In this NERI Working Paper Series No. 78, Tom McDonnell and Ciarán Nugent, NERI and Independent Consultant, Sorley McCaughey assess the viability and desirability of introducing a recurrent tax on net household wealth in Ireland.
The paper has a number of motivations. In the absence of policy reform Ireland’s fiscal position is going to deteriorate in the decades to come. It is therefore prudent to assess all options for broadening the tax base. A net wealth tax has certain advantages in so far as it yields revenue for the exchequer without impinging on the living standards of economically vulnerable households as is the case with most consumption taxes. If designed correctly a wealth tax may be less economically damaging than taxes on earned income. Our assessment is that introducing a recurrent tax on net household wealth is viable. However, this does not imply a net wealth tax of just any type is worth pursuing. Previous wealth taxes enacted internationally have failed, albeit for predictable and avoidable reasons. A well-designed wealth tax should seek to minimise administrative costs and distortions to economic activity. This suggests a simplified structure with either zero or very modest reliefs and exemptions. These have been the Achilles heel of previous wealth taxes. Further, we argue that any wealth tax should have a high threshold of liability sufficient to exclude all but the wealthiest 1 per cent or so of households. Notwithstanding the somewhat narrow tax base we estimate that a net wealth tax with a threshold of liability of close to €3 million would yield close to €800 million annually for the exchequer. The yield is certainly not transformative in the context of annual government revenue well in excess of €100 billion. Nevertheless, the yield is of a comparable order to other wealth taxes such as the Local Property Tax and Capital Acquisitions Tax. Unfortunately, there is no silver bullet to Ireland’s future fiscal problems. Even so, a well-designed net wealth tax can certainly contribute and can do so without burdening vulnerable households.
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