Wealth tax in Ireland would raise just €109m if homes and farms exempt, ESRI finds

Exemptions for the family home, farms and business assets cut deeply into the amount that can be raised.

A wealth tax aimed at the richest households, but which exempts their homes, farms and businesses, would raise just €109m a year, according to new research from the Economic and Social Research Institute (ESRI).

The study was co-authored by economists from the ESRI and the Department of Finance. It modelled a 1% annual tax on households with net wealth above €2m, or €4m for married couples.

When the tax covered only savings, investments, second properties and valuables, about 5,000 households would pay. That is 0.3% of all households, and each would pay an average of about €21,000.

At the same threshold, a tax on all non-pension assets would raise €1.03bn from about 27,000 households. That is close to the €1.12bn the State collected in gift and inheritance tax last year.

Researchers Rachel Slaymaker, Chi Tran, Federica De Blasio and Emmet Ryan found that exemptions for the family home, farms and business assets cut deeply into the amount that can be raised. The paper notes that such exemptions have historically been introduced to make wealth taxes politically acceptable or easier to administer.

"In order to raise larger revenues whilst avoiding the wider household coverage associated with low thresholds, the tax base would need to include a broader range of assets, which in an Irish context means including assets that may be harder to value, less liquid or politically sensitive such as business wealth, farms and the household main residence," the research notes.

The research marks a change from an earlier ESRI study in 2016, using data gathered in the aftermath of the financial crisis. It found a lower threshold could do more to make up for a narrower tax. Household wealth has since grown to almost two and a half times its 2013 level, and business assets account for 14% of gross household assets, up from 5%.

A narrow wealth tax would also fall mainly on older people. Under the narrow versions, households headed by someone aged 65 or over would pay roughly half to three-fifths of the total bill as savings, shares and second properties are disproportionately held by older households.

The researchers said they adjusted the data for avoidance using evidence from Spain, where wealthy taxpayers shifted assets into exempt categories. On that basis, the €109m falls to €74m. The paper warns that taxes with extensive exemptions are likely to prompt larger avoidance responses, because they give people more room to move their assets.

They also note that, historically, wealth taxes across OECD countries rarely contributed more than 1 per cent of total tax revenue and that despite wealth growth, this contribution generally declined over time. Political pressures also contributed to the narrowing of tax bases through extensive exemptions and reliefs. This was consistent with Ireland’s short-lived 1975-1978 wealth tax which had a wide range of exemptions and resulted in high administrative costs relative to the revenue it generated.

“Our analysis highlights important trade-offs between the number of households affected, the total tax liability generated and the assets brought within the scope of any wealth tax,” said Dr Rachel Slaymaker of the ESRI.

The paper does not recommend whether Ireland should introduce a wealth tax. It notes that the 2022 Commission on Taxation and Welfare did not propose one. Instead, the Commission called for reform of existing taxes on capital and wealth.