Goal of the Proposal = Making 15,000 rental properties available.
There are only ~2,111 properties listed for rental in all of Ireland on Daft.ie.
London has ~40,000 rental properties available on Zoopla alone, and… London’s population is less than double that of Ireland.
The one-year goal for this policy is to have at least 5,000 properties available for rental in Ireland on Daft.ie. The two year goal is to have 15,000 properties available. The long term goal is to gently move away from the zero-sum property ladder game, and instead shifting incentives towards building and improving Irish housing.
Part 1: Incentivising Building on Land, not Sitting on Land or Underdeveloped Buildings
Property taxes (at a ~0.1% rate) would be replaced with a tax on land at a rate of 1%. Buildings and improvements would not be taxed. Land value would be determined using established norms (e.g. as is done in certain parts of Denmark). As a simple example, land value can be calculated by comparing the overall value of two sites, in a similar location, with a similarly sized and quality building, but on a differently sized parcel of land.
Moving from a property to a land tax has the following effects:
- Raising approximately ~3B EUR in additional government revenue per year. (See Appendix I.)
- Pushing incentives in the direction of building on land and improving current housing – not sitting on undeveloped land or underdeveloped buildings.
Lots of people want to live in cities where land is valuable and this shifts incentives to use that land and those buildings more fully.
Part 2: Fairly eliminate rent controls and barriers
For tenants, the goal is to have many more options for housing available, and at lower prices. Concerns around security of shelter – particularly for those needing support – should be a big priority. Security of shelter relies on having sufficient and high quality housing supply.
Loosely, the current rental system:
- Only allows landlords to take back their residence if a) a relative is moving in, or b) the house is being sold.
- Allows rent to be increased at most by 2-3% every 15 months, even when inflation is in the 5-10% range.
These incentives drive towards:
- Reluctance to rent out properties => driving down rental supply.
- High prices for rental, because landlords will tend to rent initially only at a high price (even if it means a place not being filled quickly) to compensate for the inability to maintain rent at a market rate once a tenant is occupying the building.
Part 2 of the proposal is thereby to:
- Eliminate rent controls.
- Allow landlords to take back their residence if a) a relative is moving in, or b) the house is being sold, or c) 12 months notice is provided to the tenant.
Rent controls were recently rescinded in Argentina and led to 200%+ increases in rental listings and 20-30% reductions in rent. I would not expect that magnitude of reduction in Ireland – where inflation is much lower – but it bears positive precedent for the approach.
Part 3: Reduce income taxes
- the lower marginal rate from 20% down to 18% (a 10% decrease)
- the upper marginal rate from 40% down to 36% (a 10% decrease also)
- To the extent a household or individual has a negative tax liability (after e.g. earned income and standard deductions), allow that negative liability applied against land tax.
This reduction in income tax by roughly one tenth, amounts to balancing out revenue gained from the land tax. In doing so, the incentives for working and jobs (which we want more of!) are increased.
Who is this good or bad for and how?
Those who rent would see a substantial increase in supply of housing, and potentially a decrease in rent.
Certainly, there will be tenants who are asked to vacate their homes, with 12 months of notice, who will be challenged. On the other hand, the greater supply of rental properties will also give greater opportunity for government programs that are short of houses to rent.
Separately, those who rent and work should see a rise in their take-home pay as income taxes are lowered.
Landlords will not be able to pass the land tax onto tenants, directly OR indirectly.
With most things, when you tax something, you get less of it (e.g. if you tax work, you get less hours of work OR employment). Land is different because it is fixed. There is no way for landlords to make land more scarce just because there is a land tax. The price of rent depends on the supply and demand of rental properties.
If anything, a land tax will result in an increased supply of properties as landlords are incentivised to make more use of them (i.e. rent them or improve or build on them) to cover their land tax cost. This means the land tax would be absorbed by landlords.
At the same time, landlords will benefit from a) being able to rent at market rates, b) being able to take back their residence with a 12-month notice period and c) a lower income tax rate.
Homeowners will have to pay more in land tax than was being paid in property tax. This is clearly a new cost. On the other hand:
- Housing shortage is a major impediment to economic development, and this is a headwind on property prices. Land taxes coupled with reduced income taxes helps with this.
- Addressing imbalances in housing supply and demand may lead to more stable housing prices, reducing the risks for homeowners of sharp declines in value.
Separately, homeowners who are working will benefit from a reduction in income tax. The extent to which the income tax reduction would outweigh increased land taxes depends on a household’s relative income and value of the home.
A household earning the median income of ~45,000 EUR and owning a house worth 300k EUR (i.e. land worth ~150k EUR), would pay about 1,500 EUR in land tax (about 1,350 EUR more than property taxes).
At a median income of 45k EUR with a standard rate cut-off of 51k EUR, the income tax would come to about 20% x 45k EUR = 9 kEUR. With a personal tax credit for a couple of 3,750 EUR, one employee tax credit of 1,875 EUR, one home carer’s allowance of 1,800 EUR and one earned income tax credit of 1,875 EUR, that would lead to a net liability of:
- 9,000 – 9,300 + 300 (property tax) = 0 EUR before the proposal
- 8,100 – 9,400 + 1,500 = 200 EUR after the proposal.
In cases where standard deductions exceed income and land taxes, no land taxes would be due. This is of particular relevance for some homeowners with lower than median incomes.
Generally, this proposal shifts incentives from home-owning towards working.
The government benefits by:
- Actually addressing the rental and housing shortages.
- Further diversifying revenues to land, adding to the large buckets of income tax, VAT and corporate tax – making the budget more resilient.
- Shifting taxes from productive activities (employment, and building) to zero-sum activities (land).
In Conclusion: It will be much better
The rental and housing shortages in Ireland impose great pain on individuals and households.
The rental market is broken and the housing market is fragile. Renters and first time buyers do not have the supply available to meet their needs. Meanwhile, homeowners sit on home equity that is fragile, often with loans that would be perilous in a housing-crash. There is much to be gained by all from a better match in supply and demand.
It will take strength to shift incentives towards building and improving the country’s housing – and moving away from the zero-sum property ladder. But, this will be a progressive shift, and it will be much better for everyone.
Appendix I – Net Revenue Calculation
Irish income tax in 2021 was 23.4B EUR (excluding USC and PRSI).
Marginal tax rates in 2021 for income were ~20% and ~40%. Reducing these taxes by roughly one tenth would lead to:
- ~18% and ~36% marginal rates of tax (USC and PRSI would still be on top).
- A 10% x 23.4B EUR reduction in revenue = 2.3B EUR reduction in revenue.
- There will be some, relatively small, reduction in revenue from allowing standard deductions to be applied against land tax. For this, I increase the net reduction in revenue to an estimated 2.5B EUR.
Property tax (D29A) in 2021 was 496M EUR at a rate of ~0.1%.
This implies a notional value of property of (quite loosely) ~500B EUR.
Very approximately (and likely conservatively), putting land value at 50%, this puts the implied notional value of land at ~250B EUR.
The required land tax rate, on 250B EUR of land, to make up 2.5B EUR of revenue is therefore:
- 2.5B / 250B = ~1% tax on land.