Tax and fairness. Who pays for our hangover?

Dave Roe

I read some of the commentary on the governments, on-again, off-again property tax plans over the weekend. This isn't really about that, but a related issue. Who will pay for the property bubble?

Is it just me or is there not a really good case for looking at trying to recoup some of the money lost over the last ten to fifteen years from the people who actually have it now, rather than taxing all workers?

I've been trying to persuade friends of this over the last year or so. But, whenever I suggest what I'm about to suggest here, people tell me that it's mad, and it will never work. But Nama, huge cuts in services, new taxes, and decade-spanning state indebtedness seem pretty mad to me, and I've never got a sensible explanation as to why it won't work, so I'm posting this here to see if this really is totally unworkable. I'd love to hear from economists about specifically why this is not a soltion.

Let me set out the context for what I'm suggesting.
The roots of our current economic mess are complicated and happened over a long time, but a large part is due to the property bubble that developed over the last decade or more. This is a simplification, but I believe largely true.
For lots of reasons, property prices for all types of property began to rise out of line with inflation or their real underlying value. As a result, we built a huge amount of new property - apartments, houses, hotels, office blocks etc. The price of existing property rose rapidly, and the price of new building land rose too, along with huge inflation in building supplies, labour and other costs.
One of the things that facilitated the massive rises was that our banks allowed credit to become available at a level that was unprecedented. Credit was given more easily and in much greater volume than even in the preceding decades, especially to large developers who borrowed vast sums. Our banks borrowed this money, ultimately from other international banks who were also offering it very low interest, and on a huge scale.
Then, as well as a lot of other problems, this international credit dried up. Property values have dropped fast and hard and our banks are essentially bankrupt. Many large developers are also ruined. The value of the property which underpinned their loans has collapsed.
So far so uncontroversial, and I know there's more to it than that, but I think most people would agree on what I'm saying above.

Now, the most of the property (buildings and land) purchased by Irish people over the last 10-15 years is in Ireland, purchased from other Irish people. (I believe only up to a third is abroad, mostly in the UK - I'm not talking about that). Most of the money to purchase property in Ireland was borrowed from Irish banks. A huge amount of it cannot be paid back, the people who borrowed it don't have it any more. They've spent it, mostly on other property.
But it didn't evaporate. It's mostly still right here, in Ireland. Yes, a lot of it was spent on helicopter rides and racehorses and yachts and who knows what else, but not all of it. The reason our developers are bust - big and small - is that they spent this money on property - land and buildings to redevelop. Yes, some of the people they purchased it off are bust themselves, but not all of them. They didn't eat 55 billion in cash. It wasn't all used to light cigars. It's right here, in Ireland. Some in cash in bank accounts, some in property, some in stock and other investments. It's not worth what it was (except the cash), but we still have huge numbers of millionaires that we didn't have twenty years ago.

What I'm suggesting is that we introduce a windfall tax on property gains made over the last fifteen years. Not 100%, but a big chunk - lets say 50%. Yes, retrospectively.

I'm aware of the problems, and they break down into two kinds. Firstly, it's unfair, secondly, it's hard to collect.
Let's look at hard to collect first. These transactions were recorded. Large numbers attracted capital gains tax at the time. Most involved the payment of stamp duty by the purchaser. They were recorded. The people who received the money are (mostly) in the tax net anyway. Yes, they can flee with the money, but not everyone will. It's not so easy to up sticks and run away, especially if your wealth isn't in an easily transportable form and the market is screwed anyway.

Fairness. Yes, it isn't fair. You paid your tax at the time, and that's all the state wanted then. Now, we're coming back and demanding more of your gains. Retrospective taxation is anathema. People say (to me at least) that it is poison to normal economic activity. It smacks of despotism, the sort of thing that medieval monarchs did. Who will participate in the economic life of the state if the carpet can be pulled from under them.
To them, I say yes. It's unfair, but fairness is relative. How much more unfair is it to demand that a worker who pays income tax and has no property apart from a modest home should pay the debts of those who went berserk on the property market? At least the people I am suggesting we tax, gained some benefit from the property bubble. And they get to keep half!

No, it wouldn't solve everything. A lot of money is gone and the people who gained no longer have it. Can't pay, won't pay. Yes, it would be difficult to levy the tax, but not impossible. Does it kill economic activity in Ireland into the future? I don't think so. This is a specific, one-off, windfall tax, backed by legislation, and a constitutional referendum if necessary. This is special case. The state went mad. It got into bed with property owners and bankers, who ran up gargantuan debts with foreign banks/bond holders/markets. Now, the state says it won't default. That it will, on behalf of it's citizens as a whole, honour those debts. Okay, but, for the state to then specifically target workers (income tax payers, both public an private employees) and say they, and they alone must bear those debts, while leaving those who ended up with the money in our crazy game of pass-the-property entirely alone seems to be to not just unfair, but grossly unjust.

Most people gained nothing from the property bubble apart from a massive mortgage. Some people gained a lot. People who sold sites, sold estates (houses they inherited), traded property, invested in apartments, or otherwise made capital gains on property sold during the bubble mad out like bandits. For fairness, I'd allow anyone to offset the value of their private home, up to a certain value (a million for argeument's sake) against gains they made between 1995 and 2010. Anything else to be taxed at 50%. Payable over five years.

Why wouldn't it work? Why wouldn't it be fairer than what we're doing now?

Onthe3rdDay

It doesn't matter if it's fair or not. Impose something like this and half the country would leave, plus foreign investment would disappear. You'd be changing the rules after the game was played.

If you did it once, what would stop you from doing again in the future?

Welease

How many people do you know who made out like bandits and still have the money? (i.e it wasn't used to buy other property/investments etc.). Very few to none I'm guessing..

There are not enough people who made enough money that still have it (in my opinion) to warrant the cost of implementing such a tax, and the tax raised would come nowhere near the required amount to solve our defecits.

The large sums involved in rectifying the problem will need everyone in this country to tighten their belts.

Nijmegen

You'd be making a good go at turning Ireland into an economic pariah state, would be the main issue.

danbohan

Nijmegen wrote: »

You'd be making a good go at turning Ireland into an economic pariah state, would be the main issue.

i thought it already was !!

ZYX

Most of the money has already been paid to the state in taxes.

Capital gains tax, Stamp Duty, VAT, income tax for those workers who would never have been employed were it not for the property bubble. A small number of farmers and land owners made large sums selling land. Very few others actually walked away with money.

Government spent that money mainly on public sector, social welfare and reducing taxes.

All this is now needs to be reversed.

RichardAnd

ZYX wrote: »

Most of the money has already been paid to the state in taxes.

Capital gains tax, Stamp Duty, VAT, income tax for those workers who would never have been employed were it not for the property bubble. A small number of farmers and land owners made large sums selling land. Very few others actually walked away with money.

Government spent that money mainly on public sector, social welfare and reducing taxes.

All this is now needs to be reversed.

To graphically illustrate this point. I once read that in 1995, there was less than 700 social workers employed by the state. Right now, I don't know how many there are but I have been told it is something close to 10k.

Ireland used to have a fairly small civil service that paid low wages. This is what we need to go back to.

Dave Roe

Welease wrote: »

How many people do you know who made out like bandits and still have the money? (i.e it wasn't used to buy other property/investments etc.). Very few to none I'm guessing..

There are not enough people who made enough money that still have it (in my opinion) to warrant the cost of implementing such a tax, and the tax raised would come nowhere near the required amount to solve our defecits.

The large sums involved in rectifying the problem will need everyone in this country to tighten their belts.

I think the responses show which side of the political/economic fence people come from. That's okay.
Welease - I don't know many, but do know some. I am suggesting that those who used the money should still pay.
e.g. I sold 5 acres in north Dublin in 2008 for 7.5 million, and used that money to invest in a golf course, which I still have a half share in - estimated value today 10 million. I feel that this person should be more obliged to pay some of this massive windfall in the value of the land they sold than the guy who cuts the grass on his golf course, or indeed the teacher who teaches his kids.

I think (and this is just my opinion too) that there are many, many people like this. People from the woman who inherited her mother's house and sold it for 1.5 million, all the way up to the cannier developers who didn't gear themselves like crazy. I just don't believe that all this money has been lost. People aren't that stupid. The bulk of all that borrowed money is still here. Its in bank accounts, title deeds, shares, quietly waiting for the rest of us to shoulder the burden of bailing out the debts that were taken out to pay it in the first place.

I think that we - workers, taxpayers, non-landowners, the plain people of Ireland if you will - are being duped by property owners into paying for the bubble that they already benefitted from.
Not only that, but we're paying for an attempt to re-inflate property prices back to their 'long term economic value'.

Why? I own my own home, which has a massive mortgage. House price rises did'nt help me at all. In fact it just made trading up a colossal burden when I started a family. So why do I have to pay for the debts of people who gambled and lost. I do believe someone has to pay. I just think it should be the people who gained from property price rises. They do exist. We know who they are.
If they can't pay, fine. I'm not saying we hound them to the grave. But if someone made a fortune off property over the last 5 years. Why shouldn't they pay?

ZYX

RichardAnd wrote: »

To graphically illustrate this point. I once read that in 1995, there was less than 700 social workers employed by the state. Right now, I don't know how many there are but I have been told it is something close to 10k.
.

Not quite. http://www.nswqb.ie/downl/nswqb_report_no_3.pdf

On the 1st September 2005 there were 2,237.4 Whole-Time Equivalent (WTE) social work posts identified by the survey. These posts came from a total of 261 agencies. A total of 17 agencies5 reported that they had no designated social work posts, filled or unfilled, on the census date of the current survey. In 1999 the number of posts stood at 1,390.3

maninasia

Onthe3rdDay wrote: »

It doesn't matter if it's fair or not. Impose something like this and half the country would leave, plus foreign investment would disappear. You'd be changing the rules after the game was played.

If you did it once, what would stop you from doing again in the future?

Governments do this kind of thing all the time. What matters is if it would be against the constitution..perhaps would be difficult to get past legal challenges.

maninasia

RichardAnd wrote: »

To graphically illustrate this point. I once read that in 1995, there was less than 700 social workers employed by the state. Right now, I don't know how many there are but I have been told it is something close to 10k.

Ireland used to have a fairly small civil service that paid low wages. This is what we need to go back to.

The point is not how many people are getting paid. The point is how much and what contribution they make. If 10000 social workers equals 3X less social and crime problems it would definitely be worth it!

Welease

Dave Roe wrote: »

Why? I own my own home, which has a massive mortgage. House price rises did'nt help me at all. In fact it just made trading up a colossal burden when I started a family. So why do I have to pay for the debts of people who gambled and lost. I do believe someone has to pay. I just think it should be the people who gained from property price rises. They do exist. We know who they are.
If they can't pay, fine. I'm not saying we hound them to the grave. But if someone made a fortune off property over the last 5 years. Why shouldn't they pay?

So to sum your point up.. Lets hit the one tiny handful of people who were sensible in the tiger years and whack them with retrospective tax levels of incredible portions to bail out those who got carried away with their own importance. Maybe we should go after entrepreneurs afterwards and make sure we root out the last few people who actually didn't display incredible levels of financial niavety

They already paid all of the relevant taxes etc. why should they be double hit because of the stupidity of others?

The reason I primarily disagree is because it's the same old line trotted out again and again.. Someone needs to pay, just makes sure it's not me!!! If you bought a house with a "massive" mortgage then you played your part in fueling the property bubble.

I arrived back in the country in Nov 2007 after 20 years abroad (since the last recession), so I played no part in either the boom or subsequent bust, can I get a rebate on all the tax I now pay to fix the mess? I (and others) didn't get one cent from the Tiger years, didn't vote in any of the governments, didn't fuel the property bubble etc etc...

This country allowed the problem to happen, and collectively this country will have to fix the problem.

irishh_bob

RichardAnd wrote: »

To graphically illustrate this point. I once read that in 1995, there was less than 700 social workers employed by the state. Right now, I don't know how many there are but I have been told it is something close to 10k.

Ireland used to have a fairly small civil service that paid low wages. This is what we need to go back to.

and had we more or less social problems in 1995

Dave Roe

Welease wrote: »

So to sum your point up.. Lets hit the one tiny handful of people who were sensible in the tiger years and whack them with retrospective tax levels of incredible portions to bail out those who got carried away with their own importance. Maybe we should go after entrepreneurs afterwards and make sure we root out the last few people who actually didn't display incredible levels of financial niavety

They already paid all of the relevant taxes etc. why should they be double hit because of the stupidity of others?

The reason I primarily disagree is because it's the same old line trotted out again and again.. Someone needs to pay, just makes sure it's not me!!! If you bought a house with a "massive" mortgage then you played your part in fueling the property bubble.

I arrived back in the country in Nov 2007 after 20 years abroad (since the last recession), so I played no part in either the boom or subsequent bust, can I get a rebate on all the tax I now pay to fix the mess? I (and others) didn't get one cent from the Tiger years, didn't vote in any of the governments, didn't fuel the property bubble etc etc...

This country allowed the problem to happen, and collectively this country will have to fix the problem.

That is a fair enough point, and well done to you for coming back to help fix the mess.

I don't see where you go from taxing property speculation/windfalls to taxing entrepreneurs. I'm not suggesting that at all. Entrepreneurs drive wealth generation, or at least they try to. People who plow their money into apartments on the hope that they'll double in value and then get out, add little or nothing into the economy.
I remember some time before the crash someone pointing out that business expansion and other schemes were undersubscribed, despite being very tax efficient. People were still keener on speculating on the Irish property market than investing in Irish business.

And what I'm suggesting is taxing those who did make windfall gains instead of taxing work. Not because it's fairer - but because it just makes more sense. Shouldn't we tax activities that do not help the state recover rather than those that do?

And BTW - I'm not whingeing about my mortgage, nobody put a gun to my head to buy the house. I didn't expect or need it to rise in value, I'll never move. I was just making the point that house prices rising on a huge scale doesn't really help ordinary people who only ever buy a house to live in, it just makes trading up very difficult.

Onthe3rdDay

The problem here is tax in general. the more you tax, the more you drive away those that might make the country some money.

I'm in a situation where I know what my income is going to be (as much as anyone can know!) over the next 5 years. The work I do can be done anywhere I've access to modern communications.

If I move to another jurisdiction I'm likely to save 30,000 in tax each year. after 5 years and investment, it's a sum that should be close to 200,000.

If I stay in Ireland the 30,000 goes in taxes. I do want to set up a business or two in Ireland in a few years time. The money I save will be a large sum of the capital. However, If the government ever change the rules I would have no intention of returning.

There are several people I know who I was in college with who would like to do the same (and are in a position to do so!) However, current conditions make them wary.

Introduce taxes that look backwards and they'd never return.

By the way, some of the major profits that some farmers made went to pay off the banks. (Years of letters from the Bank Manager at 30 pounds a pop plus interest mounts up!) After bills were settled they were left with little.

Count Dooku

Everybody pays a double tax through high rents for shops, which driving prices up and then state tax commercial property owners as usual. Those guys provide 13% of all collected taxes. At the same time they are not bankrupts yet only because government decided to support them, i.e. they will still get their profits and pay taxes, while taxpayers will pay for their loses.
It will make more sense to confiscate their profitable properties, save some money on rents to state bodies and turn all their profit to state.

Just as example
State pays millions in rent to property tycoons

property tycoons, Liam Carroll and Bernard McNamara are pocketing millions for property they rent to the state — almost €117 million each year.