Slashing reliefs for wealthy might make a start on 'sharing the pain'
THE TAX QUESTION No2: THE HIGH EARNERS:Figures showing the rich paid little or no tax indicate areas that could be targeted, writes COLM KEENA
LAST YEAR some of the richest people in the State, people who earned in the region of €90,000 a week and more, paid income tax at a rate of 20 per cent, the same rate as people who were earning €500 a week.
They did so through the aggressive, multiple use of tax relief schemes introduced and operated by Government over the course of the boom years. Many of these schemes, bizarrely, were aimed at boosting construction in the course of one of the most sustained construction booms in post-second World War Europe. Some of the schemes have since been closed but they have long tail winds and continue to reap tax benefits for those who invested in them. If it were not for constraints announced in 2006 by the then minister for finance, Brian Cowen, which came into effect in 2007, these top earners would be paying even less tax.
Many of these very wealthy people also have substantial personal pension funds which were built up over a period of years with income which benefited from tax relief. In 2006 when he was introducing constraints on these pension funds, Cowen revealed that two individuals had each built up pension funds worth €100 million. When these people retire, they will each be entitled to draw down up to 25 per cent of their fund tax free, ie €25 million each.
Such egregious examples of tax avoidance using Government tax schemes were never justifiable, but their continued existence is a particular affront to ideas of equity.
The Revenue Commissioners are due to conclude a study next April that will examine the impact of the constraints announced by Cowen in 2006. Data from the income returns from high earners for 2007 will be compared with the results of a Revenue study published in 2007 and which related to the 2003 tax year.
The study examined the income tax affairs of the State’s 400 top earners and found that 80 had paid income tax at an effective rate of less than 15 per cent. Three paid no tax at all, 45 paid at a rate of less than 5 per cent, and 17 paid tax at rates between five and 10 per cent.
The Revenue did not publish figures for how much was earned in 2003 by these top 400 earners, for confidentiality reasons. When its studies draw attention to relatively small groups of people, it increases the standard of confidentiality it applies. This is why, in the table opposite, no €1 million-plus figures are given for the highest individual tax savings made under various tax schemes.
However, the figures published in this newspaper yesterday showed that the top 1,447 earners earned an estimated €3.459 billion in 2008. This translates into an average income of €2.4 million. It is not unreasonable to assume that the top 400 earners earned an average of €5 million each, or €2 billion collectively.
The measures announced by Cowen in 2006 were aimed at ensuring that no matter how aggressively taxpayers used the various Government tax schemes, they would nevertheless pay tax at an effective rate of 20 per cent on their income. The Revenue study found that 26 per cent of the 400 top earners paid tax at a rate of less than 20 per cent. Adjusting the measures introduced by 2006 could increase the effective rate at which tax would have to be paid. A number of tens of millions in extra tax could be raised, with the amount dependent on the nature of the adjustments.
The adjustments introduced by Cowen affected all investors in such schemes who had incomes in excess of €250,000, so any adjustment to the measures would increase the tax yield from the generality of investors.
While some of the property schemes were closed in recent times others involving private hospitals, nursing homes and childcare facilities, have been left in place. The studies published by Cowen in 2006 were of the view these schemes would cost the exchequer in the region of €850 million in taxes foregone over the following years. Sharply reducing or ending some schemes would create significant tax savings.
Recently, in the Dáil, Minister for Finance Brian Lenihan told Róisín Shortall of the Labour Party that the Revenue estimated that tax relief for mortgage interest for landlords would cost the State €877 million in tax forgone in 2007. The figure for the previous year was €594 million. The Government indicated it had no intention of ending the scheme.
The Commission on Taxation that is expected to report later this year is widely expected to recommend a specific change in relation to pensions which will reduce the amount of relief available to middle and higher income earners. An immediate implementation of this measure in the forthcoming budget could help restore order to the public finances.
Currently, relief on pension payments arises at what is called the marginal rate, which is the rate at which the person concerned pays income tax (either standard, 20 per cent) or higher (41 per cent). Changing the relief to the standard rate for everyone, would reap substantial savings, possibly in the region of €200 million.
At present earners can, depending on their age, divert between 15 and 40 per cent of income into their pension, up to an income level of €150,000. Reducing that, say to €100,000, would also generate tax savings. In general, pension policy as operated here tends to favour the better off as the wealthier are better positioned to set aside more money.
Pension contributions are not taxed when the money is being invested, but pensions are taxed when pensioners are being paid. So when society ages, what is a net cost to the exchequer, will become a net benefit.
The State subsidised the pension system by a net €2.9 million in 2006, the latest year for which figures are available. As well as the more general occupational pensions set up by employers, the personal pension funds operated by the better off also benefited.
Since 2007 the maximum size of the funds, for the purposes of relief, is €5.4 million. There are 6,500 self-administered schemes, but the Revenue does not know how much money is in them.
Occupational funds cannot borrow but self-administered funds can. Paul Kenny, the Pensions Ombudsman, believes that many funds have borrowed in recent years to buy property, shares and other assets that have since depreciated markedly in value. “We don’t known how much money is in them but it is very much less than it was last year,” he told The Irish Times. “Many probably owe more than they have. Ones that invested in property, I would say are in a very serious way now.”
Tomorrow: The middle income earners