Smart Taxes’s Site Value Tax versus the ESRI’s Property Tax

Ronan Lyons responded to media reporting of the ESRI’s recommendations to the Expert Group on Property Tax on the Irish Economy blog. Here is a snippet.  It is worth hitting this link and reading the flurry of comments.  I added my tuppenceworth too.

..The paper by Claire Keane, John R. Walsh, Tim Callan & Michael Savage [hereinafter KWCS] of the ESRI recommends an annual tax based on the value of the property, with exemptions for those below certain income thresholds. To me, this is definitely not the way the Government should be going. I have no issue with KWCS’s claim that their system would be fairer than the current household charge – to me, that is a very low benchmark. But aside from that, there is little I could recommend about KWCS’s system. In fact, there are three main flaws in relation to their proposal.

Firstly, there should be no exemptions from a property tax, only deferrals. If you are land-wealthy (and remember real estate made up three quarters of wealth in Ireland last time we checked) but income-poor, the State can wait until you ultimately sell it and then, through a lien or charge on the property, take the fair amount.

Secondly, a property tax should most certainly not be related back to income. If you want to punish people for having an income, then do that through an income tax. A property tax is somewhere between a wealth tax and a tool for making sure land is used efficiently. It is not supposed to be an indiscriminate revenue-raiser, as income and consumption taxes are – if you look internationally, property taxes are used to fund local services

Thirdly, as an expert of sorts in this area, I have to take issue with the following claim (as reported in the Independent):

Basing the tax on site size would be complicated because there is no database on site values. In contrast, a national register of property prices is being compiled.

It is most unfortunate that this appears to be what KWCS believe. In fact, particularly in a market as illiquid as the one we now have, the opposite is the case. I have already estimated the contours of land value in Ireland – see the map below, which is based on 1.5 million property listings from 2006 to 2011, and which controls for market conditions over time and for the fact that property types differ by location [more here]. (As before, I’m happy to share for free this and the underlying data with any Government body and to apply the model to any dataset they may have.)

The Tim Callan of the ESRI responded on the Irish Economy blog with a short reposte defending their proposal.  It is truly wonderful to see a public intelligent debate on this issue.

A conference paper  provides evidence relevant to some key choices in the design of a new property tax.  While the paper does not recommend a specific blueprint, it draws on evidence from other countries as to “what works” and analyses the impact of different forms of property tax on a nationally representative sample of households.

Ronan Lyons post yesterday contained three main comments on the paper.  Because some of these appear to have drawn primarily on an Irish Independent report that contained inaccuracies, rather than on the paper itself, it seemed best to issue this as a new post.

  1.  The first comment is that “there should be no exemptions from a property tax, only deferrals”.  The  SWITCH model is set up to analyse policy choices.  As I see it, the level of an income exemption limit is a choice variable, and in this context, zero would be Ronan’s preferred option.  Our research found a range of positive values in evidence in many countries. For example, the UK Council Tax Benefit effectively exempts those with incomes close to minimum social security levels. In Northern Ireland, they have set a higher income limit than in the rest of the UK. In our analysis we report income distribution impacts for the zero case, and also for levels at the State Contributory Pension and State Pension+25%. Our work points out the implications of the different choices. Making such a choice is a matter for public debate and government decision. Our paper aims to inform that choice.
  2. The second comment is that “a property tax should most certainly not be related back to income”.  I’m not sure what he has in mind here but it is important not to misunderstand our analysis. Apart from income exemption limits and some marginal relief above this (necessary to prevent 100%+ tax  rates), the property tax bill we consider is simply a flat percentage of market value. We analyse what the outcome is in terms of how the burden is spread across the income distribution – this depends on how, in practice, property values and incomes are related, as well as on the effects of exemption limit provisions. These are questions of legitimate interest for research and policy.
  3. Thirdly, it is stated that our paper asserts that Ireland has “no database on site values”: This is not what we said – it reflects an inaccuracy in the Irish Independent’s report. What we said is that “to our knowledge, there is no data source which combines information on site characteristics (location and size) and household incomes, so that it is not possible to provide a clear picture of how a Site Value Tax relates to ability to pay or its impact on the distribution of income”. If there is such a source, we would be glad to hear of it.

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