This cruel form of double taxation may not last

Ireland was for long an outlier in the rich world in that it did not extract from its citizens an annual tax on the value of their homes. Our unusual attitudes to property and our equally unusual attitudes towards tax – the small household charge triggered a massive tax revolt while huge increases in personal taxes and VAT have been met with little more than grumbles – may explain this. So, too, does our highly centralised political system whereby local government wields less power to tax and to spend than in almost any other European country. (Property taxes are usually the main income source for municipalities everywhere).

Revenue collapse
But crisis brings change. The collapse of tax revenues, which began in 2008, has been the single biggest factor in causing the State's debt to soar to €200 billion (massive bank bailout costs and increased recession-related spending, such as unemployment benefit, were the two other lesser factors).

As such, higher taxes in the form of brand new taxes and higher rates on existing ones were inevitably going to form part of the response to the fiscal crisis.

The decision to join most of the rest of the developed world by introducing a property tax was inevitable once the efficiency-loving technocrats of the troika started to have a say in Ireland’s economic management in late 2010.

The solid logic of taxing property is two-fold. First, efficiency-focused economists believe it to be less damaging than most other taxes, such as those on work and investment, because it doesn’t disincentivise either of those two vital activities.

Second, because property taxes must be paid regardless of economic conditions, they tend to reduce volatility in government revenues, particularly in times of slump.

Developed countries
For both of these reasons developed countries tend to have some form of property tax.

Given the extent of the brouhaha this property tax has caused, one might be forgiven for thinking its introduction would make a big contribution to closing the huge gap between the €71 billion the Government plans to spend this year and the €59 billion it expects to raise in revenues.

Alas, despite the angst it has caused many hard-pressed householders, its impact on the State’s budgetary position will be very small.

When implemented in full next year, it is expected to yield €400 million annually – well below 1 per cent of total Government revenue. That, in layman’s terms, is a mere drop in the Exchequer bucket.

The small impact the tax will have as currently planned has caused some people to wonder if it is not the thin end of the wedge which the Government will hammer ever harder in the years to come as a means of separating taxpayers from more of their cash.

That is unlikely. Across the 34-member Organisation for Economic Co-operation and Development, property taxes paid by individuals and businesses account for just one-twentieth of total tax revenue on average, a share that has stayed almost perfectly stable for over 30 years.

A narrower definition shows that tax paid by households on immovable assets (bricks and mortar for the most part) accounted for a mere 0.8 per cent of total revenues across the OECD in 2011. It is not surprising that such taxes are miniscule compared to governments' big earners: income taxes; consumption taxes, such as VAT; and profit taxes.

Double taxation
Property taxes are taxes on wealth. Given that wealth is mostly made up of years of saved income upon which tax has – or should have been – paid, property taxes amount to double taxation.

While paying tax is universally unpopular, paying it twice on the same money tends to infuriate folk.

This, combined with the particular Irish dislike for writing cheques to the taxman, makes it politically infeasible to raise property taxes much more in the future.

However strong the logic of higher property taxes, the political cost would appear to outweigh hugely the fiscal gain.

If one had to bet between further significant hikes in the tax or political parties promising to abolish it at the next general election, the latter option would appear more likely.