Tax Loopholes for high earners

[broken link removed] in today's Sunday Business Post gives the following information:

78% of people earning over €500k paid an effective tax rate of less than 20% in 2007.

The remaining 22% paid an effective tax rate of between 20% and 25%.

In other words, no one earning over €500k paid more than 25% tax.

Surely the 214 people earning over €500k are not all taking advantage of property investments?

The rough tax rate for someone earning €500k before any planning should be about 37%.

€70k@ 20% = 14
430k@41% = 176
less tax credits: €3k
Total tax: 187k
Tax rate: 37%

As their income increases over €500k, then the rate would rise towards 41%.

Those with an income between 250k and 300k pay an average tax rate of 5%.

Does anyone know where these figures come from? Is it a survey of the 439 people who paid the lowest tax or is it a survey of all people who earned over €250k?

Brendan

The source of the article is here.

It's not very clear, but I suspect that the survey only covers those individuals who have availed of the tax reliefs. In other words, there are many others who are earning over €500k per annum who are paying around 37% tax on their income.

Table 1A shows that the 214 high-income individuals with an adjusted income of €500,000 or more (i.e. where the full restriction applies) paid an average effective tax rate of 20.08% per cent on the combination of adjusted income and ring-fenced income.

Click to expand...

Table 3 is particularly interesting as it lists out the number of people who availed of the various tax schemes. The biggest one was 129 people who invested in hotels. This shows the purpose of the tax relief in the first place - to encourage risk taking to finance development. These people presumably have lost far more on their investment than they gained in tax relief.

Brendan

There is, it seems to me, a very facile tendency in the Department of Finance to assume that the 'cost' of tax reliefs can easily be assessed in terms of tax foregone. For this to be true, you would have to assume that people do not alter their behaviour so as to minimise their tax exposure. We reduced CGT from 40% to 20% and the yield increased - but the lesson was totally lost on the Mandarins.

Many High Net Worth individuals own or control trading companies. Within limits, they can choose each year how much (personal) income they will pay themselves.

It is nonsense to assume that if the various reliefs were not available, these people would still choose to take income they might not need and subject it to tax that they do not wish to pay. But that is exactly what the Department of Finance does in publishing an analysis in this form.

When increasing the capital\transactional tax rates, they seem to do the same thing - i.e. to assume that an increase in CGT or CAT will produce almost a pro-rata increase in tax take, without any - or any proper- cognizance of the fact that higher tax rates mean few taxable transactions. Or perhaps I am being harsh on them - I freely admit that in matters of public sector finance I am something of a hurler on the ditch.

From the spreadsheet attached to this article, there were around 10,000 people who earned in excess of €250,000.

Of those, only 359 took advantage of these reliefs.

Brendan