DoF Document on Tax Reliefs

I wrote a couple of posts (here and here) earlier this year about a Department of Finance release that discusses the impact of restrictions on the use of tax breaks for higher earners via the imposition of a minimum effective tax rate. I pointed out that the document is very poorly worded and leaves itself open to being misinterpreted.

Well, the latest edition of this release is out and it’s still got the same poor wording and it’s still being misinterpreted. I had missed the release when it came out but realised that the DoF’s poor wording had struck again when I heard contributors to Sam Smyth’s Sunday morning radio show discussing the report and saying how puzzled they were at how few people seemed to be earning large salaries (e.g. puzzlement at the idea that only 23 people earned over €2 million in 2008).

Let’s recap on this report. The report does not purport to be a full accounting of the tax paid by rich people in Ireland. Rather, it only covers those who would have paid less than the minimum effective tax rates that have been introduced. So, the whole report relates only to the 423 people who earned over €500,000 and were subject to the minimum effective tax restriction.

The document should emphasise throughout that these 423 people represent only a small subset of those earning over half a million euros in 2008: Unpublished information from the Revenue Commissioners published in the Irish Times last year (nice table here) showed that there were 5,393 cases of people earning over that amount. However, the report does very little to emphasise this point, leaving itself open to misinterpretation.

Sure enough, many people reading the Sunday Tribune today would have been apalled to read this piece about the Department’s “analysis of high-income earners” informing them the report showed “most of those earning more than €500,000 paid tax at a rate between 15% and 20%” and also providing other estimated tax rates that are not at all representative of the rates being paid by average high earners. For example, the figures in the Irish Times table show that the correct figure for the average tax rate paid by those earning over half a million is 32%. Remember also that this doesn’t include PRSI and that these individuals are now paying an additional 6 percent levy on income over €175,000.

I’m not saying there isn’t room to raise more tax from the rich or that tax reliefs shouldn’t be closed but it hardly helps public debate about this issue when the Department issues documents that are so easily misinterpreted.

Update: Ian Guider who wrote the piece for the Tribune linked to above has written to me to point out that the piece mentions 423 individuals and so he reckons it should be clear that all subsequent statements in his article refer only to a small subset of high earning individuals.

12 thoughts on “DoF Document on Tax Reliefs”

  1. Of course, this is not a new complaint. See this repeat of an IT report from 2002:
    http://www.thepropertypin.com/viewtopic.php?p=33#p33
    “Mr Cowen announced yesterday he had signed orders on the phasing out of the seven incentives criticised in the report, as promised in the Budget last December. This combined with an effective cap on remaining tax-incentive schemes meant that all high earners would pay a minimum rate of 20 per cent.”
    We’re still waiting for the 20% minimum it would appear.

    We’re still waiting for a lot of things…

  2. I have to take issue with you about the 423 number, though. The revenue statistical report on income distribution for 2006 (released in 2008 – we’re still waiting for one for any year subsequent to 2006…) shows that 11,714 taxable units had incomes over 275,000.

    As 2006 was peak bubble, I suspect the numbers have declined since then.

    Further, Annex 2 of the revenue document implies that 23 people had incomes of over 2 mn of whom 18 were subject to a minimum tax rate. In all, 189 had incomes of over 500k and 154 subject to the MTR, is my reading of it.

    Mind you, the use of gross income may be a little suspect. Is this gross income for the individual/one-man company, or gross income after deductions, but before tax…

  3. @Karl
    Ooops sorry about that. Yes, must be 2004 referring to 2002 stats? Given the interminable wait we have for anything approaching income stats…

  4. @ hogan

    No, this really is only the 423 that are subject to the restrictions — trust me, in 2008 more people than that made over half a million (look at the Irish Times table, for instance).

    The 23 versus 18 figure is just another example of a really poorly explained document. There were 23 people affected by the restriction. Of those, 18 would have paid some tax without the restrictions, i.e. 5 wouldn’t.

    Look at the bottom of that table and notice the difference of 35 between the two “number of cases”. This is explained elsewhere as “35 individuals with adjusted income of €500,000 or more, who would not otherwise
    have paid tax in 2008.”

  5. @Karl
    Fair enough. I stand defeated. There’s something weird going on, though. The number of taxable units has gone up between 2006 and 2008… (difference between revenue statistical report and Mr. Keena’s infographic) I would expect a decline?

  6. “the correct figure for the average tax rate paid by those earning over half a million is 32%. ”
    Given the tax breaks freely available to such earners – I suppose we should be grateful that they are contrbuting taxes they could easily avoid. Why do I have a niggling suspicion that these figures are not correct. It implies that high earners are not really interested in the money – where are all these altruistic millionaires?

  7. Are these studies looking at companies as well as individuals? Individuals in the know set up companies to take advantage of some massive tax breaks on pensions and CG on property investments? I first learned of this loophole at a state-subsidised entrepreneurship training programme some years ago.

    It’s also documented quite nicely in 2 Irish-published books “The Tactics of the Rich” and “The Tricks of the Rich”. These books make for amusing reading in the current climate.

    Panel discussions about these tax breaks emphasized the apparent reasonableness of tax breaks for Joe Soap’s pension funds. I never heard anyone mention how these tax breaks were being used systematically by those in the know to set up corporations to take advantage of tax-breaks in their property investments and personal pensions.

    A closer look at tax breaks for high-level company pension schemes is warranted, considering its potential for abuse. This is the kind of pension fund that has virtually no limit on how much you set aside, typically used by company directors & executives.

  8. Hey eggheads! There is such confusion about this. Public discussion seems very naive as a result Let’s produce a chart or infographic to show where tax revenue comes from.

  9. an interesting aside is that they no longer publish — as far as I know — details of what ALL top earners pay in tax. This used to be published up to recent years and was the one that used to yield the ” 3 millionaires paid no tax” headlines. Since the new restrictions were introduced, it was replaced by the document referred to, which covers only those who aggressively use the reliefs named in the legislation.

    a suspicion mind might wonder why the full breakdown is not published any more. All we get, as far as i know, is a much less complete breakdown in the revenue reports. Is it the case that the minimum rate now catches everyone, barring tax exiles of course?

  10. @cliff
    “a suspicion mind might wonder why the full breakdown is not published any more. ”

    sunlight = disinfectant.

    Transparency in all financial matters relating to wages, expenses, benefits and tax reliefs would lead to better and faster changes in both public & private sectors.

    We should start with the highest-level, highest-paid positions and work our way down.

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