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Assessing the sustainable nature of housing-related taxation receipts: the case of Ireland

Assessing the sustainable nature of housing-related taxation receipts: the case of Ireland PurposeThe Irish fiscal position was significantly affected by the recent financial crisis. Budgetary surpluses quickly gave way to significant deficits post 2007, culminating into a lengthy Excessive Deficit Procedure and entry into a formal EU/IMF assistance programme in 2010. Much of the deterioration in the public finances was caused by a sharp decline in property related taxes as the Irish housing market rapidly contracted. In this paper we quantify the extent to which disequilibria in the housing market can affect the tax take, finding significant implications over an extended period.Design/methodology/approachWe attempt to quantify the extent of housing related tax windfall gains and losses in Ireland over a thirty year period as a result of disequilibrium in the housing market. This involves a three-step modelling approach where we relate property dependent taxes to the housing market while estimating equilibrium in the latter before solving for the tax take consistent with that equilibrium. In so doing, we find that the fiscal position compatible with equilibrium in the housing market has at times diverged greatly from actual outturns.FindingsThis paper confirms the significant role played by the housing market in influencing both the tax-take and the overall fiscal position. We find that there have been a number of instances where excesses in the housing market have spilled over into fiscal aggregates, notably in the housing bubble period between 2003 and 2008. However, with the on-going adjustments in the housing market, it would appear that prices and volumes have overcorrected in recent years. Overall, much greater emphasis should be given to the role of the housing market in forecasting key taxation aggregates.Originality/valueThe recent crisis highlighted how domestic policy mistakes (both in terms of budgetary planning and financial market regulation) can greatly amplify economic shocks. Irish budgetary policy in the run up to the financial crisis of 2008/09 was clearly based on unsustainable levels of housing related tax receipts. This paper highlights the need for a much more granular approach in framing tax forecasts and in assessing the public finances by more explicitly factoring in housing market developments. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of European Real Estate Research Emerald Publishing

Assessing the sustainable nature of housing-related taxation receipts: the case of Ireland

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1753-9269
DOI
10.1108/JERER-01-2016-0004
Publisher site
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Abstract

PurposeThe Irish fiscal position was significantly affected by the recent financial crisis. Budgetary surpluses quickly gave way to significant deficits post 2007, culminating into a lengthy Excessive Deficit Procedure and entry into a formal EU/IMF assistance programme in 2010. Much of the deterioration in the public finances was caused by a sharp decline in property related taxes as the Irish housing market rapidly contracted. In this paper we quantify the extent to which disequilibria in the housing market can affect the tax take, finding significant implications over an extended period.Design/methodology/approachWe attempt to quantify the extent of housing related tax windfall gains and losses in Ireland over a thirty year period as a result of disequilibrium in the housing market. This involves a three-step modelling approach where we relate property dependent taxes to the housing market while estimating equilibrium in the latter before solving for the tax take consistent with that equilibrium. In so doing, we find that the fiscal position compatible with equilibrium in the housing market has at times diverged greatly from actual outturns.FindingsThis paper confirms the significant role played by the housing market in influencing both the tax-take and the overall fiscal position. We find that there have been a number of instances where excesses in the housing market have spilled over into fiscal aggregates, notably in the housing bubble period between 2003 and 2008. However, with the on-going adjustments in the housing market, it would appear that prices and volumes have overcorrected in recent years. Overall, much greater emphasis should be given to the role of the housing market in forecasting key taxation aggregates.Originality/valueThe recent crisis highlighted how domestic policy mistakes (both in terms of budgetary planning and financial market regulation) can greatly amplify economic shocks. Irish budgetary policy in the run up to the financial crisis of 2008/09 was clearly based on unsustainable levels of housing related tax receipts. This paper highlights the need for a much more granular approach in framing tax forecasts and in assessing the public finances by more explicitly factoring in housing market developments.

Journal

Journal of European Real Estate Research – Emerald Publishing

Published: Aug 1, 2016

References

  • Quantifying revenue windfalls from the Irish housing market
  • Unexpected changes in tax revenues and the stabilisation function of fiscal policy: evidence from the European Union 1999-2008