The speculation is that Brian Cowen will not reform stamp duty. He may be missing an opportunity, argues Marc Coleman, Economics Editor
No one can say he hasn't had an impact. Whether it is quite the impact he wanted to have is a different matter. Barely a wet weekend as the newly elected leader of the Progressive Democrats, Michael McDowell decided that reforming stamp duty was going to be a key plank in his party's sharpened identity. A few other parties have followed suit.
McDowell's first problem is that the housing market has also reacted to his initiative. The latest Permanent tsb/ESRI house price index suggests that house prices at the lower end of the market - the most likely area for any policy change to target - have fallen. After all, if stamp duty is going to be lowered, why buy now when you can buy after the budget and, possibly, avoid paying it?
Even if, as is likely, a reduction in stamp duty leads to price increases, this can only benefit both buyers and sellers. Sure, instead of paying stamp duty, buyers will end up paying a higher price for the house. But whereas the stamp duty goes to the Government, buyers will at least retain any price increment arising from its reform in the form of housing equity. And whereas banks will lend up to 100 per cent of a house price, they are less willing to lend buyers the amount they need to cover their stamp duty liability.
But reform is not inevitable. Despite being a Cabinet member, Mr McDowell forgot to consult his colleague Brian Cowen, who doesn't appear to have much appetite for change. The fact is, the Government needs the revenue it gets from stamp duty. An unwillingness to countenance meaningful reform has left the public sector with an insatiable appetite for spending increases.
Simply put, stamp duty is a money spinner for the Exchequer and the Department of Finance is loath to accept any significant changes to the tax.
In dealing with those objections, Brian Cowen would probably be wise to remind public servants how they benefit from benchmarking pay awards and generous pension conditions and to urge them not to push their own self-interest too hard.
But spending pressures are not the Government's only constraint here.
Considerable resources need to be targeted at adjusting bands across a wide spectrum of taxes. Whether it is VAT, income tax or capital gains tax, a growing number of taxpayers are finding themselves either paying a tax for the first time or paying a higher rate, simply because their turnover, incomes or asset prices have been pushed higher by an inflationary economy.
Then again, this is as much an argument for reform as against it. If income tax thresholds are to be increased in line with inflation, shouldn't stamp duty thresholds also keep pace with higher house prices? The fact that they haven't is what makes this issue such a live one. For first-time buyers, the lowest rate of duty, 3 per cent, applies to any house valued at between €317,501 and €381,000. Above the latter threshold, the rate escalates to 6 per cent. Moreover, that 6 per cent applies to the full value of the house, rather than just the portion above the threshold. Houses above €635,000 incur a 9 per cent rate.
The rates themselves are far above those in any other country. Average house prices here have now reached €400,000, over 10 times the average industrial wage. The first paradox here is that an average house is now beyond the purchasing power of an average income earner. But even if it were not, that average purchaser would fork out some €24,000 in stamp duty to the Government simply for having to buy a house, several times what they pay in income tax each year.
To date, most speculation about reform has focused on the possibility of increasing the exemption applied to first-time buyers. Last Thursday, the Labour Party argued that relief should also extend to those trading up to purchase modest homes.
As the call for reform now spreads from the right to the left, two more arguments for reform are becoming clearer.
A softening housing market presents the best opportunity for the side-effects of reform - a temporary price increase - to be absorbed.
Moreover, a decision not to reform would put this issue centre stage in the election campaign, prolonging the present torpor in the market not just until the election, but for a further 12 months, until the next government's first budget.