# Should investment income and capital gains be taxed at the same rate?



## Brendan Burgess (12 Jan 2022)

I am drafting my submission to the Commission on Tax and Social Welfare and I want to tease out this issue.

I don't know why investment income is taxed at different rates to capital gains.


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## Brendan Burgess (12 Jan 2022)

In the UK, there is a high annual exemption from capital gains tax - £12,300 in gains and the rest is taxed at the marginal rate.

This seems like a better model, although the £12,000 annual exemption is too high.


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## Brendan Burgess (12 Jan 2022)

It shouldn't matter to me if I get my income from my Ryanair shares through a dividend or through selling some Ryanair shares. 

It shouldn't matter to me whether I invest in companies like CRH which pay dividends  or Ryanair which don't. 

Brendan


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## Brendan Burgess (12 Jan 2022)

There are a few approaches to this

*1) The existing approach. *
A low income person could end up paying a lot of Capital Gains Tax.
A person with a big capital losses could have paid a lot of income tax on their dividends, although the source of losses and dividends is the same.

2) *A unified rate for  investment income and capital gains *

This seems more logical.  It would make no difference to an investor whether they invested in companies which pay dividends or companies which reinvested their profits.  In the latter case, they would just sell shares if they needed "income".

If this is the right approach, it seems to be assumed that the tax rate on "unearned" investment income should be lower than the tax rate on earned income. I am not sure why that is the case, so the third option is: 

*3) The same rate on all income  and capital gains *

This seems the fairest of all. 

A person's capital gains would be added to their income from their employment and taxed at their marginal rate.

A low income person who gets some capital gains might pay no CGT.
A top rate tax payer would pay Income Tax, USC and  PRSI on their Capital Gains.


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## NoRegretsCoyote (12 Jan 2022)

One major issue - and I haven't teased out the implications - is that people have huge discretion over when to sell an asset to make a gain or realise a loss. 

Most of us have very little ability to time our normal income.


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## Steven Barrett (12 Jan 2022)

No. 

First of all, there is no call for it to be changed. There is no noise about people paying income tax on investment income. The noise is coming from exit tax and deemed disposal on ETFs. Given the revenue just did a review of this, I don't think that will change. 

It favours the better off. Elon Musk famously claims that he doesn't draw a salary from Tesla. That's because he doesn't need to. If you are a professional landlord or have many sources of passive income so you don't have to work, you will also be paying less tax on your investments than people who have to go to work in the morning. This would clearly be a big tax break on the wealthy. It will obviously mean less income for the Exchequer, which means reduced services, for those who need it, which isn't the wealthy who got the tax break!

Taxation on income in this country is far too high. You shouldn't have to pay over half your income to the government. But any changes in taxation, should be something that all can benefit from (with our low standard rate band, lowering the higher rate isn't exclusive to the wealthy) and not just those with the assets to avail of these breaks. 


Steven
www.bluewaterfp.ie


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## Brendan Burgess (12 Jan 2022)

Steven Barrett said:


> First of all, there is no call for it to be changed. There is no noise about people paying income tax on investment income. The noise is coming from exit tax and deemed disposal on ETFs. Given the revenue just did a review of this, I don't think that will change.



Hi Steven

There is a Commission on Tax and Social Welfare looking for submissions.

So the fact the Revenue has clarified its interpretation of the law is not very relevant. 

I don't know why they are taxed at different rates.  Unless I see a good reason for it, then I will call for them to be changed.



Brendan


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## Brendan Burgess (12 Jan 2022)

Steven Barrett said:


> If you are a professional landlord or have many sources of passive income so you don't have to work, you will also be paying less tax on your investments than people who have to go to work in the morning.



Why is that? Is rental income not subject to the same income tax rates as salary? 


Steven Barrett said:


> It will obviously mean less income for the Exchequer



Taxing income and capital gains at the same rate would only mean less income if the income tax rate were reduced to the CGT rate.  But I am just trying to understand the principle of why they are taxed differently. 

If we agree that they should be at the same rate, maybe that rate should be 50%. 

Brendan


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## Brendan Burgess (12 Jan 2022)

The Mirless report which Protocol references in another thread seems to propose taxing gains and income at the same rate.  (It's a complicated report with a lot of acronyms so I am not 100% sure that this is their conclusion.) 



			https://ifs.org.uk/uploads/mirrleesreview/design/ch14.pdf
		


_This neutrality is only achieved if the rates of tax applied to above-normal
returns are set not at current income tax rates but at rates equal to the
income tax plus full (employee and employer) National Insurance
contribution rates. Otherwise, a substantial incentive remains to transform
earned income into capital income. Of course, for the RRA, this rate 
schedule would apply only to returns above the normal return. So whilst the
proposal might seem to involve a punitive increase in rates relative to the
current system, the reality is that the RRA allows these rates to be aligned
whilst ending the taxation of the normal return.
_
They seem to be suggesting that returns above inflation (or the rate on deposit accounts) should be taxed at income tax rates.

_Brendan  _


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## Bluefin (12 Jan 2022)

50% tax rate on any gain made is absolutely crazy. 

Why would anybody in their right mind invest in an asset class such as equities where the downside is you could easily lose your money? 

Why would you realise any gains until your income is zero or very low for example when in retirement on a meagre pension? 

It's bad enough paying 33% on any gain above €1270....


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## Protocol (12 Jan 2022)

Mirrless thinks CGT in the UK is rife with problems, very unsatisfactory.

They seem to suggest that normal returns on risky assets should be tax-free, but capital gain returns above the risk-free rate should be taxed at marginal income tax rates.


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## Brendan Burgess (12 Jan 2022)

Bluefin said:


> 50% tax rate on any gain made is absolutely crazy.



But surely 50% tax rate on earned income is crazy as well? 

Why should investment income be different from earned income? 

Or tax it at the marginal rate after allowing for inflation.

Brendan


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## Steven Barrett (12 Jan 2022)

Brendan Burgess said:


> Why is that? Is rental income not subject to the same income tax rates as salary?
> 
> 
> Taxing income and capital gains at the same rate would only mean less income if the income tax rate were reduced to the CGT rate.  But I am just trying to understand the principle of why they are taxed differently.
> ...


They are at present. I had presumed that you were looking at moving investment income down to CGT rates and not CGT rates up to income tax rates...which I would also be against.


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## Purple (12 Jan 2022)

Brendan Burgess said:


> But surely 50% tax rate on earned income is crazy as well?
> 
> Why should investment income be different from earned income?
> 
> ...


In general we should be encouraging wealth creating activity so work should have lower taxes than at present since it creates real wealth and investment incomes should have higher taxes than at present because it doesn't create real wealth but I don't think they should be the same rate.


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## MrEarl (12 Jan 2022)

It would be great to include something to improve how ETFs are taxed, as part of this submission.


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## Brendan Burgess (12 Jan 2022)

MrEarl said:


> It would be great to include something to improve how ETFs are taxed, as part of this submission.







__





						Submission on taxation of investments to the Commission on Tax and Welfare
					

I am going to make my own submission the taxation of investments and savings.  But it would be a useful experiment to see if we could get a broad consensus on the principles on Askaboutmoney.  I think it's unlikely that it will work but I will give it a try.   As it's a first draft, it will be a...



					www.askaboutmoney.com


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## Brendan Burgess (12 Jan 2022)

Purple said:


> work should have lower taxes than at present since it creates real wealth and investment incomes should have higher taxes than at present



Work is taxed at 40% Income Tax +8% USC - or 48%  (or 52% if you include PRSI) 
Capital Gains are taxed at 33% 

They won't be that far apart if you lower one and increase the other. So you might as well make them the same.


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## Purple (12 Jan 2022)

Brendan Burgess said:


> Work is taxed at 40% Income Tax +8% USC - or 48%  (or 52% if you include PRSI)
> Capital Gains are taxed at 33%
> 
> They won't be that far apart if you lower one and increase the other. So you might as well make them the same.


Fair point.


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## bstop (12 Jan 2022)

Brendan Burgess said:


> Work is taxed at 40% Income Tax +8% USC - or 48%  (or 52% if you include PRSI)


Add employers Prsi to that.


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## Bluefin (12 Jan 2022)

Brendan Burgess said:


> But surely 50% tax rate on earned income is crazy as well?
> 
> Why should investment income be different from earned income?
> 
> ...


Hi Brendan 

Could you please tell us what rates are you proposing. 

Income rates 
CGT rate
CGT allowance 
PRSI
USC
Tax Bands

Are you proposing classifying taxing all income at same rates? 

Have you thought about unattended consequences of merging both taxes to same level? 

When Charlie reduced CGT, the state took in far more tax. 

Are people more likely to sell assets (discretionary spending) when CGT is lower than leave them sit there to pass to the next generation? 

Would high net worth individuals not moved to a more favourable jurisdiction to avoid punitive tax levels? 

Government will only tweak income tax levels as we are more likely to see a much larger state in the future as people are demanding more services.


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## Brendan Burgess (12 Jan 2022)

Hi Bluefin 

I am trying to set out the principles rather than set out the rates. 

My question is why is investment income  taxed at a lower rate than investment income? 

I don't know the answer to that question.

Assuming that there is no good reason for it, then they should both be taxed at the same rate. 

But one reason might be to reduce tax avoidance and tax evasion.  A PAYE worker has no choice. They have to pay whatever tax is charged.  A wealthy investor may be able to go to Malta for a year or two and avoid paying CGT. 

I am not sure that is a good enough reason, and maybe we should counteract that saying that Irish citizens who make gains while living in Ireland pay CGT on those gains. 

Brendan


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## JohnRoberts (12 Jan 2022)

How much does CGT raise? When it was halved in a budget years ago the tax collected soared, isn't that a better proposition for the country. We have to be careful not to fall into just a populist agenda.


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## Bluefin (12 Jan 2022)

Thanks for the reply Brendan. 

_Tax avoidance would be the main concern..

Tax evasion is for the foolish... 

I paid a substantial amount of CGT last month on Shares that I sold during the year even though I felt the rate was quite high. I'd imagine that I wouldn't have bothered selling those shares last year if the rate was higher and kept my holding as I then had to spend time/effort to reinvest the proceeds rather than leave in cash. 

I actually think it's more important from a tax collection perspective to get more transactions and encourage taxpayers to reinvest, sell and reinvest and the government taking their substantial take. _


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## PMU (16 Jan 2022)

Brendan Burgess said:


> Hi Bluefin
> 
> I am trying to set out the principles rather than set out the rates.
> 
> My question is why is investment income  taxed at a lower rate than investment income?


 
Because if they are you introduce a distortion. 

Let's assume both income and capital gains are taxed at marginal 52% (40% income tax, plus PRSI plus USC), so a 1 million investment in an asset that yields 5% pays 26,000 in tax; and a 1 million investment in an asset that yields 3% pays 15,600 in tax.  The after tax returns are respectivley 24,000, i.e. 2.4% return and 14,400, i.e. 1.44% return. Assuming the 5% yielder is more risky (but also more productive) than the 3% yielder, is an extra 9,600 after tax a year sufficient to tempt the holders of the lower yielding but less risky assets to sell them and invest in the higher yielders.  Probably not, so overall social welfare is lowered by clogging up the set of investible assets with lower yielding and low productivity assets.


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## Brendan Burgess (16 Jan 2022)

Hi PMU

Interesting, but the logical conclusion of your analysis is that we should not tax investment income at all? 

Or that we should tax riskier investments less? 

But another thread has a long discussion on whether deposits are riskier than shares. 

And extending the logic, I should pay less income tax on my salary in a start up because it's riskier than working for the civil service. 

Brendan


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## Bluefin (16 Jan 2022)

Brendan Burgess said:


> And extending the logic, I should pay less income tax on my salary in a start up because it's riskier than working for the civil servi


Normally the salary in such startups are higher than what you would receive in civil service plus the excitement of working in such a dynamic environment 

Main risk associated with work is losing one's employment but with required skills it's very likely that you will find employment again.. 

Risk associated with investment is that you permanently lose a % of your investment or potential all of it.. Think of all the people who lost monies invested in Irish banks.. 

There has to some incentive to invest.. Paying in access of 50% on any gain is not


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## Brendan Burgess (16 Jan 2022)

Bluefin said:


> Normally the salary in such startups are higher than what you would receive in civil service plus the excitement of working in such a dynamic environment



Normally the potential return on investments is higher for riskier investments.

Brendan


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## PMU (16 Jan 2022)

Brendan Burgess said:


> Interesting, but the logical conclusion of your analysis is that we should not tax investment income at all?


 
Of course you tax the profits derived from assets, it is a form of tax on wealth, but taxation shoud not penalise the more productive use of wealth.



Brendan Burgess said:


> Or that we should tax riskier investments less?


 
But by doing so you will almost certainly change the price of these assets.  The price of the asset now becomes a function of its yield and of a tax break. 


Brendan Burgess said:


> And extending the logic, I should pay less income tax on my salary in a start up because it's riskier than working for the civil service.


 
This is an interesting point.  If two jobs, a civil service job and a start-up, pay the same income, but have different levels of risk (say the risk of becoming unemployed) is it reasonable to tax the person in the start up the same marginal rate as the person in the civil service?  But this is more of an argument to support your position that gifts be taxed.  Two people,  with the same income (regardless of the nature of employment)  pay the marginal tgax rate;  if they receive additional income they pay the relevant tax (CAT/CGT); so if one receives a substantial gift, why shoud he / she not pay additional tax on it?

But I suggest, if gifts are counted as the income of the recipient it follows that they should be counted as a deduction from the income of the donor as the gift represents a transfer of purchasing power from the donor to the benficiary.

Or, as I argued above, the gift just represents a transfer of ownership of post-tax purchasing power.  Income tax has already been paid by the donor.  Why shoud the beneficiary pay additional tax on it?

The only argument excuse I can see for taxing gifts is if you regard the gift as discretionary spendng of post-tax income by the donor; the donor has chosen to spend his money this way and this is not a valid reason for not charging tax to the recipient. But if you go down this road, you are introducing double taxation of the same unit of purchasing power; income tax on the donor and CAT on the beneficary.


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## Brendan Burgess (16 Jan 2022)

PMU said:


> Or, as I argued above, the gift just represents a transfer of ownership of post-tax purchasing power. Income tax has already been paid by the donor. Why shoud the beneficiary pay additional tax on it?



This keeps coming up. Why should I pay 70% taxes on my pint of Guinness? 

Why should my plumber pay income tax on his bill to me? I don't get a deduction for it.

Brendan


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## Brendan Burgess (16 Jan 2022)

We have a society in which wealth is very unevenly distributed.

I don't have a big problem with that.

But there should be some mechanism for levelling it off a little.

The best mechanism is a tax on inherited wealth.

It's not a penalty. It's a contribution towards the cost of running the country.

Brendan


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## ryaner (16 Jan 2022)

My view is that all realised income, no matter the source, should just be bundled together and then progressively taxed, right from the first Euro earned. Everything from wage income, to profits from share sales, to gifts.

For it to work, things like deemed disposal, the cgt exemption and likely loads of other deductions would need to go. Probably pension relief too although that may have other unintended consequences. 

Sadly I really can't see a lot of the vested interested ever agreeing to something like this. There would be too many fees lost in the likes of investment advice.


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## Brendan Burgess (16 Jan 2022)

ryaner said:


> Sadly I really can't see a lot of the vested interested ever agreeing to something like this. There would be too many fees lost in the likes of investment advice.



Hi Ryaner

You articulate it well. Send a short submission to the Commission.

Brendan


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## Purple (17 Jan 2022)

PMU said:


> but taxation shoud not penalise the more productive use of wealth.


Taxation penalises the creation of wealth (labour) but doesn't tax the inflation of assets until they are sold. Investing in an inflating asset is not creating real wealth, wealth is only created though the manufacture and trade in goods and services. That requires labour. Labour is taxes at the same rate whether it is creating wealth in high risk businesses or not creating wealth at all. Should employees in Enterprise Ireland client companies pay lower rates of income tax than those in the domestic services economy?


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## Horatio (17 Jan 2022)

Brendan Burgess said:


> A wealthy investor may be able to go to Malta for a year or two and avoid paying CGT.


As far as I remember the Revenue commissioners can / try to exercise a right to your capital gains  worldwide income with some listed exceptions up to 3 years after you are no longer resident in Ireland.

Source....
[broken link removed]

_"If you have been tax resident in Ireland for three consecutive tax years, you become ordinarily resident from the beginning of the fourth tax year.

If you leave Ireland after this time, you continue to be ordinarily resident for three consecutive tax years. For these three years you must pay Irish tax on your worldwide income except for:
_

_income from a trade or profession, no part of which is performed in Ireland_
_income from an office or employment, where all the duties are performed outside Ireland_
*other foreign income, for example, investment income, if it is €3,810 or less. If it is more than €3,810, the full amount is taxable."*


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## Purple (18 Jan 2022)

ryaner said:


> My view is that all realised income, no matter the source, should just be bundled together and then progressively taxed, right from the first Euro earned. Everything from wage income, to profits from share sales, to gifts.


I'd add child benefit all universal welfare payments. ALL income should be taxable just as all assets should be taxable. That doesn't mean more money should be raised but it should certainly be raised differently.


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## Jim2007 (18 Jan 2022)

Brendan Burgess said:


> My question is why is *investment income*  taxed at a lower rate than *investment income*?


Sounds like a trick question.....

Rightly or wrongly Ireland seems to believe encouraging people to take on huge amounts of debt to put a roof over ones head and consequently tax provision are targeted to encourage that.

Here in Switzerland the emphasis is on encouraging wealth accumulation through investing and so long as you make no more than 10 trades per month you are considered a private investor and as such are not subject to capital gains tax.  Accumulating ETFs are also considered capital gains and not income, so there is a good market in them.


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## Brendan Burgess (18 Jan 2022)

Jim2007 said:


> Sounds like a trick question.....



No just a typo. Why are capital gains taxed at a lower rate than investment income? 

Why is the overall return on investments (income and capital gains) taxed differently from earned income?


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