Monday 18 December 2017

Feathers will fly and capital flight likely if Government tries to pluck golden goose

Plucking the maximum amount of feathers for the least amount of hissing was how Italian statesman the Count of Cavour summed up his view on taxation. Stock image
Plucking the maximum amount of feathers for the least amount of hissing was how Italian statesman the Count of Cavour summed up his view on taxation. Stock image
Brendan Keenan

Brendan Keenan

THE Italian politician Cavour is credited with the observation that the art of taxation is to pluck the maximum amount of feathers with the minimum amount of hissing.

It can sometimes seem as if his modern Irish equivalents have mastered the opposite feat: getting the minimum from the goose with maximum hissing.

Sometimes, they get nothing at all. There was any amount of hissing over the suggestion that the money made from selling one's home might be subject to capital gains tax. Yet the outrage was largely for show. No-one believes any such measure will be introduced. Hissing would hardly cover the reaction of it were.

The geese have been doing pretty well of late. Threatened medical cards were restored, the USC (Universal Social Charge) was reduced and, of course, water charges as an alternative to taxation were abandoned, although the taxation to replace them is nowhere to be seen.

Then there is the local property tax. In a similar vein, this was frozen until 2019. At the time, house prices themselves were in the deep freeze. Now they are boiling away merrily and a return to tax on market value, which is what it supposed to happen, would mean a hike in payments on a scale which is just as unthinkable as the tax home sales.

The fate of the property tax may be one reason why the capital gains tax on houses surfaced in the tax strategy papers published by the Department of Finance before each Budget.

At the height of the credit boom capital-gains tax reached more than €3bn, but are expected to bring in little more than €700m this year. There is no going back to the bubble figures but the Exchequer could do with a somewhat bigger contribution in this area.

Analysis from this expert group feeds into strategy recommendations. Unfortunately, when it comes to actual policy, strategy has come a very poor second to placating, well, not angry taxpayers so much as angry non-taxpayers who want to stay that way.

The experts want the tax base widened, to make more people liable for income tax and, more importantly, to have new taxes other than those on income. And, in case you are confused, we are not just talking abut the rich avoiding tax; we are talking about those at the opposite end of financial scale not being liable for income tax at all.

They are the single largest group of earners. The paper sets out in cruel summary how the income tax system - already sickly - joined the list of things destroyed by the bubble. With tax cuts, wider bands and higher exemption limits, by 2007, 40pc of earners were not liable for income tax and a further 40pc were on the modest 22pc standard rate.

Then came the wrong kind of tax cuts - those caused by unemployment and falling incomes. By 2009, on a smaller workforce, 45pc were below the income tax threshold and only 13pc were paying the top rate on some of their income.

The main response in this area was the introduction of USC. Its impact is clear from the figures. Whereas almost half of earners did not have to pay income tax, only one in eight escaped USC. Of those who were paying, more than two thirds-were on the higher 7pc rate.

One can understand the outrage. This imposition came on people on lower incomes (even if "lower" had come to mean almost half), at a time when those incomes were under pressure and living standards had been further reduced by public spending cuts.

It could only have been done in the context of a national emergency, where Irish realism persuaded most people that the alternatives were even worse. What hardly anybody has asked, is what should normality look like?

In particular, is the balance between those liable for income tax and those who are not sustainable? If it isn't, more people will have to pay income tax, or new taxes will have to be raised. Wealth tax, for instance.

Lots of people are in favour of wealth taxes but wealth always belongs to somebody richer than us. There will be no hissing if they are plucked, but they do not need to make noise. If they are really rich they can move their wealth out of reach of the taxman, which made the strategy group conclude that a tax on large amounts of wealth only would be ineffective.

A wider tax, affecting half the population, would raise over €1bn, it says, but that would mean an awful lot of hissing for what is a small amount of feathers. The group consoles itself by describing inheritance and gift tax, property tax, capital gains tax and Dirt as wealth taxes but, strictly speaking, only the first two are.

The report goes through the finest tax break of all for the wealthy - so-called discretionary trusts. Provided payments for such a trust are made by an independent trustee, only the payments are taxable and the wealth itself is untouched. Lovely.

This juicy plum is available almost everywhere and the rich would certainly scarper - or at least their money would - if it were interfered with. The group makes no suggestion about curbing it.

The truth is that the bulk of the country's taxable wealth is in its houses. Yet the only significant general wealth tax, the property tax, is dead in the water. It seems unlikely it will ever catch up with the current value of houses. The OECD has pointed out that this is generally the fate of property taxes based on market value. Several experts warned against using this method but were ignored.

Meanwhile, governments continue the process of reducing their ability to raise revenue. Only one in five now pay the top rate of USC, compared with two in every three in 2011. The strategy group mulled over the difficulty of merging the hated charge into something more rational.

As things stand, and with an election looming, the USC could be whittled away to irrelevance before the difficulties are overcome. Even if they are, the system will remain skewed towards taxes on earnings, and skewed heavily towards the top third of earners, with little new contribution from wealth.

The economist Thomas Piketty, who wrote an unexpected bestseller about how wealth accumulates, proposed a global tax on the very rich, while admitting that it was unlikely ever to happen. Others have suggested that the way round this is consumption taxes aimed at the wealthy, with heavy duties on racehorses, yachts and the like (and no flat excise duty on wine).

Perhaps the same principle could be applied to housing wealth - taxing neither market value nor profit on sales but doubling Vat on furniture, kitchen appliances or carpets and, if I had my way, tripling it on DIY tools and materials. Hiss, hiss.

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