Political expedience wins out over rationality

One of the defining characteristics of Irish governance is the inability to make decisions based on evidence.

All too often we substitute evidence-based policy, where a careful weighing of the consequences and analyses of different positions leads eventually to a rational decision, for political-based policy. It would be nice if once and a while political expedience could be put aside in favour of rational decision-making.

The emergent discord on land is one area where we see, once again, that rational debate is being cast aside in favour of political point- scoring.

Two examples in recent weeks show how strong the hold of the land remains, more than 120 years after the land war. We seem to be hurtling backwards in relation to household tax and ignoring evidence and history in relation to student grants. Both of these reflect an ongoing conflict between evidence and politics. And the evidence of the past is that, when these come into conflict, politics wins.

Take first the vexed issue of land tax. It seems there might not now be a site value tax due, we are told, to “anomalies”. These anomalies seem to boil down to the fact that if I have a tumbledown shack and you a spiffy neat dwelling, next to each other, then we will pay the same tax.

Far from being an anomaly, this is in fact one of the points of such a tax. The reality is that tax can be used by governments to incentivise or discourage particular activity. We had property-based tax breaks in the boom to encourage living over the shop, building in particular areas, and so on, and we have carbon taxes that are, in principle at least, to act as a dampener on the use of particular fuels.

The beauty of a site tax as opposed to a what-is-on-the-site tax is that it will, all things being equal, encourage people to make maximum use of the site. In itself, it is not a silver bullet, but if you have a site and make poor use of it then the incentive is to make better use of it — build a house, improve the one that is on it — or sell the site to someone that is willing to make better use of it.

Instead, apparently the intention is to use a self-reported market value of the property. This in an environment where: A) there is as yet no public database of sales values; B) the only data available are disjointed asking prices across various agencies; C) the market for residential property can hardly be noted as being what might pass as “normal”, and D) there is no clarity on what the situation will be if one disagrees with the Revenue. And the sad thing is that we have had this tax before, from 1983 to 1997.

It was a massive failure, widely evaded, and was unworkable. Leaving aside the advantages of site value taxes, for example the fact that property-value based taxes are prone to procyclicality (stamp duty anyone?) while site value taxes are not, and the fact that the site tax captures for the State some value from increased infrastructure, the reality is that the political pressure is to avoid the perception of penalising urban dwellers whose sites are inherently more valuable than those of rural dwellers.

The ultimate logic of the site tax would be that it would extend to all forms of land; residential, commercial, and agricultural. And in dealing with land tax it is the principle that is important. At present, there is a rift in the cabinet on the issue of the inclusion of the capital value of farmland in the determination of third-level student grants.

For decades, it has been clear that farmers and self-employed persons can have significant levels of wealth but low (declared) income, and evidentially gain disproportional access to such grants. But again, in the face of evidence, we have done nothing. If we are to move to the logic of land taxes, we will begin to further incentivise farming to move activities to higher value uses of existing land.

The underlying idea is that land assets convey an “imputed rent” and one should be incentivised to make best and most productive use of them But there is a logical end point that leads to wealth tax.

If a farmer has land valued at €500,000 and is to be assessed on this, then we must, for equity, also assess the self-employed person with a shop or business worth €500,000 the same. And what of people with non-capital asset wealth? It’s a good job logic is not a strong point in Irish political discourse….

* Brian Lucey is professor of finance at Trinity College Dublin