionable economic rationale” or were poorly targeted.
When you retire, you are able to withdraw a certain portion of your pension fund, tax free, up to a limit of €200,000. Many argue those with larger pensions are the main beneficiaries .
Another option is removing the capital gains tax relief for entrepreneurs, which allows company shareholder-directors to pay a reduced 10 per cent rate on assets owned by a company. Many are circumnavigating income tax via this relief.
The Commission on Taxation and Welfare is also due to consider the merits of replacing the LPT with a broader site value tax.
The current LPT regime only applies to residential property but a site-value tax, drawing in non-residential and business premises, potentially instead of rates, has big revenue-raising potential.
It is too early to say what the commission will recommend but a shake-up in the current system of reliefs and a revamped property tax are plausible options.
For the past 30 years – excepting the crash period – strong, jobs-rich growth and bumper taxes have allowed us to avoid the central question of how we fund ourselves into the future. A once-off wealth tax is a short-term fix but our problem is long term.