Quarterly Economic Observer - Summer 2019 - "Taxing Property: Some Policy Considerations "

This edition of the NERI’s Quarterly Economic Observer (QEO) outlines our latest expectations for the economies of the Republic of Ireland and Northern Ireland (Section 1) and proposes changes to the taxation of capital stocks in the Republic, in particular reforms to Local Property Tax (Section 2).

Economic Outlook for the Republic of Ireland

• The short-term outlook for the Republic’s economy is positive. We now project real GDP growth of 4.6% in 2019 and 3.3% in 2020. However, this outlook is contingent on a benign outcome to the Brexit negotiations.
• Conditions in the labour market should continue to improve in the short-term with net employment growth averaging 70,000 this year. The tightening labour market will increase the bargaining power of workers. Real wages should increase by close to 2% in 2019 and 2020.
• The public finances are close to structural balance. In the event of no-deal Brexit, the automatic stabilisers and fiscal policy can be allowed to operate normally without compromising the medium-term budgetary position.

Macroeconomic performance & projections, Republic of Ireland[1]

Economic Outlook for Northern Ireland

• The short to medium-term outlook for Northern Ireland is deeply uncertain given the possibility of a ‘no deal’ Brexit. Northern Ireland is the most exposed region of the UK to economic difficulties arising from Brexit.
• Present indicators of economic activity show a mixed picture, with some signs of Brexit effecting output, particularly in Manufacturing. Despite this, the labour market in Northern Ireland remains strong, showing an unemployment rate of 3.1%.
• Historically high employment rates may mask continued labour market slack linked to high rates of inactivity in Northern Ireland. The incidence of low pay remains troubling, and is concentrated in sectors such as Accommodation and food and Wholesale and Retail Trade.

Taxing property: some policy considerations

• The key objectives of any tax system are to raise a meaningful amount of revenue for the exchequer while at the same time minimising administration and compliance costs, reducing inequality, minimising economic distortions, and changing behaviour.
• The introduction of the Local Property Tax was a welcome tax reform. Taxes on immovable property such as land taxes and residential property taxes are the most growth friendly of all taxes and equitable if properly designed.
• Given the compelling theoretical arguments in favour of recurrent taxes on immovable property there is a strong case for increasing the basic rate by 0.01% or 0.02% year-on-year over a decade and for rebasing property values to current levels. Proposals to increase the complexity of the tax by applying different rates in different local authorities have little merit. Policymakers should scrap the current equalization system, while hardship issues are best resolved through a deferment system for low-income households.
• Net wealth taxes are attractive in distributional terms and taxing wealth and the wealthy can be an important element of social solidarity. However, the Republic should avoid pursuing the type of model that has tended to prevail internationally, i.e. a model with multiple exemptions and reliefs, with a low threshold, and with a high marginal rate. The structure that will best reconcile the tension between our key objectives is one with: A) either zero or very few exemptions and reliefs, B) a relatively high tax-free allowance or threshold, and c) a flat marginal rate that is set at a low level.
• Other potential reforms are considered. These include scaling back the reliefs on Capital Acquisition Tax. One revenue neutral but potentially growth enhancing option is to shift the composition of capital taxation away from stamp duty and towards another form of capital taxation, for example, a stronger local property tax, a net wealth tax, or a land tax.

[1] Assumes a soft-Brexit outcome with a transition period until end-2020.