The Republic has a funny way of encouraging ordinary savers to invest, taxing them on gains they haven’t even realised.
Eight-year deemed disposal rules, 38 per cent tax on ETF growth, and the inability to offset losses against other gains make diversified funds less appealing than picking a single stock – a bizarre state of affairs.
Belated change appears to be on the way. Minister for Finance Simon Harris is promising a roadmap and is interested in a new savings and investment strategy aimed at helping “middle Ireland”, referring to attractive international models in the UK, Sweden, and Canada.
Canada’s Tax-Free Savings Account, for example, allows modest annual contributions (up to $7,000, or about €4,340) with straightforward rules and tax-free growth and withdrawals.
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It satisfies the maxim of Nobel economist and behavioural finance expert Richard Thaler: if you want people to act, make it easy.
Could Simon Harris’s savings scheme for the ‘middle classes’ prove to be a sound investment?
Before designing new wrappers and allowances, however, the State could start by removing distortions in the existing system. Treat diversified funds the same way as direct shares, namely by taxing realised gains at the capital gains tax rate, allowing losses to be offset against gains, and above all, by scrapping deemed disposal. Taxing gains that have not been realised is difficult to justify, prevents gains from properly compounding, and is needlessly complex to administer.
A capped, easy-to-understand savings vehicle may well have merit. Contribution limits would need to be set carefully to avoid disproportionately benefiting higher-wealth households. Administration costs would need to be kept low.
Pair it with straightforward advice on inflation, diversification, and the slow rewards of patient investing, and ordinary households could be coaxed out of cash and into equities.
However, reform does not have to begin with something new, but by ending what is plainly daft. Stop penalising diversification, simplify the rules, and tax real gains rather than hypothetical ones.
