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

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
 
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.
 
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.
 
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?
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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.
 
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
 
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
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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
 
Brendan Burgess said:
Interesting, but the logical conclusion of your analysis is that we should not tax investment income at all?
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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?
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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.
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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.
 
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?
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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
 
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
 
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.
 
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.
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Hi Ryaner

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

Brendan
 
PMU said:
but taxation shoud not penalise the more productive use of wealth.
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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?
 
Brendan Burgess said:
A wealthy investor may be able to go to Malta for a year or two and avoid paying CGT.
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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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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.
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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.
 
Brendan Burgess said:
My question is why is investment income taxed at a lower rate than investment income?
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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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