Coalition must bring in a wealth tax to balance the books
The next Budget needs to tackle the €9bn a year in interest we pay on the national debt, says James Fitzsimmons
Published 06/07/2014 | 02:30
The economy is improving, but we are awash with debt and it is dragging us down. In the six months to the end of June, the Government spent almost €5bn more than it took in, and this is added to the national debt. According to the CSO, the gross amount is now about €200bn. That works out at about €90,000 for every worker in the country.
The interest alone was €4.3bn for the six months to the end of June and is approaching €9bn in a full year. That's over 20pc of everything we collect in tax, just to pay the interest.
The economy may be recovering, but we have a long way to go before we get out of the hole the Government has dug for us; €9bn could be spent on education or health if we didn't have the interest bill. No matter how much the economy recovers, the financial crisis left us paying €9bn a year in interest - that could have paid for essential services. An elite few reaped the rewards, but everyone else will pay the price for decades to come.
Incomes are strained and there isn't enough left to pay the bills. Taxing income so aggressively is stifling economic recovery and it needs to change. So what should we do, now that things are getting better?
While the Government runs a deficit to cover what it spends, the national debt is rising, creating a mountain that we have to pay back, and that's coming too.
In 2010 we spent over €30bn more than we took in. This year, the deficit will be closer to €10bn, which is not too far off the interest on the national debt.
If the Government is looking for a wealth tax, that's probably how much it should be. The question then is who should pay it - maybe it should be the mega-rich?
There are no complete statistics on how much the truly rich are worth and what they can afford to pay.
The 'Rich Lists' published by newspapers and financial magazines are all we have. There are probably less than 10 Irish billionaires, but who knows how many billionaires claim to be of Irish descent?
There are about 300 to 400 Irish people who are worth over €30m and about 4,000 who are worth €5m to €30m. If we assume the target group has even €100bn, a 10pc wealth tax would cover the interest on the national debt, or close the gap that would wipe out the deficit on our balance of payments.
A 2pc tax would avoid the planned tax hikes, or spending cuts, next year. But even they may be shelved. A wealth tax seems so simple and it wouldn't cause the suffering that austerity created. If wealth wasn't so mobile it would be the next step along the road to recovery, here and all over the world.
Bill Gates's fortune was recently put at nearly $80bn and it grew by over $9bn last year. His net worth increased tenfold in the last 20 years.
He donates more to charity than anyone else and that cuts his tax bill too. He said that he, and others like him, can afford to contribute more in tax than they do. Warren Buffet said the same, but they are in a minority. It's not as if the chairman of the Revenue Commissioners can threaten to take it from their pay as they do with the Local Property Tax (LPT), if they don't pay up.
Most wealth is mobile and the authorities are afraid that it will disappear if they try to tax it. It's easier to collect €1,000 from one million people than €1m from a thousand. The Government could lose the income tax the rich pay if a wealth tax frightens them away. It would be a lot more complex than collecting income tax, given that it's not so easy to evaluate wealth.
As a general rule, those with the biggest fortunes get the best returns. If that's 10pc or more, a wealth tax of 5pc to 10pc would not even eat into the capital, and for the mega-rich that capital is more than they can ever hope to spend. But unless they are firmly rooted to the Auld Sod by a sense of national pride, a wealth tax will only be effective if introduced all over the world, at the same time. And when it comes, it will be gradual. It might even be progressive.
Should they pay tax where they live, or where their wealth is located? National governments will squabble among themselves as they fight to carve up the spoils. A similar row has broken out in the EU as they fight for tax on company profits. The EU wants to apply tax where the company makes its sales and not where it resides. Ireland could lose out if the EU does that.
There are tax havens all over the world and you don't have to look far to find them. It's not just about tax, anonymity can be just as important for those who have something to hide. Last week, America's Foreign Account Tax Compliance Act (FATCA) legislation became effective here. It applies all over the world and forces financial institutions to disclose information to the US authorities about savings and investments they hold for US citizens and US residents.
There are about seven million Americans living abroad who may experience a loss of independence due to the FATCA, and many US residents may feel it too. Some have even cut their ties with the home country to keep their independence.
Some financial institutions have closed down accounts to avoid the onerous compliance obligations and the costs that they involve. It's a blunt instrument that could backfire and while it might close off an old loophole, it doesn't deal with the real problem of getting more from those who can afford to pay. It's estimated that it will cost foreign financial institutions more to administer it than the US authorities will collect in tax.
As we approach the next Budget, the old problem of how to share the benefits that might accrue raises its ugly head. There's probably only €1bn to share around - that's about €500 per worker, or little more than €200 per head of population.
The Government could abolish LPT and water charges altogether. But that's not going to happen, the EU won't let it. It could reduce LPT for the most vulnerable, but how do you get the benefit to the right people? It could restore the personal tax credits that it took away, but those who don't need help would eat away the bonus intended for the most vulnerable. Tax incentives tend to benefit the wrong people. The Government was not prepared for the turnaround, no more than it was responsible for it. It should use the savings to restore essential services and use a wealth tax to balance the books.
James Fitzsimonsis is an independent financial adviser specialising in tax and financial planning.