THE issue of the privileged rich in Irish society paying little or no tax has been a hot potato for politicians and commentators for some time.

But with the rich clearly getting richer on the back of a buoyant Irish economy and little perceived change to the reliefs and incentives endemic to the Irish taxation system, the issue is coming more and more to the fore as a general election looms.

Ireland has one of the lowest corporate tax regimes in the developed world - a source of envy to our neighbours. Most voters agree with this policy but when the profits and dividends from those corporates avoid tax in the hands of the shareholders, the high level of support can diminish.

It is, however, a fact of life that in general rich people can get much richer simply by doing nothing.

Rising asset values means that the accumulated wealth of most rich people has increased overnight even before they get out of bed each morning. This applies in the Irish economy to an even greater extent than in many economies around the world.

Growth

The Celtic Tiger economic growth rates for over a decade, strong increases in property prices, increasing dividends from corporate investments have all added to the wealth of many Irish citizens. And newly wealthy people are being created every day.

There is still an issue, however, when it emerges that a small number of very wealthy people pay no tax at all. Figures just released by the Revenue in answer to a political question from Labour's Joan Bruton TD showed some startling cases of legitimate tax avoidance.

Between the 1999 tax year and 2003, a sizeable number of multimillionaires - 184 to be exact - declared incomes of more than ?1m a year and paid no income tax at all. In 2003, 16,427 people, mostly self-employed, declared incomes in excess of ?100,000 per year. The millionaires amongst them paid little or no income tax.

Significantly, many of the wealthy who are availing of tax avoidance schemes do so year after year. It is in the nature of capital allowances, for example, that the write-off takes place over a sustained period.

The millionaires have used the tax system to avoid any tax through the reliefs allowable, losses and expenses, retirement annuities, relief from tax on stallion fees and artists exemptions.

Finance Minister Brian Cowen told the Dail last week that changes in recent budgets "will increase the average tax rate for those on higher incomes."

However the Irish taxation system seems to have compounded the "rich getting richer" trends rather than spread the taxation load.

A clear example was the decision by the then Minister for Finance to cut the rate of Capital Gains Tax (CGT) from 40pc to 20pc which stimulated the sale, purchase and transfer of assets resulting in much higher receipts to the Exchequer from CGT. However, it meant that wealthy people paid at most 20pc of the gain in value of an asset while many of those on the PAYE system are tied into paying tax at the marginal 42pc rate.

Wealthy people are assisted in their accumulation of more wealth by the access that they enjoy - because they can afford it - to financial, legal and taxation specialists. These specialists advise on the highest return the wealthy can achieve from their investments with the minimum of risk.

They advise on legal structures - such as trusts - which allow the high net worth individuals to transfer part of their wealth to their partners, children or friends while minimising the tax take for society as a whole.

A leading tax adviser, who spoke on the basis he wouldn't be named, defended his life's work. "If a businessman loses millions in one business and makes profits from another, why shouldn't he write off the losses against the profits. The net effect is no profits and no tax," he explained.

On the issue of using student accommodation and stallion fees, the tax adviser argued: "These reliefs were introduced for a reason - to accommodate students or to promote the bloodstock industry - if they were unsuccessful there would be outroar."

Income from one source - such as rents from properties - can be sheltered from income tax by purchasing other properties in the form of student accommodation or hotels which have tax incentives attached. In this way high net worth individuals can legitimately use tax shelters to minimise the amount of income tax they pay on rental income from properties, for example.

The wealthy can also use devices such as massive pension contributions to avoid the PAYE income tax that the vast majority of self-employed and employees need to pay on a regular basis.

Another factor which has arisen from the halving of Capital Gains Tax to 20pc is a shift towards asset disposals in preference to payment of income. Companies can pay their shareholders by way of a small capital repayment at the rate of 20pc rather than a dividend that can be taxed at the marginal income tax rate of 42pc.

For many years the precise impact of tax reliefs were known but not quantified. However in more recent years, Revenue investigations have been taking place in an attempt to get a handle on the syndrome of the rich getting richer and paying less tax.

The most interesting study has been carried out by Statistics Branch within the Revenue commissioners. This group, after all, has access to the detailed information that outside researchers cannot use. The latest report is based on the top 400 earners in 1999/2000 but the research goes all the way back to 1997.

"The study was initiated because of concern over the ability of some high-earning taxpayers to reduce their actual tax payments to a very low level through the use of the various tax reliefs and exemptions which exist in the tax system," according to Revenue.

The Revenue points out that the 1998 Finance Act placed a cap on the amount of capital allowances a taxpayer could claim on investments outside their own business. However they wanted to assess how effective the 1998 provisions were in preventing high earners from reducing their tax to low levels.

The Statistics Branch review found that 117 of the 400 top earning individuals in the State enjoyed an effective tax rate of 30pc or less. By 2003 184 millionaires were paying no income tax at all on incomes of over ?1m a year. The top rate of income tax in 2000 was 46pc.

The 2001 study found that multi-storey car parks were a popular means of avoiding tax and that Revenue had lost ?9.7m to that incentive. Hotels were also a popular method and Revenue estimated a loss of over ?12m at the time to that relief. However it was capital allowances which made up the lion's share of the revenue foregone at ?46m. Heritage homes resulted in a loss of ?4m to the Revenue while loan interest was calculated at a ?847,000 loss.

More worryingly was the golden circle of 51 high net worth individuals who paid tax at a rate of 5pc or less.

If a significant proportion of the highest earners in the State is paying very little tax, then it follows that the large majority of people in the State, on middle or lower incomes, are paying the bulk of the taxes being extracted.

In 2005 those on PAYE paid ?8.6bn in income tax to the Exchequer or 6.5pc more than the ?8.1bn which those on PAYE paid in 2004 (reflecting the regular failure to adjust income tax bands for inflation). In comparison those self-employed in receipt of income paid tax of just over ?2bn on it or 3.9pc more than they did in 2004.

Those on PAYE include company directors but the vast bulk of those on PAYE are employees of a company in which they have no shareholding.

The self-employed include professionals such as barristers who are subject to a withholding tax on fees paid by State agencies and other designated bodies. Withholding tax on fees brought in ?342m in 2005 and ?355m in 2004.

What the minister says about the average tax take

THIS week, Finance Minister Brian Cowen said: "Changes in recent Budgets will increase the average tax rate for those on higher incomes."

In the four tax years to 2003, 184 out of 16,427 self-employed people paid no income tax at all.