The revelation that 11 people with incomes of over €1 million paid no income tax at all in 2001 will cause considerable irritation to PAYE employees. The information, provided in response to a parliamentary question from the Labour spokesperson for finance, Ms Joan Burton, showed that a further 242 people with earnings between €100,000 and €1 million also paid no income tax. In total, 391 of the highest income earners either paid a zero rate of tax or a rate of less than 20 per cent.
Much has been done in recent years to improve the tax system, with a lower burden on earned income, a simplification of the rules and improved collection procedures. However the latest figures highlight a fundamental unfairness, which is that some very wealthy people are able to use tax allowances to pay little or no tax. Property based allowances have been the main - though not the only - vehicle used by wealthy taxpayers legally to shelter income from tax. Many of these allowances have been restricted in recent years by successive budgets. In general, in respect of new investments, such allowances can now only be offset against income earned from rent. However, many people invested in such schemes before these restrictions came into place - and will see the benefits continuing for some years yet.
The original argument for property tax allowances was that they would encourage development in areas where it would not otherwise happen. Investors would take a risk in return for a tax relief. There may have been a case for such schemes some years ago. However the building boom of recent years and the associated growth in many towns and cities means that this rationale no longer exists. Meanwhile, evidence shows that tax advisers have used the allowances, in ways which were never originally intended, to construct schemes which allowed investors to avoid substantial amounts of tax. In some cases the line between legal tax avoidance and illegal evasion has been a thin one.
Successive restrictions in property schemes in recent years culminated in an announcement in the 2003 Budget that most of the schemes would end this year. However following intensive lobbying, the former minister for finance, Mr McCreevy, extended the schemes to July 2006. This was a mistaken decision. Even if the original announcement proved too short a timescale, a brief extension to the middle of next year would surely have sufficed. Instead the range of schemes remains in place as a tax shelter for better-off investors, albeit on a more limited scale than in the past.
There must be no further extension of these schemes, or introduction of similar ones. And the Government must deliver on a commitment to actively examine other reliefs and allowances. There is a case for giving people relief for pension investment and mortgage payments, and for normal business investment relief, but beyond that the rationale for many other special reliefs and allowances is highly questionable.