On Tuesday night near the end of his TV3 show, Vincent Browne returned to one his favourite themes, the taxation of those on higher incomes. He put the following statement to Fianna Fail TD, Timmy Dooley
In June of last year, the Department of Finance showed that in spite of efforts to close off tax loopholes in the 2007 and 2008 budgets, people earning over a half a million still pay only 20 percent of their income in tax. Now why weren’t they targeted rather than people on social welfare?
Dooley told Browne that the budget had seen an increase in the effective tax rate for these individuals to 30 percent, to which Mister Browne responded, “Not true, It’s just not true.” Later, after Mister Dooley discussed other steps taken to stabilise the public finances, Browne asserted that “You could have achieved the same thing by targeting people earning half a million and you didn’t bother.”
On the same theme, in his column in Wednesday’s Irish Times, Browne stated
How come there was no crisis when a report by the Department of Finance last June disclosed that, in spite of the alleged attempt to close tax loopholes, the average effective tax rate for people earning over €500,000 was just 20 per cent?
I’d like to address three aspects of the TV exchange and this column.
The 20 Percent Figure
Browne’s statements about the average effective tax rate for those earning over half a million are not correct. This is the document to which he is referring. As I’ve explained before on this site, the document refers to 214 specific people who, prior to the introduction of a minimum effective tax rate of 20 percent, earned over half a million but paid tax rates below 20 percent. The report merely confirms that these specific 214 people now pay a tax rate of 20 percent. In other words, the new effective tax rate (the “alleged attempt” to close loopholes) achieved its goal.
It turns out that these 214 people are not at all representative of those who earn over half a million. Figures from the Revenue Commissioners show that in 2008, Ireland had 5393 households with incomes of over half a million and their average tax rate was 32 percent. The source for these figures is this handy table published in the Irish Times last year accompanying an article by Colm Keena.
Most likely, rather than deliberately misleading, Vincent has simply misunderstood the document he’s quoting. And to be fair to him, the document from Finance is poorly written and open to misunderstanding. As he clearly doesn’t read this blog(!) I will try to forward this material to him. I think it is best if misleading statements of this type didn’t keep getting aired by a highly influential media figure.
Targeting of the Rich in the 2010 Budget
In relation to the raising of the effective tax rate in the current budget, I’m afraid that Mister Dooley is right and Mister Browne is not. Here‘s an extract from the Minister for Finance’s budget speech:
But the Government wants high earners availing of tax incentive schemes to contribute more in the current difficult circumstances. Accordingly, for the tax year 2010, the effective rate of income tax for those benefiting from reliefs will increase from 20 per cent to 30 per cent on top of which they will also pay PRSI and levies. This represents a significant tightening of the restriction which will yield approximately €55 million in a full year. The entry point to the restriction will now occur at adjusted income levels of €125,000 with the full restriction applying at €400,000.
So it really is true that the government has raised the minimum tax rate applying to high earners.
How Much From Taxing the Rich?
My final comments relate to whether indeed, as Vincent Browne asserts, the budget could have achieved its goal of stabilising the budget deficit by targeting people earning over half a million.
Here’s a link to a post I wrote before Christmas that examined how much money could be raised by a new marginal tax rate of an additional ten percentage points levied on incomes above various threshold levels, a move that would raise the combined marginal tax rate (including PRSI and levies) to 64%.
Based on 2006 figures, the spreadsheet showed that an additional ten percent tax levied on those earning over €275,000 a year would raise €430 million annually. One would raise less from targeting those earning over half a million. In the context of a budget deficit of over €20 billion, it should be clear that targeting those earning over half a million can only make a limited contribution.
None of this is to say that we shouldn’t look to raise more money in tax revenue from the better off and, in my opinion, the move to raise the minimum tax rate for higher earners is a good one. However, as I’ve noted before, I would question how much we would actually raise in extra revenue if marginal tax rates start to go over sixty percent and whether tax evasion and avoidance would not make this approach counterproductive.
Update, Thursday Feb 25th: To his credit, on tonight’s show, Vincent kinda sorta acknowledged that he may have been incorrect on this issue. He said “I know there’s a blog on the Irish Economy.ie website saying that I’m wrong on this but the reality still is according to the Revenue Commissioners, rich people, people earning over 160k a year still pay a very very small proportion of their income in tax something like 26 or 27 percent of their income.”