26/9/2014: FT on Land Value Taxes

FT runs lengthy discussion about the merits of the Land Value Tax http://www.ft.com/intl/cms/s/0/c92e084a-4300-11e4-8a43-00144feabdc0.html#axzz3EPmKklUV

These have been extensively covered in my paper on the subject here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2047518 here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2029519 and here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2029515 as well as by Ronan Lyons here: http://smarttaxes.org/2012/01/30/ronan-lyons-report-on-site-value-tax-now-available/

17/8/2014: The Globalization Paradox and Land-linked Taxation

Couple of years ago, I wrote extensively on the efficiency of land-value or site-value taxes in raising public investment funding and alleviating the adverse impact of private rents accruing to landowners from public investment (see for example here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2047518 and more extensive version: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2029515). I have also covered the advantages offered by land-value taxation in the context of stabilising macroeconomic and tax environments and addressing key risks to these environments (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2029519).

A new paper by Schwerhoff, Gregor and Edenhofer, Ottmar, titled "The Globalization Paradox Revisited" (July 22, 2014, CESifo Working Paper Series No. 4878. http://ssrn.com/abstract=2469725) makes a similar argument, but within the context of the land linked taxes efficiency in alleviating a different problem. Note, emphasis in italics is mine.

Per authors: "According to the Globalization Paradox, globalization limits the freedom of choice for national governments. Capital mobility in particular induces tax competition, thus putting downward pressure on capital taxes. However, while capital mobility introduces the inefficiency of tax competition, it makes the allocation of capital more efficient. Whether national welfare and tax-financed public good provision increase or decrease through capital mobility depends on country characteristics. These characteristics include the relative capital endowment, the availability of taxes on fixed factors such as land and the preference for the public good. We compare the two second best settings of a closed economy and an economy with capital mobility to show that the relative capital endowment determines whether the net effect of capital mobility is positive. Fixed factor taxes have the potential to improve welfare by defusing the globalization trilemma through a reduction in the need for capital taxation."

30/11/2013: Land Tax back in the (Irish) news

It appears that after years of research and arguments in the media, having first done the wrong thing, the Irish Labor Party is now drifting into the space of supporting the only tax that makes sense in the context of charging against fixed assets: land value tax.

The report on this are here: http://www.breakingnews.ie/ireland/labour-annual-conference-votes-to-replace-property-tax-615824.html

Those of you who follow this blog and my research would be familiar with the following three papers on the topic:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2029515
and
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2047518
and
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2029519

Additionally, Ronan Lyons also produced excellent research on the topic: http://smarttaxfiles.files.wordpress.com/2012/01/site-value-tax-in-ireland-identify-consulting-final-report.pdf

Karl Deter contributed to public debate extensively: http://smarttaxes.org/a-fair-property-tax-a-public-debate/

And Smart Taxes network produced core research funding, supports and publications platforms: http://smarttaxes.org/

26/6/2013: SVT was the only form of property tax promised to the Troika

The previous Government of the FF/GP did not shower itself in a glory of competence. However, someone recently sent me a document from the Department of Finance which clearly shows that when it came to structuring the tax changes under the Troika programme, the FF/GP Government did understand the arguments in favour of the Site Value Tax (as opposed to the Property Tax) that were presented to them by, among others, myself.

http://www.finance.gov.ie/documents/publications/other/2012/eulettertrichet.pdf page 2 contains a reference solely to the Site Value Tax and no reference to the property tax.

This implies that the Troika had no objection to the SVT being the only tax on real estate in Ireland, and that the currently instituted system of property taxation (that exempts large land ownership from tax and induces a system of charges wholly unrelated to economic, environmental and social costs of property) was installed based on the current Government decision absent any pressure or compulsion from the Troika.

You can read on the benefits of SVT over the traditional property tax here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2029515

21/7/2012: Sunday Times July 15 - No growth in sight

This is an unedited version of my Sunday Times column for July 15, 2012.

This week, the Central Statistics Office published long-awaited Quarterly National Accounts for the first quarter 2012, showing that in January-March real Gross Domestic Product fell 1.1 percent to the levels last seen around Q1 2005. Gross National product is down 1.3% and currently running at the levels comparable with Q1 2003 once inflation is factored in. Rampant outflow of multinational profits via tax arbitrage continues unabated, as GDP now exceeds GNP by over 27 percent.

There is really no consolation in the statistical fact that, as the National Accounts suggest, we have narrowly escaped the fate of our worse-off euro area counterparts, who posted three quarters of consecutive real GDP contraction since July 2011. Our true economic activity, measured by GNP is now in decline three quarters in a row in inflation-adjusted terms.

Our real economy, beyond the volatile quarter-on-quarter growth rates comparatives, hardly makes Ireland a poster child for recovery. Instead, it raises some serious questions about current policies course.

Save for Greece, five years into this crisis, we are still the second worst ranked euro area economy when it comes to overall performance across some nineteen major indicators for growth and sustainability.

Our GDP and GNP have posted the deepest contraction of all euro area (EA17) states. Assuming the relatively benign 2012 forecast by the IMF materialise. Q1 results so far point to a much worse outcome than the IMF envisions. Total investment, inclusive of the fabled FDI allegedly raining onto our battered economy, is expected to fall over 62% on 2007 levels by the year end – also the worst performance in the EA17. Despite our bravado about the booming exporting economy, our average rate of growth in exports of goods and services since 2007 is only the fifth highest in the common currency area.

Ireland’s unemployment is up by a massive 220%, the fastest rate of increase in the euro zone. Employment rate is down 20% - the sharpest contraction relative to all peers. Other than Estonia, Ireland will end 2012 with the steepest increase in government spending as a share of GDP – up 18% on 2007 levels. We have the second worst average structural Government deficit for 2007-2012 excluding banks measures and interest payments on our debt. By the end of 2012, our net Government debt (accounting for liquid assets held by the state) will be up more than eight-fold and our gross debt will rise 354%. In both of these metrics Ireland is in a league of its own compared to all other member states of the common currency area.

The latest data National Accounts data confirms the above trends, while majority of the leading economic indicators for Q2 2012 are also pointing to continued stagnation in the economy through June.

Purchasing Manager Indices (PMI) – the best leading indicator of economic activity we have – are signalling virtually zero growth for the first half of 2012. Manufacturing PMI has posted a robust rate of growth in June, but the six months average remains anaemic at 50.7. The other side of the economy – services – is under water with Q2 activity lagging the poor performance achieved in the first quarter. 

In the rest of the private economy, things are getting worse, not better. Live register was up, again, in June, with standardized unemployment now at 14.9%. Numbers on long-term unemployment assistance up 6.8% year on year. Factoring in those engaged in State-run training schemes, total number of claimants for unemployment benefits is around 528,600, roughly two claimants to each five persons in full employment. Construction sector, the only hope for many long-term unemployed, posted another monthly contraction in June – marking the sharpest rate of decline since September 2011. Retail sales, are running below 2005 levels every month since January 2009 both in volume and value terms. Despite June monthly rise, consumer confidence has been bouncing up and down along a flat trend since early 2010.

Meanwhile, net voted government spending, excluding interest payments on Government debt and banking sector measures, is up 1.9% year on year in the first half of 2012 against the targeted full year 3.3% decrease. Government investment net of capital receipts is down 19.1%. This means that net voted current expenditure – dominated by social welfare, and wages paid in the public sector – is up 3.3% on same period 2011, against projected annual decrease of 2.2%. Although not quite the emergency budget territory yet, the Exchequer performance is woeful.

And the headwinds are rising when it comes to our external trade. By all leading indicators, our largest external trading partners are either stagnant (the US), shrinking (the Euro area and the UK) or rapidly reducing their imports from Europe (the BRICs and other emerging economies).

The question of whether Ireland can grow its economy out of the current crisis is by now pretty much academic. Which means we need radical growth policy reforms.

Look at the global trends. In every five-year period since 1990, euro zone average annual real economic growth rates came in behind those of the advanced economies. As a group, other advanced economies grew by some 15 percentage points faster than the euro area during the pre-crisis decade. Both, before and since the onset of the Great Recession, euro area has been a drag on growth for more dynamic economies, not a generator of opportunities. Within the euro zone, the healthiest economies during the current crisis – Germany, Finland and Austria – have been more reliant on trade outside the euro area, than any other EA17 state.

This is not about to change in our favour. Data for China shows that the US now outperforms EU as the supplier of Chinese imports. Europe’s trade with BRICs is deteriorating. Combined, BRICs, Latin America and Africa account for less than 5% of our total exports. In the world where the largest growth regions – Asia Pacific, Africa and Latin America are increasingly trading and carrying out investment activities bypassing Europe, Ireland needs to wake up to the new geographies of trade and investment.

Given the severity of economic disruptions during the current crisis, Ireland requires nominal rates of growth in excess of 6-7 percent per annum over the long term. To deliver these, while staying within the euro currency will be a tough but achievable task. This requires drastic increases in real competitiveness (focusing on enhanced competition and new enterprise creation, not wages deflation alone) in domestic markets, including the markets for some of our public sector-supplied services, such as health, education, energy, transport, and so on. We also need aggressive decoupling from the EU in policies on taxation, immigration and regulation, including that in the internationally traded financial services, aiming to stimulate internal and external investment and entrepreneurship. We must review our social policies to incentivise human capital and support families and children in education and other forms of household investments.

Like it or not, but the idea that we must harmonize with Brussels on every matter of policy formation, is the exact opposite of what we should be pursuing. We should play the strategy of our national advantage, not the strategy of a collective demise.

Box-out:

Recent decision by the Government to introduce a market value-based property tax instead of the site value tax is an unfortunate loss of opportunity to fundamentally reform the system of taxation in this country. A tax levied on the property value located on a specific site effectively narrows the tax base to exclude land owners and especially those who hold land for speculative purposes in hope of property value appreciation lifting the values of their sites. In addition, compared to the site value tax, a property levy discourages investment in the most efficient use of land, and reduces returns to ordinary households from property upgrades and retrofits. Perhaps the most ridiculous assertions that emerged out of the Government consideration of the two tax measures to favour the property levy is that a site value tax would be less ‘socially fair’ and less transparent form of taxation compared to the property tax. By excluding large landowners and speculative land banks owners, and under-taxing properties set on larger sites, a property tax will be a de facto subsidy to those who own land over those who own property in proximity to valuable public amendments, such as schools, hospitals and transport links. By relating the volume of tax levy to less apparent and more numerous characteristics of the property rather than more evident and directly comparable values of the adjoining land parcels, the property tax payable within any giving neighbourhood will be far less transparent and more difficult and costly to the state to enforce than a site value tax. In a research paper I compared all measures for raising revenues for public infrastructure investments. The study showed that a site value tax is an economically optimal relative to all other tax measures, both from the points of capturing privately accruing benefits from public investment and enforcement. This paper was presented on numerous occasions to the Government officials and senior civil servants in charge of the tax policy formation over the last three years. 

26/4/2012: Sunday Times 22 April 2012: Water and Property Taxes

Here's my Sunday Times article from April 22, 2012 (unedited version, as usual):

Years ago, I quipped that Ireland doesn’t do evidence-based policies, instead we do policies-based evidence. Current whirlwind of taxation initiatives is the case in point. These include the household charge and its planned successor a property tax, plus the water charge and its twin meter installation charge. These policy instruments are poorly structured, rushed in nature, and are not based on hard economic analysis.

Water is a scarce resource, even in Ireland. On the supply side, we have abundant water resources in some locations and bottlenecks where population concentrations are the highest and where the bulk of our economic activity takes place. Reallocation of water to reflect demand/supply imbalances is a political issue, and creation of a monopolized system of water provision is not an answer to this. More effective would be to encourage local authorities to sell surplus water into a unified distribution system. Coupled with a structural reform and consolidation of the local authorities, this approach will incentivise productive economic activity in water-rich, less developed regions and provide competitive pricing of water.

Water delivery infrastructure is free of political constraints, but faces huge capital investment and operational problems. These factors are determined by treatment and transmission systems, and water quality monitoring capacity in the system. Chronic underinvestment in these areas means that Ireland’s quality of water supply is poor and water losses within the system are staggeringly high. Delivering this investment is not necessarily best served by a centralized monopoly of water provision. Only pipe infrastructure should be a monopoly asset, charging the transit fee that will reflect capital investment and maintenance needs of the system. Treatment and part of monitoring network can be retained at the local level to provide for local jobs and income.

Water charges are the best tool for demand management, a system of incentives to conserve water at the household and business level, as well as the revenue raising to sustain water infrastructure. In this context, a water charge is the best policy tool.

Currently, we pay for residential water via general taxation. If the policy objective is to improve water supply systems and create more sustainable demand, water charges should replace existent tax expenditure. In addition, higher level of collections is warranted to allow for investment uplift. Current price tag is estimated around €1.2 billion. Of these, ca €200 million come from business rates which feature a low level of compliance. Assuming half the normal rate of M&A efficiencies from consolidating the system of local water authorities, factoring in a 50% uplift on businesses rates compliance and allowing for a 25% investment buffer, annual revenues from residential water supply system should be around €900-950 million. This is the target for revenues and at least 1/3 of this target should go to reduce the overall burden of income taxation.

To deliver on the above target, we can either conceive a Byzantine, and thus open to abuse and mismanagement, system of differential allowances, rates and exemptions. Alternatively, we can take the existent volume of residential water demand and extract from this current price per litre of water. This rate should allow a 10-15% surcharge to incentivise future water conservation and to finance investment in water supply networks. Use this system for 3 to 5 years transition period. Thereafter, the market between the local authorities will set the price.

The charge, should apply to all households consuming publicly-supplied water. For poor households who cannot afford the charge, means-tested social welfare payments should be increased to cover water allowance based on the family size and characteristics. Savings generated by some households should be left in their budgets. The resulting system will be ‘equitable’, and economically and environmentally sustainable.

A complicated pricing structure of exemptions and allowances, backed by a quango and a state water monopoly, will not deliver on any the above objectives.

A different thinking is also needed when it comes to structuring a property tax. The latest instalment in the on-going debate on this matter is contained in the ESRI report published this week. In the nutshell, the ESRI report does two things. First, it proposes an annual tax on the value of the property while applying exemptions for those with incomes below specific thresholds. Second, the ESRI report attacks the idea of a site value tax as being infeasible.

Both points lead to an economically worst-case outcome of a property tax that falls most heavily on younger highly indebted families, thus replicating the distortionary effects of the already highly progressive income tax.

An economically effective system of property or site-value taxes should be universal, covering all types of property and land, regardless of ability to pay. Why? Because a property or a site value tax offers the means for capturing the benefits of public amenities and infrastructure that accrue to private owners. These benefits accrue regardless of the households’ ability to pay. Low-income household facing an undue hardship in paying the rates can be allowed to roll up their tax liability until the time when the property is sold.

My own recent research clearly shows that a site value tax imposed on all types of land, including agricultural and public land, represents a more economically efficient and transparent means for capturing private gains from public investments. It is also the least economically distortionary compared to all other forms of property taxation. This is so because a land value tax increases incentives for most efficient use of land and decreases incentives to hoard land for speculative purposes. A traditional property tax, in line with that proposed by the ESRI, does the opposite.

With a deferral of tax liability for those unable to pay, a land value tax will bring into the tax net those who hold significant land banks and/or own large parcel properties, but who are not investing in these lands and are not using them efficiently. The system will allow older households to retain their homes, but will charge fair fees on the property value that has nothing to do with these households own efforts when the gains are realized either at sale or in the process of inheritance.

The ESRI argument against implementing a site value tax is that the lack of data and a small number of land transactions in the economy prevent proper valuation. This argument is an excuse to arrive at the desired conclusion of infeasibility of the site value tax. Ireland is starting property valuation system virtually from scratch. Thus, unlike other countries, we have the luxury of doing it right from the start. Compiling a database for land valuations is easier than for property valuations precisely because sites have much less heterogeneity than the properties that occupy these sites. In simple terms, value of property is determined by the value of buildings located on it, plus the value of the site. The former is much harder to value than the latter. The value of a specific site can be backed easily out of an average or representative value of the properties located within the vicinity of the site, plus by referencing directly specific attributes of the site.

As with the water charges, the property tax system must be designed not from the premise that the Government needs a quick hit-and-run revenue fix, but from the premise that we need a new approach to taxation. Such an approach should aim to reduce the burden of taxation that penalises skills, work effort, entrepreneurship and discourages households from investing in their own human capital and properties. Instead, the burden of taxation should be shifted on paying for specific benefits received and on privately accruing gains from public investments and amenities. In this context – both water charges and a property or a site value tax represent a step in the right direction. But to be effective, these policies must be structured right.

Charts:

Box-out:

Just when you thought the taxpayers can breath easier when it comes to the banks, the latest data from the Irish, Spanish and Italian authorities shows that the banks of the European ‘periphery’ have dramatically ramped up their holdings of their countries’ Government bonds. In 3 months through February 2012, Irish banks increased their holdings of Government bonds by 21%, Spanish – by 26%, Italian – by 31%. Back in late 2008 I warned that the banking crisis will go from the stage where sovereign debt increases will be required to sustain zombified banking systems, to the stage when the banks will be used as tools for financing over-indebted sovereigns, to the final stage when the weak nations’ sovereign debt will become fully concentrated within the banking systems they have nationalized. Sadly, this prediction is now becoming a reality. As GIPS’ banks increased their risk exposures to the Governments that underwrite them, German and French banks have been aggressively deleveraging out of the riskiest sovereign bonds. In Q1 2012, Portugal ranked as the second most risky Sovereign debtor in the world in CMA Global Sovereign Credit Risk Report, Ireland ranked seventh and Spain ranked tenth, with Greece de-listed from the ratings due to its recent default. This concentration of risk on already sick balancesheets of the largely insolvent banks is a problem that can reignite the Eurozone banking crisis.

Economics 07/06/2010: My points from CPA conference

The following is a quick transcript of the main points of my speech at CPA Ireland annual conference last Friday, with some of additional points in brackets.

Friday, June 4, 2010

Ireland is ten quarters into twin crises of credit contraction and house price declines which [can be expected] last for 33 quarters unless radical policy changes are made according to Dr Constantin Gurdgiev. Dr Gurdgiev was speaking at the annual national conference of the Institute of Certified Public Accountants (CPA) in Carton House, Maynooth, today.

Dismissing optimistic reports of an imminent recovery Dr Gurdgiev said: “Since May 2009, we’ve been “turning corners” to a recovery more often than Michael Schumacher on a World Grand Prix circuit.”

According to Dr Gurdgiev, Ireland’s combined Government and economy-wide debt is the worst of any of the other so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain) states and the other three EU member states which he groups with them in terms of economic difficulties – Belgium, Austria and the Netherlands (BAN).

“The structure of our fiscal spending is working against us”, Dr Gurdgiev told the conference. “Fiscally we have excessive structural deficits of 50-60% of the total deficit and, courtesy of the banks we are now accumulating off balance sheet structural deficits. Our deficits are the worst in BAN-PIIGS group.”

Ireland’s asset bubble implosion is also set to continue for some time. “Asset bubble crashes last longer than our policies anticipate”, he said. “The OECD average is 10 quarters of credit busts for 18% average contraction and 19 quarters of house price falls for a 29% average price decline. Ireland’s bubble of a 60% decline in credit supply implies 33 quarters of credit contraction and our 50% house price fall implies 33 quarters of price declines. We are currently roughly 10 quarters into these twin crises.”

Compounding these crises is the fact that Ireland has the least competitive economy in the BANPIIGS group in terms of relative unit labour costs. “We haven’t been competitive since at least the mid-1990s”, Dr Gurdgiev contended. “While the latest data from the Irish Central Bank provides some grounds for optimism on the competitiveness front, regaining our overall competitiveness compared to other small open economies around the world will require more hard choices on public sector reforms and restructuring of our public utilities and semi-state service providers.” [You can see more on these points here]

On the other hand, Ireland does have a healthy exporting sector dominated by multinational companies. “But it is struggling against uncompetitive capital, public services and utilities markets, has no credit support and is suffering from capital flight and assets downgrades. Our exporting sector alone cannot carry this economy out of the hole. We are in for a structural recession; unemployment will remain high and employment will continue to fall.” [Notice, I am stressing the word ‘alone’ – it is naïve to believe that we can move out of the crisis on the back of exports. In the longer run, exporting activities will have to dominate the overall economic structure, but we are very far away from this being a reality. More importantly, our exports are being held back – at the indigenous firms’ level – by uncompetitive domestic economic structures, with some of the most pressured areas relating to semi-state companies operations].

Looking at the international picture he claimed there will be decreased pool of foreign direct investment and portfolio investment for Ireland to compete for and there will also be a decreased appetite among investors globally for an ‘Irish story’; “Firm fundamentals will matter in future. In addition, competition for foreign direct investment and portfolio investment amongst the smaller EU states will heat up and as investment diversification becomes more important the flight of capital from Ireland will be significant.”

[There are several things going on here. First on inward FDI – it is clear that Ireland will have to be re-packaged for the future efforts by IDA and EI and in general as a location for inward FDI.

Tax advantage on the corporate side will have to be matched by tax advantages on labour side, especially on skills and entrepreneurship, creativity and knowledge. This means that just as we did with the corporate tax rates, we will have to move to lower tax on premium that skills and other forms of human capital earn in the market place. And this means the need for dramatically re-thinking the system of taxation of labour and the system of taxation in general.

In addition, Ireland will need to get more serious about importing not just raw corporate FDI, but also much higher risk and less anchored entrepreneurial investment. We need to actively pursue young, aggressive, promising start ups and even potential start ups. This too requires re-balancing tax rates, amongst other things, away from taxing labour returns and in favour of taxing immobile and less productive forms of capital. Land is clearly a good target for shifting tax burden.

Ireland will have to re-market itself. We need to put to rest the tourist brochure approach to presenting ourselves and start putting in place real and meaningful changes to our immigration regime, naturalization regime, visa agreements with the neighboring countries. We also need to start thinking about the problems of services provided by the public sector, our cities, to citizens and residents. These services will have to be world class, competitive, easily responsive to demand changes, efficient, individualisable and, frankly speaking, dramatically different from the ‘cattle-em-onto-a-bus’ type of service we supply currently. If Ireland were to become competitive as a location for younger, dynamic, globally mobile highly skilled workers and entrepreneurs of the future (home-grown and foreign alike), the idea of having people on trolleys in dirty hospital halls will have to be buried, fast. The idea of expecting public transport passengers stand in freezing rain for hours waiting for a bus that operates to the bus driver-own schedule has to be binned asap.]

Dr Gurdgiev told the CPA Annual Conference that he did see some opportunities for Ireland’s exporters in the near term, however, particularly among those countries experiencing a relatively high speed recovery - primarily in rapidly developing emerging markets in parts of Asia and to a lesser extent Latin America.

“There is a substantial continued demand for investment in major public infrastructure in these countries [as well as in areas of domestic private demand]”, he said. “These regions are likely candidates for products and services from Ireland, but Irish firms need a differentiator in entering these markets. They have to attract and deploy top talent and deliver meaningful gains to local and foreign clients investing in these regions, while offering the legal and counterparty security of being domiciled in Ireland. The most likely pathway to these markets is by partnering in broader joint ventures with local providers in the countries themselves.” [This too requires a categorical change in indigenous enterprises. The Celtic Tiger ways of hiring ‘bright young foreigners’ for lower grade positions and retaining often unskilled, inexperienced senior staff with legacy tenure will have to go. The glass ceiling for younger and more ambitious and career driven, skilled foreign and domestic younger people will have to be broken.]

Growing knowledge economy in Ireland is the long term solution to Ireland’s economic problems, Dr Gurdgiev argued. “We have no choice but to develop our higher value added, traded services sectors. This is the real ‘knowledge’ economy.

[And I have gone to pains to explain that the ‘knowledge economy’ the policymakers have been talking about is just a small subset of the real knowledge economy. What differentiates my view of the knowledge economy from that of official policy-driven one is that to me knowledge economy reaches across various sectors of services that are largely neglected by our politicians and civil servants. Advertising and new media, e-games, health services, legal services, financial services, design and technology/creativity integration – these are some of the examples of real traded and high value added services that we should be developing here.]

But our prospects are not guaranteed here. The knowledge economy is human capital intensive and our taxation system creates no incentives to invest in human capital. We need to become more human capital focused.

“This requires a maximum flat rate income tax of 20%; a shift of the tax base to property; closing the welfare trap; and reducing the fiscal burden”. [I specifically pointed to the fact that we have a good policy on the books – the Land Value Tax – but that virtually no work is being done today to get this tax implemented in the next Budget. I also clearly stated that this should be a revenue-neutral shift in tax burden, not a new tax grab by the Exchequer. For links to background papers on SVT/LVT see here. On flat tax - back in 2006 I wrote a series of 3 articles in Business & Finance magazine on the issue of Ireland adopting flat income tax. I should dig them up and post them on my long run site...]

“We used to have a more productive and balanced economy”, Dr Gurdgiev concluded. “We’ve lost it to hype and construction, property, credit and fiscal bubbles. We need a productive knowledge based services economy next.”

Economics 26/01/2010: House affordability in Ireland

Demographia International issued Housing Affordability Survey: 2010 (based on Q3 2009 data) (hat tip to Ronan Lyons).

Couple of interesting points highlighted below:

1. Irish dynamics are improving, but not fast enough; and
2. International evidence suggests that land (site) value taxation might be a better way of cooling the overheating markets than draconian planning and regulatory restrictions on land use.
   

The ratings are based on a house price relative to a median multiple of income, with table below showing the relative categories.The authors use gross median income, which, of course implies that taxes are not considered to be an impediment to affordability. Now, Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States are the markets considered, and in general Ireland stands out as the higher tax economy here.

The ratings are based on major urban centres' data for 272 markets surveyed across the countries listed above.

For the entire sample, the study found that in 2009 there were 103 affordable markets, 98 in the United States and 5 in Canada. None in Ireland.

Note that of 5 regional markets surveyed for Ireland, 3 were found to be moderately unaffordable and 2 were seriously unaffordable.

In other words, we are still way off from actually reaching affordability that would be consistent with our house price declines and income uncertainty (ca x2.5-2.75 multiple). Or, put differently, we are far away from getting support for this property market.

But what about regional variation?
Now, I am not going to pass a judgment as to whether Limerick is more desirable than Cork or Galway... One has to enjoy though a comparative: Limerick is ranked next to Portland (Oregon). I had a laugh. Galway is between Sacramento (California) and Austin (Texas). Cork is ranked next to Atlantic City (NJ) - somewhat reasonably, but more expensive than Quebec in Canada. Waterford is, apparently, comparable to Philadelphia and Tucson Arizona. Hmmm...


An interesting chart: relationship between housing affordability and land regulation. Notice the reds - these correspond with more prescriptive nature of land regulation - regulation based on more planning, stricter planning and more state/local authorities' controls. Predictably - greater controls, higher prices, lower affordability.
Unfortunately, I cannot tell out of this chart or the discussion in the report as to what exactly comprises prescriptive model of regulation. Only a glimpse:

"Severely Unaffordable Markets: There were 62 severely unaffordable markets this year, down from 64 in 2008. The least affordable markets were concentrated in Australia (22) the United Kingdom (19) and the United States (11). Nine of the 11 US severely unaffordable markets were in California. There were 5 severely unaffordable markets in New Zealand and 5 in Canada (Table ES-3). However, many of these severely unaffordable markets have experienced steep price declines in the last year. Among the major markets, Vancouver is the least affordable, with a Median Multiple of 9.3, followed by Sydney (9.1), Melbourne (8.0), Adelaide (7.4), London (7.1), New York (7.0) and San Francisco (7.0). As in the past, all of these markets were characterized by more prescriptive land use regulation (such as “compact city,” “urban consolidation,” “growth management” or “smart growth” policies), which materially increase the price of land, which makes housing unaffordable."

This is interesting, for it really does suggest that some other means - other than direct regulation/rationing of land - must be used to cool the markets at the times of excess demand. Not a restriction on supply, but, perhaps, a reduced incentive to speculatively invest in land? Indeed - bring on land (or site) value tax...