The slightly rich pay their taxes these days, but what about the super rich?

There is a rather dull – if vitally important – concept in economics about the advantages of having a broad tax base. The Republic learned the lesson of this, in spades, during the financial crash, when property-based revenues collapsed and a big hole appeared in our public finances. But as well as the structure of the tax system, there was another reason why, for many years, Ireland’s tax base was so narrow. It was that a lot of people did not pay.

Up to the early 1990s, illegal tax evasion was a national sport and legal tax avoidance was not far behind. For many years, building societies coyly advertised that your account would be “confidential” – and everyone knew this meant not telling the tax authorities. Tens of thousands of people had money in offshore accounts, opened for them, with a nod and a wink, by Irish banks. And, as came to the fore again following the death of Ben Dunne and the focus on the cash he paid to Charles Haughey, the really rich had money in offshore tax havens.

In 1980s Ireland, those with a few bob were encouraged to put it in a bogus non-resident account in an Irish bank branch in the Isle of Man or London, while the really wealthy hid their assets in more complex structures, some also in the Isle of Man but others further afield in tax havens such as the Cayman Islands. No wonder there were a series of “tax marches” in the early 1980s by PAYE workers, forced to pay income tax at marginal rates of 60 per cent. The highest rate kicked in on incomes above £7,000 in 1982 – less than €30,000 in today’s money.

While the better off were hiding money from the Revenue, ordinary PAYE employees were being soaked. And as illegal vehicles started to be closed off, the better off found another – legal – way to avoid paying tax via the use of a range of tax reliefs, mainly related to property investment, which were used to incentivise investment in everything from apartments in certain areas to car parks through the 1990s and into the 2000s. In turn, this diversion and the associated borrowings helped to inflate the property bubble in the run up to the crash.

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Time for a purge

The late 1990s and early 2000s saw something of a purge in tax evasion and after the crash, the special tax allowances and reliefs were slowly closed off. It is interesting to reflect on where this has left us today – the better-off now take much greater risks if they seek to salt money away offshore and have fewer tax reliefs available to do it legally. The super-rich, meanwhile, often have the cash and the incentive to set up tax structures, generally based on being tax resident elsewhere, which allow them to shelter significant parts of their income from tax, or at least minimise what they pay.

The investigation into offshore accounts started with a drip feed and turned into a flood. The revelations that Dunne paid money to Haughey included the news, as reported in this newspaper, that some of the cheques were made out to a man called John Furze. Shortly afterwards it emerged that Furze had worked with Haughey’s former accountant, Des Traynor in the Cayman Islands, where Ansbacher’s branch had taken over the operation of Traynor’s bank Guinness & Mahon.

The McCracken Tribunal set up to investigate the payments from Dunne to Haughey and politician Michael Lowry, hit the jackpot, identifying the presence of the “Ansbacher Accounts”, secretive offshore holdings by Irish residents in the Caymans. An official investigation in 2002 found close to 200 wealthy individuals had Ansbacher accounts. Subsequent investigations by the Revenue Commissioners led to €113 million being paid in tax. An investigation into bogus non-resident accounts, subsequently probed in hearings by the Public Accounts Committee, yielded €650 million. More than 300,000 people in the State held such accounts, dubbed at the time as the “poor man’s Ansbacher”.

But in cash terms, these high-profile investigations were only the tip of the iceberg. A series of Revenue initiatives in relation to offshore accounts, including a range of voluntary disclosure schemes over the years and other investigations, has raised over €3 billion. Voluntary disclosures allow those who confess to avoid publication on the tax defaulters list and prosecution. Since 2017, tax defaulters who use offshore facilities to hide undeclared income, accounts or other assets can generally no longer make qualifying disclosures.

Meanwhile, property-based vehicles which generally allowed higher income individuals to legally shelter their income from tax have been gradually restricted and closed off, even if the historical benefit of some of them remains. The original idea was to encourage people to invest in generally property-based assets, risking their capital by putting money into underdeveloped areas of Irish cities or towns. The reality, in many cases, was that tax accountants designed schemes involving little or no risk but significant tax gains, thus allowing those involved, for many years, to shelter not just rental income but also income earned from other areas.

Appearing at the Joint Oireachtas Committee on Finance, Public Expenditure and Reform in 2017, Revenue chairman Niall Cody also spoke of the point where aggressive tax avoidance regimes became questionable legally. In some cases, such as certain schemes involving medical consultants, Revenue took action.

“It is a challenge that we in the Revenue Commissioners constantly have to address,” he said at the time. “There is what we call aggressive tax planning. Some of the advisers in the accountancy firms look at us blankly and cannot understand the concept of aggressive tax planning, as they see it as very sensible advice.”

A new kind of tax planning

Such tax planning still exists, but the scope for it is more limited in the past. Current tax relief schemes such as the Employment Investment Incentive Scheme (EIIS), which encourages people to provide equity-based finance to trading companies, offer significant relief but generally does involve a significant risk for investors. If the company goes belly-up, it looses its capital. Pensions relief is still generous. And controversy continues about special tax deals available to some senior multinational executives who come to work in Ireland. The Commission on Tax and Welfare recommended a more stringent regime of putting sunset dates on tax reliefs and subjecting them to more rigorous and regular analysis.

But the bottom line is that the income tax system is now increasingly reliant on higher earners. The effective tax rate on a single person earning €100,000 is now 36.4 per cent or 39 per cent for someone earning €120,000. The top 1 per cent of earners – those earning over €250,000 a year – will pay 21 per cent of total income tax and USC, while the top 10 per cent will pay 62 per cent of the tax and USC.

Scope for those who remain tax resident in the Republic to reduce their tax bill still exists, but it is more limited than in the past, while the international exchange of information among Revenue authorities has been recognised as a key factor in reducing the ability of rich individuals to hide money in one jurisdiction without the knowledge of the other. Even formerly closed regimes such as Switzerland are now part of this network.

The Commission on Tax and Welfare did, of course, point to another area of inequity. And that is wealth. While the income tax system is highly progressive, taxation of wealth in Ireland is low by international standards. This has led some parties, such as Sinn Féin, to champion a wealth tax. The commission felt a better approach was to reform and ramp up existing taxes in areas such as capital gains, property and inheritance. This is highly controversial territory, but this is where the big remaining inequities in our tax system lie, rather than in the area of taxation of what people earn.