Another tax advantage for the wealthy

With that blathering self-congratulation that is a hall-mark of Charlie McCreevy, he told the Dail last Wednesday:

"In my first Budget, I reduced the rate of capital gains tax from 40 per cent to 20 per cent in the case of disposals of most categories of assets. The rate change affected four months of the 1997-1998 tax year yield, and the entire yield for 1998-1999. Instead of reducing the yield the figures are as follows: 1997: £132 million; 1998: £193 million; 1999: £343 million estimated.

"Need I say more!

"The one category of asset that was left after my first Budget at the 40 per cent capital gains tax rate was development land. But in order to encourage land-owners to sell land for housing, as recommended in the Bacon Report, this rate was since reduced to 20 per cent for the disposal of land zoned for residential use or with residential planning permission. This now leaves only one type of asset still liable at the 40 per cent rate, that is disposals of development land for non-residential purposes such as, for example, road-building, or the construction of factories or offices. I have decided therefore for simplification reasons to apply the 20 per cent rate to this remaining type of asset in the case of disposals occurring after today."

Well, indeed he should say more and this is why.

It was thoroughly obvious in December 1997, when he reduced capital gains tax from 40 per cent to 20 per cent that the yield from the tax would increase. This was because it was predictable that a significant number of high tax earners would simply shift their remuneration from income to capital gains to take advantage of the huge tax bonus. (At the risk of emulating Charlie McCreevy, I forecast this in a column in this newspaper on December 31st, 1997.)

What economic or social justification could there have been for this at the time?

Yes, the reduction in capital gains tax probably encouraged additional investment; but at a time when the economy was booming how was this justified given the social inequities to which it was certain to give rise? This was all the more so in late 1997 because just then a study had been conducted by the Revenue Commissioners into the tax paid by high earners, people earning over £250,000 per annum. This study revealed that only 8 per cent of these high earners paid tax at the top rate and that a quarter of these high earners paid tax at a rate well below the standard rate (8.5 per cent of these high earners paid tax in the year 1994/95 at less than 5 per cent of their income).

So, precisely at a time when it was revealed by a study undertaken by an agency under his jurisdiction that high earners were cheating on their taxes on a massive scale (cheating either through tax evasion of clever-dick tax avoidance), he introduced a measure which enabled them to avoid tax on an even greater scale. And he did this at a time when there was no economic necessity for him to do so.

When this huge tax advantage was given to the wealthiest in society, there was no public pressure from any quarter for it and my information is that officials in the Department of Finance resisted it. So why was it done?

When he introduced this measure two years ago he excluded from this dramatic tax reduction "disposals of development land which will remain taxed at 40 per cent". Presumably then he did not see that the justification he offered for the tax reduction generally on capital gains applied to development land. And indeed how could he?

Why should the owners of development land be the beneficiaries of massive windfalls, solely because of decisions taken by public authorities to zone their lands for residential purposes? The inequity arising from those arbitrary windfalls was partly redressed by capital gains tax at 40 per cent.

But last Wednesday that changed. The owners of development land will now have capital gains on their land subject to half the tax that previously obtained. There may be some modicum of justification for this in the case of land zoned for residential purposes to encourage the release of lands for the construction of more houses (why the recommendations of the 1974 Kenny Commission on the compulsory acquisition of land for residential development are not followed remains a mystery).

But what possible justification could there be for this massive tax favour for lands that are not intended for residential development? The only justification offered by Charlie McCreevy is that this is done for "simplification reasons". That such a huge tax advantage should be given to an elite group in society for no purpose other than "simplification reasons" begs all kinds of questions.

Yes, Charlie, you certainly need to say more. How could the demands of "simplification" justify such a huge bonus to the owners of development land not intended for residential purposes? This is all the more so when there is every evidence that many such people already avoid paying anything like the proportion of their incomes (whether obtained through earnings or capital gains) that the vast majority of taxpayers are required to pay.

The Budget has been a political fiasco, of course, for reasons unrelated directly to capital gains. But the outrage that has arisen over the discriminatory treatment of single-income families vis-a-vis double-income families and the general bias of the Budget in favour of the rich suggests there may be a coalition of opinion now in favour of redistributive measures on a scale not previously contemplated by parties in government.

PS: In his column in this newspaper on Tuesday week last (November 30th), John Waters wrote that in the course of a radio discussion with him I dismissed his suggestion that crime figures were far higher than the official Garda statistics suggest. He said I should be impressed by the recent report of the Central Statistics Office which shows there are far more crimes perpetrated than recorded in the Garda statistics.

John missed the point entirely.

My point was and remains that there was little reason to believe that a larger proportion of actual crimes committed go unreported to the Garda nowadays as compared with, say 20 or 30 years ago. This is simply because there is nowadays a greater incentive to report crimes than there was then - i.e., insurance claims. I never contended that the actual crime level was not higher than that reported by the Garda.