Income, capital gains and inheritances should be taxed at the same rates

[Brendan Burgess]

Here is an article I had in yesterday's Sunday Times

IF a hospital nurse, in an effort to make ends meet, earns €10,000 additional pay through extensive overtime, she will pay 51% of it in income tax, USC and PRSI. If one of the consultants in the hospital makes a profit of €10,000 through selling shares, he will pay 33% tax. If the same consultant gives his son a gift of €10,000, that son will pay no tax at all.

How on earth can this be considered fair or reasonable? Someone working hard, doing a valuable job that benefits society pays 51% of their earnings in taxes, while someone lucky enough to have a wealthy dad pays nothing?

And while our nurse can do absolutely nothing to reduce the tax burden, there are plenty of legal ways around taxes on capital gains, gifts and inheritances.

A child can receive up to €3,000 a year tax-free from each of his parents. So over a 20-year period, the child can receive €120,000 tax-free. A parent can give a child a one-off gift up to a threshold of €225,000 free of tax. And if a person receives a gift of the house they have lived in for three years, it’s completely exempt from tax.

It doesn’t matter if that home is worth €30,000 or €3m, it’s completely exempt from tax. So a parent could gift a child a house worth €1m and €445,000 in cash and the child would pay not a cent in tax. How many red-eye shifts would our nurse need to work to earn that type of money?

And there are more reliefs for inheritances or gifts of businesses and farms. If the owner of a business worth €10m passes it on, 90% of the value will be disregarded when calculating gift tax. So it will be treated as a gift of €1m and the recipient will pay €250,000 gift tax. That is an effective tax rate of 2.5% on a gift worth €10m. That is 1/20th of the marginal tax rate on income.

Amazingly, there are calls from Fine Gael backbenchers to increase the thresholds and exemptions even further.One of the arguments against inheritance tax is that it is a form of double taxation. So what? Double taxation is a feature of the tax system. If our nursing friend drives to work, she will pay VAT and duties on the petrol. She is paying these taxes out of her net income.

There are plenty of ways around capital gains tax as well. If I make a profit of €1m on selling my home, I pay absolutely no capital gains tax. When I die, my estate will pay absolutely no tax on any gains made on selling my assets. Anybody who bought investment property between December 2011 and December 2014 (some at rock bottom prices) will pay no capital gains tax if they hold on to the property for seven years. And all the time our hard-working nurse is paying 51% tax on every euro of additional income and can do nothing about it.

We need to rebalance the tax system. Taxes on incomes should be lowered and taxes on capital gains, inheritance and gifts should be raised. A simple solution would be to abolish the thresholds and exemptions and to treat all capital gains, inheritances and gifts as income and make them subject to income tax, USC and PRSI. Maybe make an exemption for the family home — but limit that exemption to €200,000.

There would also be an economic benefit to rebalancing the tax system. High taxes on income and expenditure act as a disincentive to work and enterprise while taxes on property and capital are much less of a disincentive.

While we do have income inequality in Ireland, it is greatly reduced through a combination of a very progressive income tax system and generous social welfare payments. Wealth inequality is much starker and is perpetuated by allowing people to accumulate and pass on wealth with little or no tax. Michael Noonan, the finance minister, must address this in the budget.

 

[KOW]

I totally agree that "Drastic Surgery needed for our unhealthy tax system" is badly needed.
Article in todays Sunday times
That said.

Most people trying to give a leg up to their children are people exactly like the nurse who genuinely want to help out their family.

Brendan
There will always be very wealthy people in society who will have the tools to will extreme wealth to people they choose.

If as I am a PAYE worker and buy a few pints the weekend or fuel my car up I am double taxed.
So this continuous argument around double taxation around most purchases etc is a nonsense.

Many are of the opinion that any wealth passed on should be heavily taxed. I have worked the past 37 years and in that time have been unemployed for 3 weeks. My wife has worked for a straight 36 years. We are both on about the average Industrial wage.
I strongly disagree with penal taxation on my hard earned income. I do not tell anybody how to spend their money.

My money is hard earned income fully put through the tax system. If I was to give it to Paddy Power no ones business. If I was to take a cruise every year so what.
If I choose to gift to family and friends my choice.

Every time the government mess around with the property market it is a disaster.Investment property bought 2011-2014 a prime example.

In the article a 200k limit on the family home is suggested before tax is payed. How would this work out in relation to city and country properties.?

Of course the tax system needs to be fixed. The effective tax rate on the multi-nationals would be a start.
The thousands of farmers spreading their income over five years effectively paying little or no tax would help.
The tens of millions in grants payed out to farmers children in college grants even though they may hold assets in the millions might be a start.
Tools used by multi-nationals need to be addressed.

In my opinion it all comes down to one thing should any person after paying tax on their income be allowed to do whatever they like with whats left over.

I think they should.

 

[Fella]

I didn't like the article a quote from it

IF a hospital nurse, in an effort to make ends meet, earns €10,000 additional pay through extensive overtime, she will pay 51% of it in income tax, USC and PRSI. If one of the consultants in the hospital makes a profit of €10,000 through selling shares, he will pay 33% tax. If the same consultant gives his son a gift of €10,000, that son will pay no tax at all.

How on earth can this be considered fair or reasonable? Someone working hard, doing a valuable job that benefits society pays 51% of their earnings in taxes, while someone lucky enough to have a wealthy dad pays nothing?

Its not comparing like with like , firstly the nurse is already on high tax band if all the 10k is at top rate its hardly making ends meet at this stage imo. Secondly the consultant has already paid 51% tax on the money that he has invested in shares and now is paying an additional 33% profit if he makes it on these shares , and he has already paid 51% tax on the money he is giving to his son , similarly the nurse can give 10k to her son is she has it tax free.

 

[Steven Barrett]

I didn't like the article a quote from it

IF a hospital nurse, in an effort to make ends meet, earns €10,000 additional pay through extensive overtime, she will pay 51% of it in income tax, USC and PRSI. If one of the consultants in the hospital makes a profit of €10,000 through selling shares, he will pay 33% tax. If the same consultant gives his son a gift of €10,000, that son will pay no tax at all.

How on earth can this be considered fair or reasonable? Someone working hard, doing a valuable job that benefits society pays 51% of their earnings in taxes, while someone lucky enough to have a wealthy dad pays nothing?

Its not comparing like with like , firstly the nurse is already on high tax band if all the 10k is at top rate its hardly making ends meet at this stage imo. Secondly the consultant has already paid 51% tax on the money that he has invested in shares and now is paying an additional 33% profit if he makes it on these shares , and he has already paid 51% tax on the money he is giving to his son , similarly the nurse can give 10k to her son is she has it tax free.

What a , factually incorrect comparison. Nothing more than an attempt to portray the nurse as someone struggling to make ends meet while the evil, nasty consultants can throw money around and pay little tax.

A hospital consultant does not live on income from shares. He pays tax at the rate as the nurse. He also probably employs staff in his private practice, making further contributions to the tax system. As Fella says, there's nothing stopping the nurse selling €10k worth of shares or gifting her son.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Brendan Burgess]

What a factually incorrect comparison.

Hi Steven

I don't mind you disagreeing with me, but what is factually incorrect about it?

The same income tax rules apply to the consultant. And I am very clear in the article that income taxes are too high. The income taxes which the consultant pay, should be reduced as well as those of the nurse.

I pay income taxes at 52% (I think) on my income and Capital Gains Taxes at 33%. This makes no sense at all. They should be at the same rate.

Brendan

 

[T McGibney]

I disagree profoundly with Brendan's argument.

High CGT & CAT rates depress the exchequer revenue from asset disposals and gifts, as each are normally voluntary and can be postponed indefinitely. Cut rates and the tax take swells, and vice versa.


And I'd argue that incentivising people to hold on to wealth and assets literally until they die is also both socially and economically crazy.


Our historical adherence to such incentives created a situation up to circa 20 years ago where 65 year olds were living and working on farms with their 90 year old parents, and the majority of productive family firms failed to make it to a second generation - while a hostility to selling agricultural or development land still persists to this day with considerable and negative social consequences.

And equalising capital and income taxes would directly disincentivise entrepreneurs from investing and reinvesting in Irish businesses. Far easier and more attractive for them to relocate to the UK which enjoys a much higher critical mass both in terms of population and infrastructure as well as generally much kinder income and capital taxes systems.

 

[Brendan Burgess]

Hi Tommy

Do you agree with any of my points at all?

Do you think that it is right that I can gift a house worth €1m to each of my children, completely free of tax?

Do you think that if I sell my family home and make a gain of €5m, that it should be free of taxes?

Do you think that when I die, my capital gains will all disappear for tax purposes?

Brendan

 

[T McGibney]

Yes, yes and yes, Brendan.

We need fewer and lower taxes, not more of them.

 

[Brendan Burgess]

High CGT & CAT rates depress the exchequer revenue from asset disposals and gifts, as each are normally voluntary and can be postponed indefinitely. Cut rates and the tax take swells, and vice versa.

This is an interesting argument. When Charlie McCreevy reduced the CGT rate to 20%, the take rose.

But it would be easy to deal with that. There is a deemed disposal of of investment funds after 8 years. You could have a deemed disposal of general investments after 8 years as well. You would have to exclude business assets from this or allow for some other form of disposal.

You can't postpone CAT indefinitely. We will all die.

Brendan

 

[Brendan Burgess]

We need fewer and lower taxes, not more of them.

I agree that we need to lower government spending and taxes generally. But we need to rebalance the taxes. We should lower the income taxes and raise the capital taxes to the reduced income tax levels.

Whatever about allowing someone to inherit their long term home, worth €200k, free of CAT - I simply can't see how it can be deemed fair that I can pass on my wealth by gifting someone €1m free of tax, by buying a home for them and all they have to do is live in it for three years.

Brendan

 

[Fella]

I agree that we need to lower government spending and taxes generally. But we need to rebalance the taxes. We should lower the income taxes and raise the capital taxes to the reduced income tax levels.

Whatever about allowing someone to inherit their long term home, worth €200k, free of CAT - I simply can't see how it can be deemed fair that I can pass on my wealth by gifting someone €1m free of tax, by buying a home for them and all they have to do is live in it for three years.

Brendan

If someone saves 1million pound and wants to give it to their kids I think there should be no tax at all , you've already paid tax on the money before you have saved it , you have paid tax on the interest you got while you saved it , if your prudent and want to leave some money behind for others why should the government get yet another cut , that 1million pound has already been taxed at 50% , another cut now is savage , you can't keep forever penalising people that are sensible with money. Income should be taxed and it is progressively taxed , outside of this anything you do with your money is taxed , but if i have 1million saved and want to leave it to my kids its 100% unfair that the government get a penny out of this imo , I have paid tax on it already.

 

[T McGibney]

I think you've missed my earlier point Brendan that raising capital tax rates depresses capital tax revenues because capital transactions are, in the main, voluntary. The key to rebalancing taxes is to cut capital tax rates, increase capital tax revenues and use this to cut income taxes.

We can argue all day about specific capital tax reliefs but the fact remains that each of them are there in order to alleviate hardships that the earlier blanket application of tax charges were causing. The obvious one here was the situation where recently bereaved people were being kicked out of their home to pay inheritance taxes on the value of their home.

 

[T McGibney]

But it would be easy to deal with that. There is a deemed disposal of of investment funds after 8 years. You could have a deemed disposal of general investments after 8 years as well. You would have to exclude business assets from this or allow for some other form of disposal.

Sounds bonkers, Brendan. It would mean a mortgaged investment property bought 8 years ago would face a compulsory CGT charge on an unrealised profit. Essentially an investor would have to remortgage every 8 years to pay tax on money they don't have.

This would be ruinous for all but the most affluent of investors.

And of course there would be no recourse if the property value fell after tax was paid on the phantom "profit".

 

[44brendan]

I'm with TMcG on this argument. Firstly the article is definitely emotive with the usual "poor" nurse compared with the "rich" consultant approach to turn a purportedly balance article into a polemic. Secondly there is a presumption that an increase in CGT will in effect garner more taxes. The idea of a notional capital disbursement would make no sense in practice as it would effectively kill off capital investment in this country. This who can will invest abroad. Those who can't will be forced to divest assets purely to pay the tax on these assets. Certainly there are extremes of inequality in the current CGT/CAT system (as in the zero cap on PDH transfers) but overall our system compares well with other countries and manages to retain the fine balancing act of getting in a reasonable level of income from these sources while at the same time not forcing the wealthy into either tax evasion or out of the country totally.

Yes of course the tax system in this country is neither ideal nor totally fair. However it is a dam sight fairer than it was 10 years ago and a significant number of the "loopholes" that facilitated legal tax avoidance to the wealthy have now been blocked or cancelled.

 

[Sarenco]

I have paid tax on it already.

You may well have paid taxes on that hypothetical sum but your kids haven't.

I wouldn't necessarily agree with Brendan's conclusion that taxes on incomes should be lowered and capital taxes should be raised but I do share his amazement at the current clamour to increase exemptions and thresholds on gifts and inheritances (which are already fairly generous IMO).

I would personally much prefer to see a restructuring of the taxation of savings to encourage a greater level of self-reliance and the elimination of the unfair tax treatment of the self-employed to encourage a greater level of entrepreneurship within our society.

 

[Prudence]

If someone saves 1million pound and wants to give it to their kids I think there should be no tax at all , you've already paid tax on the money before you have saved it , you have paid tax on the interest you got while you saved it , if your prudent and want to leave some money behind for others why should the government get yet another cut , that 1million pound has already been taxed at 50% , another cut now is savage , you can't keep forever penalising people that are sensible with money. Income should be taxed and it is progressively taxed, outside of this anything you do with your money is taxed , but if i have 1million saved and want to leave it to my kids its 100% unfair that the government get a penny out of this imo , I have paid tax on it already.

I think there is a different way to look at this, which might be part of the original point of the article. A parent would of course look at it as their money to do with whatever they will, and they have paid tax on it already. But the person receiving it has not paid tax on it. For them, whether a child or someone else, it is income. Speaking for myself, currently I am in line to inherit a multiple of my annual salary from my parents, at some point in the future, and it seems very reasonable to me that I would pay tax on it, as income to me, and I will still appreciate the windfall that remains after tax. (Not that I don't appreciate there being a reasonable exempt amount as well.)

I am not trying to address the other, very legitimate, questions about the overall social and economic effects of particular policies.

 

[Brendan Burgess]

if your prudent and want to leave some money behind for others why should the government get yet another cut , that 1million pound has already been taxed at 50% , another cut now is savage , you can't keep forever penalising people that are sensible with money.

The money is not going to the government. It is going to the Exchequer and would be used to reduce income taxes.

But our poor nurse has already paid 51% tax on her income. When she buys petrol she pays more tax. When she goes for a meal or a pint, she will pay more tax. So the argument that the donor has already paid tax simply doesn't add up.

 

[Codogly]

I have to agree with Prudence and fair play to you for pointing out the justice in taxing yourself. We will always have inequality in our society if childern can inherit wealth from their parents. Nobody is arguing that the parent hasnt already paid tax on their wealth but their childern haven't paid any tax and havent done anything to earn that income / wealth other than be the child of wealthy parents.
In a trully fair society everybody would start with Zero and would benefit only from their own work over their lifetime.
Where's the incentive to work for kids who inherit wealth (i'm not saying that everybody who inherits wealth does nothing from that point onwards) but they like everybodyelse should only have what the earned themselves... thats fair and makes everybody work for there share of the pie.

 

[Brendan Burgess]

capital transactions are, in the main, voluntary.

But I have already shown that they are not voluntary. I can defer them through living longer. But at some stage I will die. At present, I can pass on most of my wealth via gifts or inheritance largely free of tax. That seems completely wrong to me.

I can defer Capital Gains through not selling assets. Under current legislation, if I defer all sales until I die, then the gains are no longer taxable. I can't understand why this happens.

I wouldn't have a problem with Revenue waiting until a person dies. This would not reduce the long-term tax take. If you wanted to boost the medium term tax take, you could introduce the 8 year deemed disposal. You point out a problem with investment property, but that could be dealt with. It would not be a problem for liquid investments like shares.

 

[Fella]

Its a fair point that it's income to the child and something I hadn't considered thanks . In hindsight I was wrong to suggest it should be totally tax free.

I don't agree with the article though comparing a nurse paying tax at 51% to a consultant selling shares and been taxed at 33% , its like what David McWilliams is on about , I think the tax on shares is way above uk already any suggestion it should be taxed more is crazy IMO , that 10k the consultant made on shares was risked money and not a guaranteed income.