Tax Breaks and Tax Rates for Top Earners

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.

Link here.

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.

23 thoughts on “Tax Breaks and Tax Rates for Top Earners”

  1. So, tax them all at 100% and get:
    (34×5)+(5.8×5)….

    Saved, by the pot o’gold, begorrah.

    I’ll say it again. A household income of twice the average wage is rich, particularly if it has multiple earners. Those piously calling to tax the rich, meaning those others, should be aware that they are in that group. They are not.

    Oh, and there is no pot of gold. Not unless you count tax evaders…

  2. The rich are different from us, not just (as Hemingway famously pointed out) that they have more money than us but also because they are in general more mobile. So how do we know that squeezing them a bit more not might make them bunk off to their Portugese golf condos?
    It might make us feel good to get one over on those disgusting rich people & certainly it would appease Vincent Brown’s fanatical egalitarianism but it could lower revenue. What’s it going to be then?
    Of course we don’t know what the relevant elasticities are & its doubtful the Revenue do either but its not a given that raising tax rates on these guys will bring in any more dosh.

  3. You don’t set your laws on the basis of how enforceable they are or how easy they are to avoid / break. Tax law should not be any different. If our tax laws drive those who can afford to exile themselves abroad then so be it.

  4. @Karl Whelan
    Many people – myself included – thought that the property tax breaks were to build houses at a time when there was an (artificial?) shortage. There may have been a few little schemes but otherwise the tax breaks were for houses. Lots of times we heard deeply sincere expressions from the government about their deep concern for those who could not get on the property ladder.

    Then we found out about the hotel room mountain:

    http://www.irisheconomy.ie/index.php/2009/11/12/report-on-hotel-sector/

    So the government were giving vastly excessive tax breaks for hotel rooms at a time when the public wanted houses. There was no public outcry about the hotel room shortage.
    This one was all them.

  5. @KD
    The quote is from Scot Fitzgerald, who apparently was talking to Hemingway.

    As a 100% PAYE high earner, I get none of the aforementined tax breaks. At risk of allowing you all to calculate my gross pay, I can reveal that tax + PRSI + levies equalled 48.3% of my gross income in calendar 2009. Vincent Brown is forever saying that the rich should pay 45% tax. Bring it on.

  6. @Karl

    “More generally, a close examination of all tax expenditures is certainly called for”

    I think the raising of the minimum tax rate and the reduction in income limits to which this applies is a far more fruitful approach than trying to tackle expenditures one by one. This is the taxation equivalent of getting your stomach stapled rather than trusting yourself to diet. I expect many of these expemptions will just wither on the vine in the coming years as higher earners start to become more selective about which they use, so film industry etc will start to come under pressure.

  7. I would like to know who exactly are the rich??

    At what income level does one sudddenly become rich.

    The bearded brigade seem to think that €100,000 p.a makes one rich-I do not agree,

    any thoughts

  8. @ KW: Any data on the gross tax that is foregone by the multitude of ‘tax breaks’?

    If there were no tax breaks of any kind – and I mean none – and you adopted a basic tax rate for all incomes – what would this xx% need to be to bring in the revenue we need? There are quite a few non-stated assumptions here, but I am just curious about the matter in a general way.

    B Peter

  9. @simpleton
    I don’t think so. As legend has it, the conversation was:
    Scott Fitzgerald “The rich are different from us”
    Hemingway “Yes, they have more money than we do”

    Based on what Karl has said, I have no confidence in statistics quoted by VB who has his mind made up on these matters anyway. I am not saying the rich should not pay more but that care has to be taken that, particularly with regard to the super-rich, that policies don’t lower revenues since they are more elastic: they can – and do- bugger off.

    @dealga. With respect, that’s so dumb. The purpose of taxes (with the exception of taxes designed to influence behaviour like Pigouvian ones) is to RAISE MONEY. If you change the tax system and it lowers revenue than you have failed.

  10. In Britain the recent temporary change to the tax law rasing taxes to 50% on all bonuses was widely criticised, with the argument that it would lead to a mas exodus from the City and permanently reduce the tax base. That criticism found more than one echo on ths blog.

    Over a number of weeks FT articles have explained that the response of leading City fims and banks has been the opposite of that predicted. Generally, they have raised the bonus levels, often so that the beneficiaries receive exactly the same remuneration as they would heve prior to the tax increase. Frequently, they have done this by dipping into the gobal bonus pool, or simply by retaining lower earnings.

    The British Chancellor estimated the yield on this one-off would be £500mn, and was derided for doing so. City estimates now centre around a yield of £4bn. We shall see.

    Why did critics of the measure seem to get it so wrong? And what lessons can be drawn? It seems that the overwhlming bulk of City professional are not based there because of the clement weather, great infrastructure, cheap cost of housing or great food. It doesn’t seem to be the case either that they are there for the low taxes. They are there because that is the location where profits can be maximised.

    Perhaps that is a general law relating to the domicile of both highly paid individuals and of corporates, with tax rates just one factor in that calculation.

  11. @Karl Whelan
    “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.”

    Many people believe that if effective rates for the superrich go up their own marginal rates will go up too. So they oppose raising the effective rate on the superrich. It’s the unsalted slippery slope argument.

    On the other hand many people believe that the tax breaks for the superrich will stay while they have their rates increased. This is unfair.

    Perhaps if the opposition were committed to keeping marginal income tax rates unchanged under their next administration but also committed to abolishing the tax breaks they could convince everyone.

  12. I think the debate is in the wrong area…

    You get the economy you deserve; we got a property based economy; because we incentivised people to invest there. Build a hotel; creche; car park and write off tax.

    heres the relevent section from Form 11. Section N….Until this section of Form 11 is shut down; were going nowhere.. Look at the list of specific exemptions, and then there is the ‘other’ because there is so many of them

    N – PROPERTY BASED INCENTIVES ON WHICH RELIEF IS CLAIMED IN 2009 [901 – 930]
    blah blah blah
    901. Urban Renewal S.372AP & AR
    902. Town Renewal S.372AP & AR
    903. Seaside Resort S.372AU
    904. Rural Renewal S.372AP & AR
    905. Living over the Shop S.372AP & AR
    906. Park and Ride S.372AP & AR
    907. Student Accommodation S.372AP
    Industrial Buildings Allowance Owner Occupier Investor – Lessor
    908. Urban Renewal S.372C & D
    909. Town Renewal S.372AC & AD
    910. Seaside Resort S.352 & S.353
    911. Rural Renewal S.372M & N
    912. Multi-storey Car Parks S.344
    913. Living over the Shop (Commercial Premises Only) S.372D
    914. Enterprise Areas S.343
    915. Park and Ride S.372V & W
    916. Hotels S.268(1)(d)
    917. Holiday Cottages S.268(3)
    918. Holiday Hostels S.268(2C)(b)
    919. Guest Houses S.268(2C)(a)
    920. Nursing Homes S.268(1)(g)
    921. Housing for elderly/infirm S.268(3A)
    922. Convalescent Homes S.268(1)(i)
    923. Qualifying Hospitals S.268(2A)
    924. Qualifying Mental Health Centres S.268(1C)
    925. Qualifying Sports Injury Clinics S.268(2B)
    926. Buildings used for certain childcare purposes S.843A
    927. Specialist Palliative Care Units S.268(1)(m)
    928. Buildings or structures in registered caravan & camping sites S.268(2D)
    929. Mid-Shannon Corridor Tourism Infrastructure
    Investment Scheme S.372AW
    930. Where the scheme(s) on which you are claiming relief is/are not listed at Lines 901-929 above state the name of the Incentive
    Scheme(s), quote the relevant Section and enter the amount of relief claimed in the year (Owner Occupier, Investor-Lessor).

  13. @Kd
    According to one record, we are both wrong:
    ”Hemingway is responsible for a famous misquotation of Fitzgerald’s. According to Hemingway, a conversation between him and Fitzgerald went:

    Fitzgerald: The rich are different than you and me.
    Hemingway: Yes, they have more money.
    This never actually happened; it is a retelling of an actual encounter between Hemingway and Mary Colum, which went as follows:

    Hemingway: I am getting to know the rich.
    Colum: I think you’ll find the only difference between the rich and other people is that the rich have more money. ”

  14. @simpleton. Fair enough ‘though I prefer the legend. Colum of course is wrong: the rich differ in many ways both observable and unobservable. And lets not forget that relative to probably 95% of the world’s population we are rich.

  15. These tax breaks are usually connected to a leveraged investment of some sort. This is a form of fiscal stimulus. Surely we should be redirecting this fiscal stimulus to appropriate areas (i.e., not property development), rather than getting rid of these breaks outright?

  16. True indeed, Karl. An interesting aside is that, as you say, the last available top 400 high earners report relates to 2003. So while those using the reliefs covered by the new rules are now paying 20 per cent — and more after the recent budget — we still do not have a full picture of the income tax paid by the 400. Surely there can’t be other ways they are using to reduce their bill, beyond the reliefs covered in the legislation……

    The figures that are available do show that the better off pay a large portion of the income tax, but it would still be interesting to see if some of the 400 have other dodges on the go that cuts their bill.

  17. @Antoin
    We have a low corporation tax rate. Pension contributions should get relief at the standard rate. That sounds like enough. If we give the the tax breakers an inch they’ll take a mile. We are a tax broken nation. As Garry showed tax breaks are the financial cocaine of our establishment. It’s no use in saying they’ll just snort a little bit. Give them a few years and they’ll turn the country back into the financial equivalent of Studio 54 – but at the end of the party the public will be paying the bills, again.

    Just as NAMA is our establishment’s final party, for Studio 54
    “The nightclub closed with one final party called “The End of Modern-day Gomorrah”, on February 4, 1980.”

    There was even a financial recovery operation – though I doubt they hired someone who had never done it before to conduct it, even though it was for a (in NAMA terms) microscopic recovery operation:
    “After the nightclub’s closing, cocaine and money were found in its walls.”

    Use the cleaner in the public service test. If large numbers of them are not availing of a tax break it shouldn’t exist.
    Wide base, low rates.

  18. In the five years I’ve lived and worked in Ireland I’ve seen nothing but increasing taxation and lowering of living standards. My take home pay (after tax) is now 15% lower than when I first started despite five pay rises and in-post promotions. I am but waiting for a position back home to become available before returning, hopefully soon, I wonder how many other’s find themselves in this position?

  19. The total effective tax rate should be set high enough so that the government recaptures a high percentage of the money it spends. In order to keep unemployment low the government should spend as much money as it can focusing on infrastructure, education, health care, national security, and law and order. If unemplyment is over 5% the government needs to spend more and if it needs more revenue to support the increase spending then it needs to raise the effective tax rate.

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