In this NERI blog and its associated Working Paper and two Research InBriefs, NERI Co-director, Dr. Tom McDonnell discusses Wealth Tax.
The main economic debates of the moment inevitably centre on the US/Israel attack on Iran and the consequent disruption to global energy supply and prices from the Iranian counterattack. For better or worse the inevitable response of the Irish government has been to try and ease rising fuel prices by cutting excises. Essentially the government is socialising the losses that would otherwise fall on individual households and businesses and hoping that this dampens inflationary pressure. Unfortunately, reducing fuel excise is likely to be regressive. It would have been better to have used the welfare system to help with genuine cost of living issues.
Ireland finds itself in a unique position. Unlike most other European countries we have fiscal surpluses. These surpluses are seemingly allowing us to throw state resources at problems without worrying about consequences such as bond market troubles, or fiscal sustainability and future austerity. The problem is that these headline surpluses are based on enormous windfall corporate tax revenues coming from a tiny number of US multinationals funnelling profits through Ireland. Relying on these receipts is a huge risk.
The windfall receipts have created another problem in so far as it has infantilised the public debate about tax reform and public spending. The 2022 Commission on Taxation and Welfare found there was a need to meaningfully increase government revenue as a percentage of output in order to pay for future spending pressures in areas such as health, pensions, long-term care and climate adaption. Innumerable reports from the Fiscal Council and the recent ‘Future Forty’ report from the Department of Finance have also highlighted the coming fiscal crunch, as indeed has NERI’s own research.
Despite this analysis it seems that any lobby group with enough power and effort can bully the government into special tax reliefs for themselves despite any clear economic or equity case for doing so. The 9% VAT cut for hospitality is a recent and particularly egregious example but government is now flagging cuts to inheritance tax and capital gains tax again without any obvious rationale for why these particular cuts are a public policy priority. We need to be broadening the tax base not weakening it further.
It is in this context that the NERI will produce a series of papers on fiscal policy over the next three years leading up to the 2029 election – with the hope of stimulating a mature debate around our fiscal options. This series will form part of our New Economic Model work.
NERI Working Paper No. 78 and NERI InBrief No. 93 look at the potential and the pitfalls around introducing a recurrent tax on net household wealth in Ireland. Wealth taxes have failed in many jurisdictions for predictable but avoidable reasons. Such taxes have generally been very poorly designed. Notwithstanding these failures, we find that a recurrent tax on net wealth is very much a viable option to broaden the tax base (albeit only modestly) provided great care is taken around the design of the tax. Taxes on capital stocks including taxes on net wealth have important equity and efficiency advantages relative to increasing other taxes such as those on consumption and income.
A well designed wealth tax would have either zero or very minimal exemptions or reliefs; a set of measures crafted to simplify the tax and reduce administrative costs, and a high threshold of liability that excludes 98 to 99 per cent of households. We estimate that setting the tax at a rate of 1% and with a high threshold of liability that targets just the top 1% of households would generate almost €1 billion annually for the exchequer.
NERI InBrief No. 94 which is based on previous work by McDonnell and Collins examines the case for reforming the tax on inheritance and gifts (Capital Acquisitions Tax or CAT). In its current form this tax brings in less than 1% of total government revenue (circa €1.1 billion in 2025) and the effective tax rate is far below that of taxes on earned income (including labour income) despite the more economically distorting effect of taxing earned income relative to taxing income from wealth transfers. There is, therefore, a strong case for seeking to increase the annual yield from CAT. In addition, CAT is undermined by enormously generous reliefs for agricultural and business assets. These reliefs disproportionately benefit the wealthiest in society and are of such immense generosity that they enable the tax-free transfer of wealth sufficient to bring the recipient into the top 1% of wealthy households without doing anything themselves. Such reliefs are incompatible with horizontal equity or any notion of tax justice.
The addition of a net household wealth tax and reforms to our inheritance tax will only make relatively modest contributions to broadening the tax base and ensuring our long-term fiscal resilience. The reality is that a range of additional measures will be needed. This does not invalidate the argument for increasing taxes on wealth. Whether it should be done depends on the opportunity cost of not doing so and the implications for tax raising elsewhere or even public spending cuts. The Commission on Taxation and Welfare argued that we needed to recalibrate our tax system in favour of the greater taxation of capital stocks. This seems wise. It is unfortunate that we may be moving in the opposite direction.