At this time of year, officials in the Department of Finance survey the entire horizon of taxable activity in the hope of finding some low-hanging fruit which would help fund increased expenditure, lowering of other taxes, or debt reduction, or all three.
As this activity coincides with the media silly season, the potential for scare stories arising out of the exercise is enormous. In a parallel process in the Department of Public Expenditure and Reform, shopping lists are devised consisting of possible expenditure cuts – ranging from the politically toxic to the barely tolerable.
In combination, these seasonal activities are quite scary for ministers – not least for Pascal Donohue – as they raise the political hue and cry among opposition politicians and the commentariat, leaving members of the government with a sense of being hunted down by the pack of public opinion.
Particularly galling for ministers is the knowledge that these outings are more like drag-hunts. There is no quarry. Nobody in cabinet has any intention of raising most of the proposed new taxes or the proposed expenditure cuts.
And so, the Department of Finance boffins have dutifully wheeled out capital gains tax on the family home, increased stamp duty on commercial property and scrapping reduced rates of Vat for hotels and restaurants for public appraisal.
At one level, imposing capital gains tax on family home disposal is attractive to the mandarins. Rising house prices have given rise to very substantial capital gains for some home-owners in the right areas.
But the idea is politically suicidal. A lot of capital gain realised on family homes is already open to the effects of inheritance tax.
But taxing capital gains made on disposals of family homes, other than in the context of the death of the homeowner, runs counter to a number of long-cherished public policy objectives. If you want to promote home ownership, CGT on sales would totally subvert that aim. If you want people to down-size when they can, CGT would throw a spanner in the works. If you want a liquid, friction-free, responsive market in owner-occupied family homes, imposing CGT would achieve the exact opposite.
How do we know this? When CGT was levied at 40% (and then as now family homes were exempt), I and Charlie McCreevy, in opposition, tabled amendments to the 1997 Finance Bill proposing a reduction to 20%. Needless to say, this was strongly opposed on two grounds – ideological fairness and cost to the Exchecquer.
Charlie, as Minister, went on to reduce CGT to 20% and the yield to the Exchequer from CGT surged by 500%. The logjam of capital transactions held back by the 40% rate was broken and most people felt that 20% was a reasonable share for the share in the capital gains they realised. A small minority of wealthy citizens were still unwilling to pay CGT at 20% and devised tax avoidance schemes involving them or their spouses becoming non-resident in order to avoid paying any CGT at all. That loop-hole should have been closed but it wasn’t.
But the bottom line was that CGT at 20% produced far more for the Exchequer than CGT at 40%.
When the crash came and the capital gain tax base largely evaporated, CGT was raised back to 33%. But it would still make sense now to cut it back to 20%. That would bring in more revenue
Now ask yourself what the effect of introducing CGT on the family home would be. Would there be more or fewer transactions? If there were fewer transactions, would the cost of family homes rise? Would people down-size? Would people move their home to seek new jobs? Experience suggests that extending CGT to family homes would send the home-ownership market in the wrong direction completely.
So, quite apart from being a lead balloon politically, CGT on homes would drive prices up, drive volumes down, and drive more and more people into the rental sector.
If Pascal wants more money from CGT, he should leave family homes out of it, cut the rate from 33% to 20%, and plug all the loop-holes.
What about equity in all of this? Why should a capital gain be more lightly taxed than income from work? That ideological question needs to be addressed. And the answer is that CGT at 20% would yield twice or three times what CGT at 33% yields. Ideology simply doesn’t deliver revenue to the Exchequer.
We don’t charge Vat at 23% on home sales. But we do charge 23% Vat on toilet tissue and soap. Ideologically there lies a conundrum – but not in the real world.
A real ideological question is whether we want to promote home ownership and why? Leftist thinking would, I believe, prefer to have us all live as tenants. Would such a society increase the economic and political power of the state over the individual? Liberal republicans, by contrast, believe that the property rights of property owners are there for the many and not for the few. They are not sacrosanct but they are an integral part of the common good.
Consequently, there are major issues in public policy when it comes to taxation in respect of the single, major, and most widespread form of citizen-held property – the family home over which the citizen family wants to be in control. We have to very carefully examine proposals from apolitical civil servants in search of low-hanging fruit at budget time; they are quartered in a political submarine. They see the real world through a periscope – when and if they raise it.
We already live in a society where the prospect of home ownership is an ever-receding horizon for the coming generation. The future must be planned by more than the bean-counters, if democracy means anything at all.
By the way, I have no ideological objection to a truly local property tax. The present LPT is, however, grossly unfair. I believe that property owners in every county and city should contribute to the costs of their local government services. But the system needs reform. That a family with an income of €250,000 living in a large five bed-roomed home in the Midlands with no mortgage should pay less towards the spending of Westmeath County Council than a family with an income of € 50,000 with a 90% mortgage on a modest two bedroomed terraced house in Dublin must pay towards the spending of Dublin City Council is indefensible. I have proposed reform in the Seanad and will campaign to reform LPT to ensure fairness across the country.