There has been a lot of discussion in recent months about the scale of tax reliefs in Ireland and I’ve been planning to write a couple of posts on this topic. In relation to this issue, an opinion that is commonly expressed by leading figures in the Irish media is that the very richest in Ireland pay very little in tax because of these reliefs.
For instance, on his TV3 show on Tuesday night, Vincent Browne said:
The Department of Finance published a document in July of last year to estimate what the effect on the top 400 earners was of the closing off of tax reliefs in the 2007 budget and it found that the top 400 earners paid an effective tax of 20 per cent.
This is the document that I believe Vincent Browne was referring to. However, it does not show that the top 400 earners pay tax rates of only 20 per cent.
The document discusses the effect of measures introduced to ensure that those earning over €500,000 pay an effective tax rate of at least 20 per cent and that those earning between €250,000 and €500,000 would pay minimum rates that rose towards 20 per cent. It highlighted 214 cases of people earning over €500,000, and a further 225 people earning between €250,000 and €500,000, that were affected by this measure.
The document shows that, as intended, the 214 people with annual incomes over half a million that were affected by this measure now pay a tax rate of 20.08 per cent, thus meeting the intended goal. An additional €34 million in tax revenue was raised from these 214 people; an additional €5.8 million was raised from the 225 affected people who earned between a quarter and a half million.
It is worth clarifying, however, that people paying this 20.08 per cent tax rate are not the richest people in the country. Instead, they are a specific group of people who were paying anomalously low tax rates and are now paying a somewhat less anomalously low rate.
The document is very poorly worded in ways that suggests it is referring to all high earners—for instance, it says things like “the 214 high-income individuals with an adjusted income of €500,000 or more” when in fact it is known from the Revenue’s Income Distribution statistics that there are thousands of cases with incomes above half a million. As such, it is easy to see how it may have mislead people but it is worth clarifying this confusion.
Vincent Browne may also have been confusing this report with other reports that have occasionally been issued by the Revenue Commissioners on the tax paid by the top 400 earners. Here’s the latest one I could find, released in 2007 and pertaining to tax rates for the year 2003.
The figures certainly show that some of the richest people in the country were availing of tax breaks in a way that seriously reduced their tax rates: 104 of the 400 paid tax rates of less than 20 per cent in 2003 (presumably most of them are no longer permitted to pay such a low rate). However, almost half of these individuals paid rates of income tax above 35 percent. It isn’t possible to calculate the average tax rate of the 400 highest earners from these individuals but a rough guess would put it at about 30 percent.
If one compares this figures with the average tax rates paid from gross income reported in the Revenue Commissioners Income Distribution statistics, this 30 percent figure is higher than the rates paid by people on average incomes or those on high but not seven-figure incomes.
This is not to defend these tax loopholes. I’m all in favour of closing them off and ensuring that the richest people can’t avoid paying tax. More generally, a close examination of all tax expenditures is certainly called for: The Commission on Taxation, for instance, recommended that many of these tax breaks be abolished. However, it is worth clarifying that these loopholes have not lead to the type of regressive tax system that is commonly claimed.