Contrary to often-cited statistics, changes to the law have limited the scope for tax avoidance by the rich, writes SARAH CAREY
I’LL HOLD my nerve if you hold yours. In the meantime I’ll channel Karl Whelan, the UCD economics professor and stalwart blogger at irisheconomy.ie. He’s been banging his head on his keyboard as journalists and politicians propagate some misconceptions about our taxation system and who pays what.
Tax exiles have long been hate figures but you’ll see frequent references made in the media to people who live here full time but use tax-relief schemes to reduce their tax bill to zero or next to zero. It’s a big issue because, as the Government scrambles to raise more money, fairness must be a key factor. I don’t mind paying so long as everyone else does.
Every so often a journalist or politician will quote from a report from the Revenue Commissioners which states that 423 people who earned over €500,000 in 2008 paid no tax on their income by using reliefs.
It’s not true. The 423 were those who would have paid no tax had there not been changes to the law in 2006 and 2007. The introduction of a minimum tax rate obliged them to pay 20 per cent income tax which they otherwise would have avoided had they used all their tax-relief entitlements. In 2008, the application of this measure raised just under €40 million.
It’s important to state too that there are thousands of others – 5,393 households according to one report – who earned over half a million in 2008 and who paid an average rate of 32 per cent. I’ve never liked the word “average” as this means some people paid more and others less, but it shows that despite popular belief, tax planning has its limits. There is a small group of people – 234 in 2008 – who earned between €250,000 and €500,000 and used the reliefs to reduce their tax bill significantly. Because they had not hit the half-million income threshold, the Revenue applied a tapering system whereby the rules were introduced gradually. For example, there were 49 people who earned between €300,000 and €350,000 and they paid an effective rate of 5 per cent. It’s not great but the numbers involved were very small, and the last budget moved to eliminate this group completely.
The new rule is that anyone earning over €400,000 must pay at least 30 per cent of their income in tax even if they are entitled to use various reliefs. The graduated introduction of the rule begins at €125,000.
This means that the number of people who can now use loopholes to pay little or no tax is tiny. It also means that anyone who claims that wealthy people are using these reliefs to pay nothing or half nothing, should be challenged. As Whelan has stated – by all means have a debate on how taxes should be changed, but a debate based on fact.
Another statement occasionally quoted from a Revenue report also gives rise to confusion. It says that “3,800 people who earned more than €100,000 last year paid no tax on their income according to estimates prepared by the Revenue Commissioners”.
The keyword here is “estimates”. The Revenue took figures from 2007 and used various models to try and predict what the figures would be for 2009. They won’t actually know the real figures for a while yet.
There were 2,300 people in 2007 who earned over €100,000 and paid no tax, but this was not because of the restricted tax-relief schemes like the hotels and car parks. These tended to be sole traders or farmers where the total income of the business, and hence the person, was reduced by normal tax deductions. In other cases, losses from the previous year were carried forward. These are very legitimate deductions and it’s not fair to use them to imply that the wealthy (although €100,000 is hardly great wealth anyway) are sneakily avoiding tax.
It was absolutely correct and long overdue that the loopholes relating to the property incentives and business expansion schemes were closed. Their existence cemented the link between the business classes and Fianna Fáil. However, the link between our bad politics and lax income tax system is not confined to high earners. The depressing ability of Fianna Fáil to get elected repeatedly had much to do with its appeal to working-class constituencies. Nearly 42 per cent of all earners in the State paid no income tax in 2007 – almost one million people who had been taken out of the income tax net.
This policy was a disaster for many reasons. The State became dependent on consumption taxes, which collapse far quicker than income tax in a crisis; and of course consumption taxes are deeply regressive. But not paying tax directly also makes for bad politics. I think it takes the sight of your monthly wage slip minus a chunk going on tax to encourage reflection on how public money is spent.
It’s just not the same with VAT, is it? An increase in direct taxation over indirect wouldn’t just raise more money, it would also raise political awareness. A little more of that and a little less cash in the past 10 years would have been useful.