High Earners and Tax: Media Misinterpret DoF Report Again Department

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The Irish Times reports:

For example, the latest official breakdown on the 423 highest earners in the State showed that for 189 individuals who earned €500,000 or more in 2008, the average tax rate was 19.86 per cent.

I’m afraid this isn’t true. This report does not relate to the 423 highest earners in the State, as I’ve written about here, here and here. It only relates to a subset of the highest earners who would have paid less than 20 percent because of tax loopholes but who are not doing so now because of the introduction of a minimum rate.

To be fair, I don’t blame the journalists because the relevant document is so poorly written.  At this point, however, I really think the folks in the Department of Finance responsible for this report should consider issuing an official clarification.

Update: In comments, Joseph O’Toole reckons I’m being mean to the Department of Finance because this is a Revenue Commissioners report. Well, I found the report here on the Department’s website, which suggests that they are responsible for its release. But, yes, the report is put together by Revenue Commissioners staff.  So let me rephrase my point: Whoever is responsible for this report might think about issuing a clarification.

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32 Responses to “High Earners and Tax: Media Misinterpret DoF Report Again Department”

  1. Rory O'Farrell Says:

    Why not blame the journalists? The Irish Times is supposedly the paper of record. Its not exactly ‘All The Presidents Men’ type stuff to read a report correctly.

    The poor standard of Irish broadsheet journalism is partly to blame for why our banking policy is a complete mess, while Brian Lenihan can still be popular.

  2. joseph o'toole Says:

    This is a Revenue Commissioners report not one from Finance. Why do you repeatedly misrepresent this ?

  3. Sarah Carey Says:

    [blush]

    I’ll send a formal alert to my superiors. I’ve read Karl’s corrections on this before so I knew there was a problem.

  4. Michael Taft Says:

    You’re right, Karl – a bit more clarity from the DoF would be helpful. However, the 19.86% figure may not be too far off the mark for high income groups. The CSO/EU Survey on Income and Living Conditions shows that taxes on personal and wealth for the top household decile made up 24.5% of all direct income (when removing the Employers’ PRSI element) in 2008. This, of course, includes taxes in addition to income tax – which the Revenue Commissioners focused on. Therefore, the Revenue figures is probably a reasonable, though not precise, guide to the income tax liability of high income groups. This will have changed somewhat with the income levy and other measures taken by the Government.

  5. Rory O'Farrell Says:

    Also, a poor distinction is made between income tax and the total tax take, leading to “Latest Revenue projections indicate that the top 2 per cent of earners accounted for almost one third (32 per cent) of tax collected during 2009.”

  6. Karl Whelan Says:

    @ Michael

    I don’t think it’s a good idea to use the EU SILC data to infer tax rates across deciles. It’s a small sample and I’m not sure how the tax information is collected other than by asking people to provide this information.

    The Revenue Commissioners provide information on the full universe of tax payers, so there’s no need to rely on EU-SILC.

    Here’s a nice table published in the Irish Times last year.

    http://www.karlwhelan.com/IrishEconomy/KeenaTable.jpg

    In 2008, those earning more than a million paid an income tax rate of 1158 / 3459 = 0.33. And one can add in PRSI payments to that 33%.

    Plus, as you note, these guys would now be paying a 6 percent levy on income over 175,000. This would add 5 percentage points to the average tax rate of someone earning over one million.

  7. Brian Woods II Says:

    The fault is clearly with the journos. The reports are very clear about what they are saying.

  8. Michael Taft Says:

    Karl – thanks for that. The EU SILC data is, I would suggest, fairly robust with all the caveats of coverage and subjective response as you point out. For instance, EU SILC estimates that taxes on personal income and wealth average 17.8 percent of all direct income (excl. employers’ PRSI). CSO’s National Income and Expenditure estimates that taxes on personal income and wealth averaged 19 percent of personal income (a tiny portion of that actually includes taxes paid by corporations which, as the CSO admits, is not appropriate in this category – therefore, the real situation would be even closer to the EU SILC estimate). Of course, this doesn’t suggest that the average tax rate for all the deciles are correct. But the EU SILC data is helpful as it includes much more income and tax categories than the Revenue data does.

    Of note: according Keena’s 2008 table with married couples treated separately (Revenue doesn’t disaggregate couples’ income: http://www.tascnet.ie/upload/IT_table.doc) the average income tax rate for the top 11.6 percent was 26.2 percent – not too far off the EU SILC data, though the latter deals with household, not individuals.

    The problem with the Revenue ‘universe’ is, that whatever about the totality of taxpayers, they clearly point out the considerable amount of income they exclude (page 2 of their income distribution tables). In light of the Commission on Taxation findings, this Revenue list may not be comprehensive, nor does it claim to be. But some income excluded from ‘gross income’: stallion fees, profits from commercial forestry, certain income from patent royalties, and earnings of writers, composers and artists, interest on certain Government securities, pension contributions, certain interest income, incomes of certain self-employed persons, etc. I would suggest that if this income were included, the average tax rate for higher income groups would fall.

    It’s not a matter of excluding one or another – both EU SILC and Revenue data can be used frutifully. However, we must acknowledge the caveats when using one or another. Given that the EU SILC is more comprehensive in terms of income and tax, and that it corresponds to other CSO data, it should at least be considered when discussing the distribution of both income and tax.

  9. Karl Whelan Says:

    @ Joseph

    The report is published here on the Department of Finance website.

    http://www.finance.gov.ie/viewdoc.asp?DocID=6401

    But, to keep you happy, I’ll update the original post.

  10. Sarah Carey Says:

    Question:

    “ABOUT 3,800 people who earned more than €100,000 last year paid no tax on their income, according to estimates prepared by the Revenue Commissioners.”

    Is that because they were on tax breaks, which haven’t expired, and the minimum tax rate can’t apply to old tax breaks? I just don’t understand why they paid none, if a minimum rate is supposed to apply. What’s the loophole?

  11. OAC Says:

    @ MT
    Thanks for the reminder about all the income that gets *excluded* and effectively makes the stats misleading when most people see them.

    This could also be part of the answer to Sarah’s question about how some of the highest earners pay no tax.

    Pension contributions by company executives or directors is a BIG loophole that high earners are aware of. I have heard advice from several directions that a tax-efficient structure is to form a limited company (e.g. for investment purposes or any other purpose you articulate), and through the company you can create pension plans that allow for unlimited or extraordinarily generous contributions to a special executive pension plan.

    In the boom years the company could make speculative real estate investments, and then the profits get transferred into the special executive pension plan. I’ve heard this strategy promoted at government training programmes, and in books on Irish investment and financial planning. It’s legal.

    When this loophole is discussed on business radio programmes the guests I’ve heard have defended it–as if it supports the Joe soaps. No one mentions that this loophole is one of the most common–and most lucrative–for high earners.

    If it were just about the average person’s pension contributions, the tax advantage could have been capped years ago. But it hasn’t happened. You can draw your own conclusions.

  12. Michael Hennigan - Finfacts Says:

    @ Sarah Carey

    Royalty income, income of ‘indigent’ artists and other shelters allowed exemption of up to income of €250,000 to 2009.

    Recall the recent disclosure from One51 dissident shareholders, that some executives availed of a patent royalty tax shelter.

    From 2010, the entry point to the restriction now occurs at adjusted income levels of €125,000 will the full restriction applying at €400,000.

    So if you wish to get the artists’ exemption like poor Bertie, there is still a chance.

    What about a blockbuster on all the benefits for all the chancers!

  13. joseph o'toole Says:

    Thanks for making the clarification. Various taxation reports are published on a variety of Government websites – sometimes multiple websites – but it doesn’t necessarily indicate authorship. I think if you’re going to be critical of a report’s author – and in your posts you are – its important to get the author’s name correct.

  14. Observer Says:

    Too many lazy journalists out there who either get their information from re-writing blog posts or dont know how to interpret data when they get it first hand.

    EU SILC data is a perfectly valid source to make inferences about tax and income. If it is not, then a series of social policy and economic journals cannot be taken seriously.

  15. Rory O'Farrell Says:

    @ Observer

    It is also the responsibility of management/editors to hire people with the appropriate expertise. Surely the Irish Times must have qualified accountants, even just to do their own accounting. Or they could send their journalists to do a H Dip in Statistics or something similar. I think they have improved a bit, but they are still letting simple mistakes slip through. I don’t agree with alot of Dan O’Brien’s (or with RTE George Lee) opinions, but they knew what they were talking about. Plenty of journalists simply don’t.

    As for rewriting blog posts, its something I find particularly annoying, especially when these articles have a negligible basis in the facts.

  16. Sarah Carey Says:

    Ben Goldacre ( http://www.badscience.net/) frequently makes the point that most journalists are arts-humanities graduates, because writing is seen as the key skill base, but much journalism calls for science, maths and the mathsy side of economics. I guess finding people who can do sums and write well is the tricky bit, but fundamentally the people who want to be journalists and so do the courses and apply for the jobs are the arts people. I suppose if one was an editor you should be ringing up science/maths departments and asking the heads if there’s a literate graduate who’s been writing for the university paper.

    In the meantime the likes of me is highly dependent and extremely grateful for the work you guys put in here.

  17. Rory O'Farrell Says:

    @ Sarah Carey

    I don’t know much about journalist salary scales, but in 2006 they were reported as €48k to €63k (http://www.finfacts.com/Private/isl/nmcv.htm). Someone with an economics PhD from a decent university can expect to start out at about €45k to €50k.

    It should be reasonably easy for a newspaper to find someone with an economics PhD, who doesn’t want to teach or do academic research who would find journalism an interesting job.

  18. Sarah Carey Says:

    @Rory

    It should. But then it took the IT two years to replace Paul Tansey. I’m afraid I can shed no light on the career structure – I’ve never worked in a newsroom – freelance columnists like myself are entirely different beasts to newsdesk journos.

    But I can only speculate that journalists are people who really want to be journalists and bang down the doors so that editors don’t feel the need to go out and do the looking. Also business journalists are particularly vulnerable because at least in politics and social issues there are vociferous and competing sides. In business, fundamentally the players are all on the one side and less likely to brief against each other. In science its just ignorance.

    But it’s an international problem – as Goldacre’s entire (excellent) journalistic career shows.

  19. Ray Says:

    @Sarah

    You can tell your Editor that the IT does not need more economics people on the staff. What the Irish papers including the IT needs is people with real business experience who can interpret and understand what is really going on in the business world as it affects business and ordinary people and not journos wet behind the years as far as business experience is concerned. The IT in it’s better days did employ people with actual business experience as business journos now we are led to believe that Fintan O’Toole is an expert in this area . Jebus help us ……

  20. Brian J Goggin Says:

    @Ray:
    “interpret and understand what is really going on in the business world as it affects business and ordinary people”
    What are the sources of information available to these “people with real business experience”? Apart from their own experience and chats with a few mates at the golf club, how do they know “what is really going on”? And, given that some of it might be discreditable to themselves or their mates, or might reduce their profits, how much of “what is really going on” are they going to print?

    bjg

  21. Digest – August 29 2010 – The Story Says:

    [...] Karl Whelan has one too. [...]

  22. Pat Donnelly Says:

    What makes you naive folks think that news is what newspapoers are for?

    Did they bring the news of the depression? A bubble in housing? A massive increase in banking exposure? Failure to regulate?

    Pathetic! The msm are part of the problem. Why else do publishers of bullshit get knighthoods and peerages?

    And you all claim to be capable of thinking? Try it sometime?

  23. Pat Donnelly Says:

    Sub-editors clearly can choose to make it clearer or

    to obfuscate the meaning, even if merely by omission. Strange Sarah Carey did not know that?

  24. Sarah Carey Says:

    Dame Carey. I like the sound of that.

    Bring on the peerage.

  25. P O'Grady Walshe Says:

    I believe it is important to discourage the use of the word “loopholes” in the context of income tax receipts. These are tax relief structures, however flawed, duly enacted by the Oireachtas and legitamately availed of by compliant taxpayers. They were/are largely flawed because they promoted investment into largely undesirable schemes at substantial cost to the Exchequer in the absence of any performance measurement and despite empirical evidence to the contray as to their efficacy. It is, however, unfair to introduce a minimum tax rate, having promoted taxpayers to invest their monies in such flawed schemes, given them the applicable tax reliefs and then subsequently to remove or severely limit the refief.

  26. Mark Dowling Says:

    The Canadian econ blog “Worthwhile Canadian Initiative” had an interesting note this morning on regressivity in the Canadian tax system, but the point made about limited companies, trusts and the like is well taken.

    The rich simply don’t report their income as the rest of us do and it is futile to imagine unless the Revenue and the DoF via the Oireachtas get rid of such schemes that this will ever change. The bureaucracy tends to worry about tax equity within income brackets, I fear, more than between them.

  27. Old Media Shown Up Again? « John P. Muldoon Says:

    [...] released by the Revenue Commissioners, Ireland’s tax authorities. The blog post is here where many aspects of the story being [...]

  28. Ronan L Says:

    @Karl
    If you keep up with this inexplicable defence of accuracy, people may start suspecting you as one of the top earners dragging the average up to 33%!!

  29. Ray Says:

    @BJG

    I am referring to the fact that Business Journos should have some real experience of business if they are going to comment on issues in this area. Business journos might have say 5 -10 years actual experience working in one of the related areas of Accountancy, Finance, Marketing, Production or HR if they are going to write in the media on business. The usual rubbish about golf clubs etc shows your naive knowledge of the situation. I have worked with diversely highly qualified and seriously bright people in multinational and native businesses who deserve better than jingoistic attention seeking articles written more for the benefit of the writer than the audience.

  30. Brian J Goggin Says:

    @Ray:
    Your response merely repeats your initial contention without saying where these persons with “real experience of business” are going to get their information.

    bjg

  31. Mark Dowling Says:

    It’s worth asking whether publishers/editors make any note of qualification when assigning journos, or whether it is often “buggins turn” or “who do we have available”. After all, a cull of Arts journos to make way for hires of Bus and Econ types to match available posts might not go down well at the local NUJ chapter, one thinks…

  32. Ray Says:

    @ Mark Dowling

    I agree that the standards of publisher/editors is now so low that they often prefer any eejit to deal with the Business Section of their newspaper. Unfortunately some of these eejits can have a major impact on business confidence with their consistent negative reports and lack of any reasonable level of balance but are also expert in disinformation when they want to run an agenda.

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