Tuesday, October 17, 2006

Stamp Duty Hypocrisy but who pays for Development Land at €500,000 or more an acre

PD President and Junior Minister Tom Parlon (seated) has warned that any change in the restrictive rezoning system of land for development that has a 50+ times multiplier effect on values, would be to the "left of Stalin" even though as a big farmer, he is a significant beneficiary of European socialism

Promoting stamp duty reform to ease pressure on property buyers while ignoring the crazy system that results in land making up to €500,000 an acre in a country that is 4% urbanised, is rank hypocrisy.

The increase in the site cost as a percentage of the total cost of a housing unit in Dublin, from 15% to over 40% in a decade, is bad enough in itself but for the past nine years, a public tribunal has been investigating planning corruption and absolutely nothing has been done to change the system that promoted it. The brown envelope has simply been replaced with a more subtle form of bribery.

The Government collects an average of €100,000 in taxes and levies from every new housing unit built in the State - amounting to about 30% of the cost- and this year, new house completions are up 22% in the nine months to September.

First-time house buyers have to pay VAT to the Government while second-home buyers for investment can get an exemption from paying the VAT as a lump sum.

Research published by Chambers Ireland today has revealed that income from development contributions has risen from €0.11bn to €0.55bn between 2000 and 2005 and now represent 13.6% of local government expenditure.

Chair of the Chambers Ireland Ratepayers’ Council Hilary Haydon explained, “income from development contributions has risen dramatically in recent years, increasing by 62% from 2004 to 2005 alone. Local authorities now rely on this income stream which is unsustainable as it is dependent on continued construction growth which is predicted to fall in the coming years.”

It has been reported that PD Senator John Minihan, said on Saturday that the issue of stamp duty requires immediate action and demanded that the Government deal with it in the Budget, rather than as an election promise.

No call for immediate action in respect of ending the anti-competitive protections on Minihan's own profession, the pharmacy trade - see below.

"The PDs are committed to stamp duty reform, and I would hope that our colleagues in Government will embrace this policy in the forthcoming Budget and introduce the necessary changes," Minihan said. "Recent polls show the public's keen awareness of economic issues. Property prices and the pressure being placed on people buying residential property have to be addressed. It is imperative that the Government act on the issue of stamp duty which will help stabilise a wobbling property market."

Some Irish farmers who are supported by European public welfare via the Common Agricultural Policy, have become immensely wealthy through sale of land, which is effectively a "tax" paid by first time home buyers in particular.

Six years ago, Taoiseach Bertie Ahern asked the Committee on the Constitution to examine the issue of the pricing of development land. In 2004, it concluded that Mr Justice Kenny's recommendation in 1973 that development land should be priced with a 25% mark-up on agricultural land prices, could be introduced by legislation, and without amending the Constitution.

Senator Minihan's colleague PD President Tom Parlon said in 2003, that any change to the current system would be an approach (that) is gift-wrapped in an ideology somewhere left of Stalin, which has no place in a modern dynamic open economy like Ireland. Any measure giving the State the power to control the value of private assets would have major negative ramifications for thousands of property owners and would be a jump back to the dark days of the 19th century.

So the creation of new landlords of property interests in both Ireland and overseas, via a "tax" on the economy and the rest of the community, is different to the 19th century system?

Last August, the Financial Times reported that: there is an...appetite for land in England and Wales from farmers in the Irish Republic, many of them the descendants of tenants of absentee British landlords who were ceded land under the Land Acts of the 1870s.

Bank of Ireland Private Banking has said that Irish investment in commercial property both domestically and overseas, amounted to €30 billion in the period 2001-2005. Ion Equity says that venture capital investment in Irish firms in 2006, is unlikely to exceed €200 million.

Last week, a Davy Stockbrokers report said that tax revenue from the property market - including VAT, stamp duty and capital gains tax - has tripled since 2002 and will account for almost 17% of tax receipts this year. Davy said that the total abolition of stamp duty would be a misguided policy. It may lead to the ex-stamp duty prices re-adjusting relatively quickly to the previous stamp duty-inclusive level. It may amount to an inequitable cash transfer from the government to vendors and developers.

Senator Minihan is of course not going to concern himself with the worries of economists, with election hay to be made and first-time house buyers are not typical PD voters. So exempting them from VAT is not a proposal.

The Senator said in his statement on stamp duty that: It is imperative that the Government act...

Not only has it not been imperative to challenge the vested interest of farmers, there has been no urgency to tackle the vested interests of the pharmacy trade, represented in the Oireachtas by Senator Minihan and his PD colleague Minister of State Tim O'Malley.

While the implementation of an EU Directive has liberalised some aspects of the pharmacy trade, the OECD said the following in its May 2006 Economic Survey of Ireland:

There are several barriers to competition in the pharmacy industry. The worst is the restriction on foreign-trained pharmacists. Even Irish citizens who train abroad are not permitted to open or run a new pharmacy – the best they can do is buy one that has been operating for three years.

This does nothing to promote healthcare; it is purely an anti-competitive restriction that protects incumbents.

While the virtue of competition in aviation is getting a lot of attention, after nine years in Government, the heads of a Bill to remove some barriers to competition in the pharmacy trade, is the only signal of some movement in the glacial pace. Lauding competition is indeed very selective.

The issue of abolishing stamp duty is comparable with the abolition of rates in 1977. It is a good selective wheeze to get the attention of voters, but do not expect any overall reduction in the tax burden and even on property.


State of Chassis: Artificial restriction on land supply puts Ireland and UK at bottom of property league in Developed World; Irish urbanisation at 4% is among Europe's lowest

For more material on how the land development system logjam has give us the shambles at Dublin Airport and the back-of-an-envelope decentralisation plan plus what the OECD said in May 2006 about Senator Minihin's protected pharmacy profession, see here:

Irish Economy 2006 and Future of the Celtic Tiger: Putting a brass knocker on a barn door!