Using Effective Tax Rates to Compare Investments

Sophrosyne said:
I'm afraid not.

Using Brendan's example, the additional tax payable is €6,120 leaving an after tax gain of €5,880.

The effective rate on the gross income is 33.74%.

This does not mean that the €12,000 rental income should be taxed at 33.74%, but rather that the tax rate averaged on €62,000 is 33.74%.

Brendan's example was easy to work out as the lower rates of income tax and USC were used up by the salary.

In other cases you might have to take account of unused portions of lower rates.

That said, your point regarding incomes subject to progressive rates and incomes subject to flat rates is legitimate.
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Hi Sophrosyne

Yes, I am conscious that ~34% in this example represents the effective tax rate on the aggregate income and not the rental income alone.

I don't really see why you would treat the PAYE income alone as having benefited from tax credits and having used up the lower tax rates - you could just as well have treated the rental income as having these benefits.
 
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Sarenco said:
My difficulty is that this would appear to inevitably treat the rental income as the top "slice" of income that is subject to the headline rate of tax for no particular reason.
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No, it's for reasons of logic and chronology. There's existing income on to which rental income is being added. Doing anything other than looking at the marginal rate (i.e. the rate that the income will be subject to) makes no sense at all.
 
Sarenco said:
My difficulty is that this would appear to inevitably treat the rental income as the top "slice" of income that is subject to the headline rate of tax for no particular reason.
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Sarenco said:
I don't really see why you would treat the PAYE income alone as having benefited from tax credits and having used up the lower tax rates - you could just as well have treated the rental income as having these benefits.
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Hi Sarenco


I presume you have no argument with the principle in my example?

It's actually a fairly simple decision making process. It's a marginal decision - in the sense that only marginal issues are relevant.

But, at this stage, it's your problem. You have a blind spot, which you will have to deal with yourself. Quite a few of us have spent a considerable effort trying to help you see through this, but we have failed.

Brendan
 
Sophrosyne said:
Hi Sarenco,


I think you problem lies with averaging.


However, this article may help you understand the principle.
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Many thanks for that link Sophrosyne - that's exactly the sort of analysis that I was looking for.

So the correct rate to apply is calculated by dividing the amount of additional taxes that will be due as a result of some decision by the amount of income involved. Depending on a taxpayer's individual circumstances, this rate could be anywhere between 0% and 55% as things stand.

Blind spot corrected! :)
 
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