The Myth of Fair Taxes

Opposition to taxes is universal. That statement looks like a truism - something so obvious that it does not need to be said. And yet there are exceptions. Few object to the things that our taxes pay for, unless it is the high salaries and expenses of those charged with the task of administering them. And lately in Ireland and in the UK there is plenty of clamour from those who see the solution to their own supposedly high taxes as the imposition of even higher taxes on others.

This is usually expressed as a move toward greater fairness. So, for example, many in Ireland would like to see the introduction of a third tier of income tax, taxing marginal income above, say, €150k at 50% instead of 41%. Meanwhile, in the UK, the run up to the 2012 budget saw a debate about whether the 50% rate already in force there should be reduced.

The other suggestion that is being made in certain quarters is the imposition of a "wealth tax"; a one off charge on the assets of the richest one or two percent of the population.

Whilst I can sympathise with the anger that lies behind such arguments I have serious doubts about the practical effects of such measures were they to be introduced.

50% Income Tax doesn't work

Consider, first, the 50% income tax band: those eligible to pay tax at that rate already have a marginal rate of 41% in Ireland. If they spend most of the remaining 59% they will pay 23% VAT on their purchases. With less to spend they will pay less in VAT so the €90 increase in tax on every €1000 of income has to be offset against a reduction of €21 in potential VAT income due to the reduced spending. The net gain to the exchequer is therefore only 90-21=69 or 6.9%.

It is also important to look at the kinds of things such individuals are likely to spend their money on. Someone on a tight personal budget will inevitably make the bulk of their purchases in British or German owned chain stores on goods imported from the Far East. Those with cash to spare are more likely to spend that spare cash on high-end Irish made artisan products or imported luxury goods that earn high margins for their Irish importers. Reduce the amount they have to spend in this way and you damage Irish businesses and put Irish jobs at risk.

Wealth Tax - the best way to export the nation's wealth?

I turn now to the idea of a wealth tax. It is my understanding that the wealth that is being talked about here is not cash lying idle in some vault. It is tied up in property, in race horses, in various valuable artefacts and, mostly, in businesses. In order to liberate cash to pay a wealth tax it would be necessary for the wealthy person to sell some of those assets. A forced sale would, of course, not realise the full value of the asset sold. And who except another wealthy person would have the means to make such a purchase? And as the only Irish people with the means to make such a purchase would be seeking to sell some of his or her own assets the only serious buyers would be foreigners; Arabian sheiks and Russian oligarchs spring to mind.

The impact on jobs would perhaps not be great; the assets and the jobs they represent would still be there but now under foreign ownership. The government would have the cash to spend but the overall wealth of the nation would have been reduced and a significant part of it transferred overseas, something that not even those on the extreme left want to see. All this, of course, assumes that the wealthy would readily succumb to the imposition of such a tax without taking avoiding action such as moving themselves and their assets overseas.

The plain fact is that the only way to reduce tax is to reduce the size of the public sector. We can all point to waste and ways in which the public services could be made more efficient. But, just as we object to paying taxes we don't like it when one person's efficiency saving leads to the removal of a perk from which we have benefitted. You may say that a particular road improvement is a waste of money; I might be grateful for the opportunity to get from one place to another more quickly and in greater safety.

In reality there is a limit to what can be achieved through increasing efficiency and reducing waste. And the most effective way of bringing those savings about is to tighten budgets and leave it to the people at the sharp end to seek and to implement the necessary changes. And isn't that precisely what Fine Gael/Labour are trying to do and what everyone seems to object to almost as much as they object to taxes?

Who should pay for your child's communion dress?

I heard an extraordinary thing on Will Faulkner's radio show this morning. Apparently there is in Ireland a social welfare payment especially to cover the cost of children dressing up for their first communion. Will drew attention to a report that the government wants, not to end the payment, but to cut it back. According to the report, published in the Irish Examiner today 2nd February 2012, €3.4 million were distributed in such payments in 2011.

I have blogged previously about the extraordinary excesses of the Irish social welfare system but the discovery that such a payment is available left me spluttering into my porridge. I suppose I should not be surprised. The importance attached to such religious ceremonies within Irish culture is well known. News reports at the height of the "tiger" years claimed that some parents were hiring helicopters to bring their little treasures to Church for confirmation or first communion.

Solemn occasion sullied by materialism

It is at this time of year that such events take place and the shops are presently full of communion dresses. Hotels and restaurants advertise their availability for confirmation celebrations. I have made no secret of my atheism so I hope people will not be too shocked at my reaction. But, growing up in England I never came across any such pomp in the protestant churches I attended. Indeed, such extravagance is generally frowned upon because it is seen as being a long way from the teachings of Jesus of Nazareth that are supposed to form the basis of belief for all Christians.

In my mind confirmation and communion should be serious and solemn occasions at which the true Christian affirms his faith in the healing power of his/her Saviour, seeks the forgiveness of his/her sins and promises to lead a better life in the future. It should not be sullied by the materialistic symbolism of dressing up and partying. The idea that tax-payers should be asked to fund such behaviour at all, let alone at a time when the country is being bailed out by its European neighbours is surely beyond reason.

Irish parents are already in receipt of remarkably generous child benefits and those who qualify for this special occasion allowance will already have received a payment toward the cost of school clothing.

Property Tax Pros and Cons

The Household Charge currently being introduced in Ireland is an interim measure pending the introduction next year of a "property tax". It is argued that Ireland is one of the few countries in the developed world that does not levy a tax on private domestic property and use that levy to fund local public services.

The notion of taxing property, or more specifically, land, goes back a long way and is based on the belief that the land and the natural resources on and under the land should be held in common. It is not possible to make a moral case for ownership of land and natural resources to be held exclusively by a single individual or family. Any rent charged for the right to develop and use the land rightfully belongs to the community. A property tax is therefore justified on the basis that it returns to the community a portion of the value generated by use of the land.

Location, Location, Location

Whilst this can readily be seen to apply to commercial uses of land, how can it be applied to domestic property? Especially in the case of the ownership of a single dwelling? The answer can be found in the old estate agent's adage "Location, location, location". Homes that are established close to good public amenities command a higher value than those in isolated locations. It follows that the increased value that arises because of those public amenities should be taxed in order to contribute to the cost of providing those services.

In a paper produced at Dublin Institute of Technology in 2005 Tom Dunne enumerated these arguments and went on to highlight the practical difficulties associated with the implementation of such a tax. It makes interesting reading and we must hope that Enda Kenny and his advisors have studied it. [Land Value Taxation: Persuasive Theory but Practically Difficult, Dublin Institute of Technology School of Real Estate and Construction Economics, 2005]

Tax Bads not Goods

A more thorough examination of the case for a tax based on the increased value of land that arises from community provided services can be found in an earlier article by Nic Tideman which also discusses the practical issues and offers suggestions for ways to overcome them. Tideman also points out that such a tax could be developed in such a way as to benefit the community by taxing only "bads" rather than "goods". Thus a business that imposes burdens on the community such as pollution or traffic congestion, lowering the value of neighbouring property, could be taxed at a higher rate than businesses that are of benefit to the neighbourhood which might even be exempted from the tax. [The Case for Site Value Rating, T. Nicolaus Tideman, Date unknown, originally published by the British Liberal Party]

I found the Tideman article via a website called Wealth and Want. Although this is a USA based site geared to the US economic situation the articles that the site owner has assembled and to which he has provided links are from around the world and relate just as much to the Irish and wider European economy as to that of the USA. He has created an excellent resource for those seeking alternatives to our failed economic system.

I would urge anyone actively seeking solutions to our woes, rather than merely seeking to explain how we got here, to study these articles. In my humble opinion they make a very strong case for a complete re-thinking of our economic system with the potential of ensuring fairer distribution of wealth, at the same time providing greater rewards for wealth creators. As the site's masthead states "... democracy alone is not enough to produce widely shared prosperity"