At the height of the boom, indirect, cyclical property taxes – stamp duty, capital gains tax and VAT – were contributing17% of the total tax intake, up from 5% in 1998 (see figure 1). Revenues from stamp duty on all property transactions were c. €2.98b in 2006 alone, up from 387m in 1998, and there were c. €3.2b in VAT receipts. Residential stamp duty in 2006 was €1.3bn on 52,901 transactions.
Since the height of the boom these taxes have fallen off a cliff. A piece in the Irish Times yesterday (no online version) revealed that in the 2010 the residential stamp duty take will be less than €100m, a fall of 92% from the peak. Residential transactions liable for stamp duty is set to fall below 10,000 in 2010 (see Figure 2). The fall in stamp duty is clearly due to a slump in both house prices and sales, and also a change in the constitution of buyers, with around 50% of those buying at the minute being first time buyers (who are not liable for the tax). Non-residential stamp duty has suffered a similar collapse and combined residential and non-residential stamp duty now only accounts for 0.6% of overall tax receipts. What was a minor, but significant, contributor to the overall tax intake has withered away to insignificance due to its cyclical nature.
Relying on indirect forms of taxation, such as stamp duty, is a folly because they are cyclical. Direct forms of property tax, in contrast, have the benefit of being sustainable and robust to the boom and bust cycles of the market. They might not be popular, but they are necessary if we want to minimise the depth and severity of this and future fiscal crises. The abolition of property taxes for short term political gain was political vandalism – they should have been reformed or restructured to make them equitable, but not taken off the books.
The present debate concerning the re-introduction of property taxes needs to move from being whether to do so, to what forms of property tax will be introduced and whether they will include primary residences or only second, investment and commercial properties; whether those that have paid huge sums of stamp duty in the last number of years will be included, or included on a phased basis; how to deal with asset rich/income poor households or whether households below certain income thresholds or certain benefits will be included, etc. Yes, any property tax will be deeply unpopular, but it will be sustainable and non-cyclical and it has to be better than the austerity measures we are presently suffering. Not introducing them suggests a lack of political will to take unpopular but necessary decisions address the present crisis head-on and create a more robust taxation system. The stamp duty slump illustrates perfectly the fiscal problem if we stick to present policy.