Two of the recent alternative budgets, Sinn Fein’s and the United Left Alliance’s, have proposed wealth taxes which, it is claimed would generate €800m per annum (SF) and €2.4bn per annum (ULA). Opponents of a wealth tax have claimed such a tax would destroy jobs and investment. This blogpost examines the subject.
In researching this blogpost, I have spent some time recently with the two main Irish richlists, the Sunday Independent’s produced by its business editor, Nick Webb and the Sunday Times richlist for the UK and Ireland.
And to start off, consider Ireland’s richest person, with a fortune estimated by the Sunday Independent at €7.4bn in 2012, Pallonji Mistry (pictured below). Some of you might ask, “who he?” because he is not a household name and his name doesn’t sound very Irish. He’s Indian in fact, though he was granted Irish citizenship in 2003 and he is married to a Dubliner. His wealth mostly derives, it seems, from his 18% share of India’s Tata conglomerate – Tata is what the Quinn Group would have been in a decade if it hadn’t imploded amid gambles on shares and a poor insurance model. Tata is worth €75bn, but the Sindo sticks with a €7.4bn estimate for Pal’s fortune. Pal has houses in Mumbai, Surrey, Dubai, the South of France and London – there’s no mention of a residence in Dublin. Apart from his stake in Tata and houses, the only sign of wealth is a stud farm in India.
I don’t personally know this 82-year old man, but he looks gentlemanly and dignified in his photo. But if the Government were to slap a 1% wealth tax on Pal, that is, €74m per annum, then I would not be surprised if he extended his middle finger in a frozen stare, and remained in that pose as he was transported in his bathchair to Dublin airport for the first available flight out of this place. And could you blame him?
The Top 300 in Ireland all seem to have wealth estimated at over €20m apiece, and as you study the rich lists, you notice some patterns:
(1) Some people are only nominally resident here (the Westons, Denis O’Brien whose residency is shown as being in Malta, Robbie Keane who is resident in Los Angeles, Bob Geldof who spends most of his time in the UK)
(2) Some of Ireland’s richest aren’t very Irish at all, put to one side Pal Mistry, but the Sunday Independent lists many of Northern Ireland’s wealthy amongst its 300. And at the risk of insulting Mr Lucky Feet himself, Michael Flatley is about as Irish as Honda.
(3) Most wealth seems to be tied up in businesses. Ordinary people hold “stocks and shares” in companies. The rich hold “stakes” and so significant are the stakes, that they might properly be considered proprietors. Some of the stakes are in Irish companies, some are in “foreign” companies, for example, a lot of Bono’s wealth would appear to be tied up with Facebook and Yelp via investments through his Elevation Partners private equity fund.
(4) There is very little detail on the trappings of wealth that usually occupy the popular imagination. Very few have stud farms or racehorses, a couple have greyhound racing interests, a handful seemingly have yachts, few are shown owning jets or helicopters, there’s an odd art collection here or stamp collection there, but most of the wealth, I would estimate 95%-plus is tied up in business. Most of the rest that is detailed is in residential property. However we do know that according to the Central Bank of Ireland, there are €92bn of deposits by Irish households in Irish banks which equates to an average of €54,000 for each of the 1.7m households in the State.
Ignorance is Bliss (for some)
There is an incredible lack of information in this country on which to base any wealth tax. And I wonder how much of the information gap is deliberate. Is that paranoid? Well, ponder this. When ordinary people buy a house in this country, they pay stamp duty at 1% up to €1m and 2% beyond – all simple and straightforward. But what happens when a property is put in the name of a company or a trust? And instead of selling a home, there is simply a transfer of shares in a company or change of beneficiary of a trust. In these instances, stamp duty payments may fall considerably below what would apply to “ordinary people” buying a home. But if the companies or trusts are based outside Ireland, then the Revenue Commissioners have zero visibility of what is happening, and shares can be transferred or trusts altered with zero stamp duty being paid.
Now stamp duty is not a wealth tax, it’s a transaction tax, but this Government appears unconcerned *about the use of companies or trusts to reduce stamp duty payments. And there are no plans to examine or plug loopholes. Or at least, whilst the Minister for Finance is Michael Noonan.
So, although we can all have belly laughs at Sinn Fein justifying their wealth tax plans by reference to Goldman Sachs or Bank of Ireland reports, remember that household wealth estimates will not be produced by the Central Statistics Office until 2014 ** – that shows you where this Government’s priorities lie. The United Left Alliance produced their own pre budget submission last week which contained a proposal for a wealth tax, and it was based on Q2,2012 Quarterly Financial Accounts from the Central Bank of Ireland which estimates that net household wealth – by “net” they mean after deducting loans – now stands at €446bn, and the ULA estimates that €50bn of this is wealth held by households who are worth more than €1m in net terms, and the ULA proposes an annual 5% wealth tax on that €50bn, meaning annual tax of €2.5bn.
We need far more transparency in this country. We need an accurate Property Price Register – was it just coincidence that the most expensive property sold in 2012 according to The Phoenix magazine, “Woodside” at 18 Shrewsbury Road by Seamus Fitzpatrick for “somewhere north of €5.7m” was actually recorded by the Property Price Register as €1.7m “which is understood to be an error”. We should have the Register extended to take account of transactions before 2010, something ruled out by the Minister for Justice, Equality and Defence Alan Shatter. And what exactly is the barrier to putting everyone’s personal tax returns online, as they are in Sweden and Norway?
So, although we know there is a lot of wealth out there, we seem to have a giant information gap, which prevents us from examining further the potential to impose a wealth tax. And based on the positions of Ministers Noonan and Shatter, it seems this Government has no real interest in producing the information to facilitate a wealth tax. Indeed should the Government move to produce such information, I suppose it would be uncomfortable the next time Michael Noonan appeared as a special guest of billionaire JP McManus.
The existing wealth taxes
In May 2011, this Government did something unprecedented – it imposed a 0.6% annual levy on pension funds in a bid to raise €470m per annum for its Jobs Initiative. This unprecedented, but understandable step, didn’t impose an income or transaction tax, but it was a tax on existing wealth.
And the property tax, set to be unveiled on Wednesday next, is also a wealth tax. You will have bought your home with a deposit which was probably cash you had earned and paid tax on. You are repaying your mortgage from your income after tax. A wealth tax is in many cases, a double tax and is levied according to the value of your property.
What about the neighbours?
In the UK, despite there being a coalition between the generally right wing Conservative Party and the centrist Liberal Democrats, there is a trend towards reducing taxes on the wealthy, and this is justified by the claim that wealthy people will contribute in indirect ways to the health of the economy, through investment and consequent employment for example. And this thinking can’t be dismissed out of hand – it makes intuitive sense that where individuals are rich enough to decide where they live, and are not short of countries welcoming them and their wealth with open arms, then wealthy individuals are likely to spend their wealth in places where they live. Not only that, but if they live in your country, they are exposed to being tapped for investment.
On the other hand, some advanced economies like France do have wealth taxes, which in principle are similar to what is now being proposed in Ireland by Sinn Fein and the United Left Alliance.
So is a wealth tax feasible and will it just be a tax on industry which will destroy existing jobs and investment and deter future investment?
The evidence from the richlists is that most wealth is tied up in business, and it may be the case that a tax on such businesses may lead to job losses and reduction in investment.
But other evidence such as deposits shown on Central Bank returns, which exclude deposits by Irish citizens overseas, come to €92bn. Last year, when the hullabaloo was breaking out over the pension levy, we learned that there was over €70bn of funds being managed on behalf of Irish pensioners and pension contributors. And we do know that some very expensive residential property in this country is owned by trusts and corporations.
So, the view on here is that there is merit in exploring further the possibility of a wealth tax. But smash-and-grabbers need tread carefully lest they destroy jobs or investment which overshadows the combined value tax that would be generated PLUS the value of the sense of solidarity and fairness.
* 23rd October 2012
Deputy Pearse Doherty: To ask the Minister for Justice and Equality further to Parliamentary Questions No.183 and 184 of 9 October 2012, if he will provide in tabular form the number of residential properties in the State that are owned by companies incorporated in the State; the number of residential properties in the State owned by companies incorporated outside the State; the number of residential properties in the State owned by trusts set up within the State and the number of residential properties in the State owned by trusts set up outside the State..
Minister for Justice and Equality, Alan Shatter: There are two systems for recording property transactions in Ireland, the system of registration of title operated by the Land Registry and the system of recording deeds operated by the Registry of Deeds. Both systems are under the control of the Property Registration Authority.
Where title or ownership is registered in the Land Registry, the legal ownership is entered on folios which form the registers maintained in the Land Registry. Where title is registered in the Land Registry it is referred to as “registered property” and is open to public inspection.
The Registry of Deeds provides a system of recording the existence of deeds and conveyances affecting unregistered property (i.e. property which has never been registered in the Land Registry). The effect of registration of a Deed in the Registry of Deeds is generally to govern priorities between documents dealing with the same piece of land.
I am advised by the Property Registration Authority that the information sought by the Deputy is not available. The Land Registry registers the ownership of legal estates and interests. The register of title maintained by the Authority does not distinguish between residential and commercial properties. Under Section 92(1) of the Registration of Title Act 1964, no notice of a trust may be entered on the Register. Therefore, property held under a trust is not readily identifiable as such from the folios of the Register.
The address of any company registered on the folios of the Land Register is the address of the company in the State for the purpose of the service of notices under the provisions of Section 106 of the Registration of Title Act 1964. Therefore, an inspection of the registers of ownership will not reveal whether a company was incorporated within or outside of the State.
10th October, 2012
Deputy Pearse Doherty: To ask the Minister for Finance the annual tax that would be generated from applying a 2% tax on the current market value of residential property whose registered owner is not a natural person but a corporation or trust or other non-natural person..
Minister for Finance, Michael Noonan : I am informed by the Revenue Commissioners that, as they do not have a statistical basis for compiling estimates of yield in relation to proposals for the taxation of residential property, it is not possible to provide the information requested by the deputy.
While there are data sources which provide information on property ownership – for example, the Property Registration Authority and the databases for the Non-principal Private Residence charge and the Household Charge – none of these sources has information on current valuations and therefore it is not possible to estimate the yield that would be generated from a 2% tax on residential property whose registered owner is not a natural person.
** Deputy Pearse Doherty: if he has examined the potential for a wealth tax; and the estimated return to the Exchequer from a 1% wealth tax on individual wealth in excess of €1 million. [38298/12]
Minister for Finance, Michael Noonan: The Government does not propose at this time to introduce a wealth tax, although all taxes and potential taxation options are constantly reviewed. To estimate the potential revenue from such a wealth tax, we would need to identify the wealth held by individuals. I am informed by the Central Statistics Office that the institutional sector accounts do not give an indication of the number of households or persons classified by the categories of wealth they hold. These statistics are based on aggregate information collected from financial institutions and do not contain the demographic details which would enable such a breakdown of the statistics. So while the CSO’s institutional sector accounts show that households held c. €126 billion on deposit in 2010, this is not broken down by income or wealth categories.
However, I understand that, following discussions between the Department of Public Enterprise and Reform, the CSO and the Central Bank, the CSO has commenced a “Household Finance and Consumption Survey”, which will include, inter alia , a survey of wealth. The first results of this survey will be available in 2014. The data to be collected by the CSO as part of this survey is primarily targeted as general information on the financial situation and behaviour of households. I am informed by the Revenue Commissioners that they have no statistical basis for compiling estimates in relation to a potential annually recurring tax on wealth. It is therefore not possible to provide the information requested by the Deputy on the potential return from a 1% wealth tax on individual wealth in excess of €1 million.