Household wealth in Ireland largely consists of people’s homes – accounting for almost 70 per cent of net wealth. This is a good bit higher than the euro-area average of just over 60 per cent. Over the last decade, the value of our housing wealth has risen by more than two-thirds, whereas aggregate housing borrowings have remained unchanged.
The increase in housing prices, with only limited changes in housing stock, is what has largely driven the growth in housing wealth.
European Central Bank (ECB) data shows a very uneven distribution of wealth across the euro area, with much greater inequality than the spread of income.
The most unequal wealth distribution is found in Germany, Austria, Finland and Italy. Ireland experiences less wealth inequality than across the euro area as a whole. Here the top 10 per cent of households own just under 50 per cent of household wealth, compared with 57 per cent across the euro area.
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This difference is mainly due to a more equal spread of housing wealth in Ireland. The top 10 per cent of the population in the euro area own 44 per cent of housing wealth, but in Ireland their share is about 33 per cent.
The bottom 50 per cent in the euro area own only 8 per cent of housing wealth, but in Ireland they own 14 per cent.
[ Richest 10% of Irish households hold nearly half the wealthOpens in new window ]
But Ireland has become more unequal in this respect over the last decade as younger generations got locked out of the housing market, while the value of the homes owned by their parents and grandparents increased.
The share of housing wealth owned by the bottom half of the population has dropped from about 25 per cent to 14 per cent, a fall of 10 percentage points. Making home ownership affordable again for younger people could help reverse this trend.
On the income side, Ireland is among the more equal countries in Europe because our tax and welfare systems do a good job of levelling the pitch.
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However, we are an outlier in how lightly the tax system intervenes to even out the distribution of wealth.
The Central Bank, the Department of Finance and the Irish Fiscal Advisory Council have all drawn attention to the excessive dependence of our tax system on corporation tax and income tax, particularly that raised on the profits of a handful of multinationals and their high-earning staffs.
The Commission on Taxation and Welfare has recommended the introduction of a tax on wealth, both to diversify the sources of taxation and to deliver greater equity.
Ironically, parties such as Sinn Féin and People before Profit, which have been vocal in calling for wealth taxes in response to recent data, have also been implacably opposed to taxing the main form of wealth, which is housing.
[ In an era of rising property prices, the rich in Ireland are only getting richerOpens in new window ]
The Fine Gael-Labour government of 1973-1977 replaced estate duties with capital acquisitions tax on transfers between individuals at whatever time, together with a modest wealth tax.
The subsequent Fianna Fáil government in 1977 abolished the wealth tax, along with rates on private homes. A 1985 Economic and Social Research Institute study of this experiment with a wealth tax highlighted that the small number of individuals potentially affected by the tax were extremely effective in lobbying to emasculate the proposed tax before implementation. The result was a very low tax yield.
Given the complexity of trying to tax financial assets, the costs of doing so were high. The State spent more than 5 per cent of the tax revenue in actually collecting the tax but those paying the tax spent almost 20 per cent of what they paid in tax as fees to advisers to avoid paying it. There are important lessons to be learned in designing any wealth taxes for the modern age.
Capital acquisitions tax has proved more effective than the wealth tax in collecting revenue, at a lower cost. As families have become smaller and household wealth has risen, inherited wealth can drive growing inequality in our society. In the interest of fairness, as well as maintaining diversity of taxation sources, further dilution of capital acquisition taxes should be resisted.
The modest property tax, collected by Revenue and passed on to local authorities, is efficient in terms of collection cost, but governments and councils have shied away from enabling the yield to rise in line with soaring house prices.
Of all forms of wealth taxation, property tax is the most difficult to evade or avoid – the physical assets cannot be shifted abroad.
Artificial changes in ownership through a network of companies does not affect the liability. By definition, this tax is only paid by those who actually have housing wealth, including landlords. Those who cannot afford a house are exempt. If we want to achieve a fairer distribution of wealth, an effective property tax is essential.
