Ireland: I don't believe wealth taxes will ever raise much revenue
13 January 2015
Posted by: Author: Dan O'Brien
Author: Dan O'Brien (Irish Independent)
A prediction for 2015: wealth taxes will increasingly feature in political discussion in the year ahead.
The reason to believe that is because momentum behind new taxes on wealth have been building over the past few years. Political parties and groupings including Sinn Fein, the Socialist Party and the People Before Profit Alliance have advocated such taxes. Also getting in on the taxing wealth act have been the left-leaning think tanks TASC and the Nevin Institute, along with the latter's trade union mother organisation, ICTU.
Although it is more than a little ironic that some of the most enthusiastic supporters of a wealth tax are among those who object to the newest kind we have - the property tax - most of their proposals have focused on 1-2 pc tax on net wealth over €1m (net wealth is the value of all assets - property, bank deposits etc - less debts and other liabilities).
One reason to tax wealth is simply because there is a lot of it, which, in theory, mean there is lots of revenue to be raised. The Central Bank's quarterly financial accounts put household net wealth at €508.5bn as of the middle of last year. That sum is roughly equivalent to almost three times annual GDP. If it were equally divided among the population, then every woman, man and child in the country would be worth €110,312 per capita.
But, of course, wealth is not equally distributed, even if we don't know how unequal the spread is - as there is no reliable measure of how wealth in Ireland is distributed.
Nor is it known how many people come in over the €1m threshold, so it is unclear how much the proposed new wealth tax targeting this group would raise.
While much else is uncertain about how a wealth tax would work and what its consequences would be, experience and evidence from the rest of the world clarifies a great deal.
Four points are worth highlighting.
First, perhaps the most striking thing about wealth taxes is how little they raise anywhere across the world.
On average in OECD countries they account for less than 2pc of total tax revenue.
Second, and as a cursory glance at the accompanying chart shows, property taxes are the biggest source of wealth tax almost everywhere, followed by transaction taxes (such as stamp duty), and inheritance taxes.
Third, and somewhat counter-intuitively, the societies which place most emphasis on egalitarianism (those of northern Europe) rely less on wealth taxes than those which place more emphasis on individual liberty (the Anglo-Saxon world). Britain has the highest proportion of revenue coming from wealth taxes, the lion's share of which comes from the 'council tax' on property.
Finally, and perhaps of most interest to readers of these pages, Ireland is broadly in line with the average across the OECD in terms of reliance on wealth taxes. In 2012, the most recent year for which comprehensive figures are available, the 2pc of revenue raised from the various wealth taxes in place - capital gains, inheritance and gift taxes, stamp duty and the like - was marginally ahead of the OECD average.
Given how much wealth there is in the rich world and how urgently most governments need revenues, why are wealth taxes not used to a much greater extent?
Among the biggest reasons is the scope for avoidance.
The easiest way to avoid taxes is to exercise the exit option. In Europe, free movement of people means anyone can move abroad - as has famously happened in France since the introduction of a 75pc tax on the highest incomes.
For the super rich, the range of options is wider still. Because money talks everywhere, few countries turn down foreign billionaires who seek residency.
Any country that goes out on a limb by introducing big wealth taxes could expect some of its richest citizens to redomicile - with negative consequences for all tax revenues (and most likely for investment too, as a result of capital flight).
For those who do not want to go as far as relocating, there is the alternative avoidance option of resorting to clever accountants.
Those who have accumulated wealth can often afford to hire people to minimise their tax liability. And for those who have accumulated the most, it makes most sense to do so.
Yet another reason that wealth taxes are unpopular and little used is because they amount to double taxation.
Most wealth is built up from saved income. As income is already taxed (usually heavily in developed countries) people are often particularly irked more by paying again on their wealth - anecdotally, this writer has often heard those fortunate enough to have decent pension pots rage at the levy introduced on retirement funds by the current government.
More specifically in relation to pensions (the second largest household asset after property), introducing taxes such as the levy can only disincentivise people from making provision for their old age. Given that successive governments have tried to encourage people to save more for retirement, any wealth tax on pension assets doesn't make much sense.
A further argument against wealth taxes is related to income.
It is not uncommon for those who have above-average net worth to have below-average incomes - think of the ageing widow who rattles around alone in a large family home, but gets by on a meagre pension.
After property and pensions, the largest source of wealth is cash held in bank accounts. While DIRT tax is imposed on the interest - a source of income - taxing the deposit itself hardly ever happens.
Among the main reasons bank accounts are rarely subject to wealth tax is because it would encourage people to keep cash in mattresses, or wealth in other forms, such as precious metals and works of art. Wealth locked up in this way is dead money. By contrast, cash deposited in bank accounts gets channelled to those who can put it to work, including businesses who borrow to invest in productive capacity.
Given all of these factors, the trend has been towards getting rid of wealth taxes rather than levying new ones. The Netherlands has decided that the administrative cost of garnering that small proportion of revenue was too high and discontinued its target tax on overall net wealth. Austria, Belgium, Canada, Denmark, Germany and Italy have all moved in the same direction.
Despite that, wealth taxes will likely retain their allure for their advocates here. But given the experience of other countries, supporters should not expect them to be a game changer if they get their way. A rich seam of wealth tax revenue is as realistic as a pot of gold at the end of the rainbow.
This article first appeared on independent.ie.