Indo - "Almost one in four Irish earners is paying no income tax, says Revenue"

[blackdog]

At the risk of wading into this debate:

• Pensions are not a "tax break", they are a deferral of income to the future, and thus the income tax charge.
• Notwithstanding this, you still end up paying USC and PRSI (often in excess of 12pc) today on income you might not see for 40 years.
• Saying "I'd pay 40% IT today but I'll pay 20pc in two decades" is like saying I'm healthy and wealthy today so I'll be healthy and wealthy in 20 years. You have no control over the tax regime that will apply at drawdown.
• Australia is advancing legislation to tax previously tax free unrealised pension funds.
• You need to take a look at demographic, fiscal and economic trends and draw your own conclusions about whether tax rates in decades time will be higher or lower than they are now.
• Ireland has recent precedent of directly levying pension funds - regardless of whether in gain or loss. You have no control over whether or when that recurs.

 

[Protocol]

If so many people are disincentivised to work or work alot less by our welfare and taxation system

We used to have high rates of household joblessness, as in we were an outlier.

However, those rates have fallen.

Also, note that societal preferences for providing informal social care in the home, supported by Carer's payments and tax reliefs, may mean lower employment rates than in other countries where the bonds of family may be weaker, and more formal social care is used.

 

[Fibbernacci]

Ireland has recent precedent of directly levying pension funds - regardless of whether in gain or loss. You have no control over whether or when that recurs.

The tax optimised 'deferral' of income is one of the only good things workers have here. In the US and UK there are a zillion variations of tax advantaged accounts while we instead have deemed disposals. There has to be a reason for people to come work here other than great craic. I don't see them hurting the pension too much unless something terrible happensm

 

[TomEdison]

If the 53k properties were available in the private market it would reduce the impact on rents remember supply v demand in economics. They are not because they are fulfilling a social service ie housing those who can't house themselves.

Are you suggesting that these people should live in tents, or that the state should find other ways to house them that, through some miracle, has no effect at all on the private housing market? Good luck with that. The provision of social housing in any form will affect the private housing market.

People purchasing a property to live in do not see it as financial investment they see it as having stability to start a family etc. I wonder how many of those who purchased a property to live in during the boom would agree with you in 2011/2012.

Sure. I myself did not buy my house as an investment and have never seen it as an investment. Nevertheless it has been an astonishingly good investment, delivering a far better return than any actual investment that I have ever made. And, despite what you say about 2011/12, my experience is typical. Home ownership is, by far, the biggest factor associated with accumulating wealth in Ireland, and does more than anything else to determine whether you will be in the haves or the have-nots.

Those who avail of the "generous tax breaks" will end up paying it back via higher income tax when drawing down their pension by ending up in the higher tax bracket.

No, not at all. The bulk of tax deductions for pension contributions are claimed against the higher rate. At the other end, a substantial portion of the pension payout is not taxed at all (the tax-free lump sum, remember?) and the majority of the rest ends up being taxed at the standard rate. The result is that the tax on pensions paid out doesn't remotely balance the tax deductions granted on pension contributions. (And that's before we take any account of the benefits of the tax free roll-up within the fund, which is actually the most valuable aspect of pension fund tax treatment.)

I stress, I'm not saying that this is a bad policy or that it should be changed. I'm just saying that anyone in denial about the fact that it is a hugely advantageous policy to those who benefit from it risks creating the impression that their views on tax policy are not grounded in reality.

 

[TomEdison]

There is no doubt that Ireland's overall high productivity figures are driven by the multinational sector. Some of this relates to distortions from transfers to Ireland from elsewhere. But even after excluding these transfers the productivity of the multinational sector is very high. There is surely something to be learnt from this. On the other hand I am not sure how they compare "productivity" in this sector to say homecare services, nursing homes or early childhood services.

This is an issue in all economies, not just Irealdn. It's in the nature of things that a signficant part of the public sector workforce is engaged in doing work that it isn't profitable, or isn't very profitable, for the private sector to do — that's why the state does these things. The output of these workers — education, social care, medical care — may be hugely important and beneficial but much of it is not financially valuable, which is why the private sector is not good at providing it (at least, not without massive taxpayer subsidies to do work which is not profitable).

The upshot of this is that, in financial terms (which is all that is measured by labour productivity) public sector workers are, on average, less productive than private sector workers. But this doesn't mean that they work less hard, or less smartly, or less efficiently, or that what they do is unimportant. It just means that we need to realise the limitations of the information that labour productivity gives us.

(Hypothetically, it could be the case that public sector workers work less hard, etc. Or, the opposite could be the case. But labour productivity figures are not much use in casting light on this, one way or the other.)

 

[TomEdison]

However you have completely ignored my main arguments ,the disincentives to work by all these government interventions. If so many people are disincentivised to work or work alot less by our welfare and taxation system . . .

But are they? You're ignoring the point I'm making, which is that I've often seen this claimed but never seen any evidence that it is actually true.

 

[walktothewater]

I'm not sure that the Indo article presents useful analysis, neither would I agree that is a useful conclusion to support broadening the tax base.

The article refers only to income tax. We have extremely high rates of indirect taxes by international standards, such as VAT, excise duty, VRT, etc. Those paying no or very little income tax are largely two categories:

(1) those on comparatively low incomes, including those on social welfare, and also those in full or part-time employment but not on sufficient remuneration that they fall into the income tax bracket

(2) the wealthy, who use various legal tax avoidance schemes

Most of the both categories often pay large amounts in other taxes.

Disproportionately, the burden falls disproportionately on category (1) if we compare it to income.

Overall, the article seems to support a narrative that Ireland is a "low tax regime".

In fact, we have anything but, I'd argue. We have admittedly low Corporate Taxes, but on every other tax, we are about average compared to similar countries, and in some cases very significantly higher - in % terms and compared to income.

Personally, I don't have an issue with us being a relatively high tax country, once the public services, infrastructure is there. But the narrative in the article strikes me as intellectually dishonest.

 

[Sister Sara]

The idea of cutting public expenditure, mercilessly or otherwise, doesn't really address the issue of broadening the tax base.

Cutting public expenditure is just another form of the game of wack-a-mole.

Cutting doesn't work. Managing public expenditure to improve efficiencies and value for money is the key.

A €300,000+ bike shed is, for example, an obvious area to inquire about efficiency and value for money.

But the base reality is that most of that money went into the construction industry. Archaeological services and contract administration took a small but not insignificant portion.

It is effectively just government expenditure that finds its way into the economy creating demand for services and goods boosting employment and investment.

It is not an effective or efficient way of creating demand in the economy for boosting employment and investment.

The €300,000+ of course could be cut for the next bike shed (if there was ever a thought for an extension) and that reduces government expenditure into the economy reducing demand for services and goods, reducing employment and investment.

Alternatively, the €300,000+ could simply be put to more efficient and effective use in any amount of areas where public services are badly needed and could be improved sustaining demand in the economy for goods and services, employment and investment.

 

[Protocol]

Given the following three realities, it is very difficult to cut public spending:

(1) rising population
(2) ageing population
(3) infrastructural deficits

 

[Purple]

the wealthy, who use various legal tax avoidance schemes

We don’t tax the wealthy. We tax those on high incomes. The problem in Ireland is that most of the wealthy don’t know they are wealthy as they conflate income and wealth.

If you own a house worth a million euros and have a pension fund worth in excess of a million euros then you are wealthy. You mightn’t have a high incomes but that’s a different thing. Such a person isn’t taxed on their wealth and pays very little income tax. Those are the people who are under taxed.

 

[Purple]

Given the following three realities, it is very difficult to cut public spending:

(1) rising population
(2) ageing population
(3) infrastructural deficits

Given those realities it makes the current levels of waste and inefficiency in the State funded sectors, particularly the healthcare industry, totally unsustainable.
It also shows how vulnerable we are to economic shocks because of our narrow tax base which taxes work and transactions but not wealth.

 

[Protocol]

It also shows how vulnerable we are to economic shocks because of our narrow tax base

Yes, one big risk is the dependence on CT receipts, which have grown from 4bn to 24bn in a decade.

 

[Sybilla]

QE and the resulting inflation of the value of my home and pension resulted in an increase in my net wealth of over €800,000. That was a tax free transfer of wealth from future generations of Irish citizens to me and older people like me.

The result is that they can't afford to buy a home and if they work hard what they earn is taxed at a marginal rate of over 50%. Meanwhile in a few years I can retire in comfort with a State pension that they won't get, a private pension that's twice as high as it should be and tax free assets that they'll never have.

I've worked hard all my life and I've earned about half of my wealth.
Young people will also work hard all their lives and they'll earn the other half of what I have.

I have more than a few moral reservations about that.

For 50 somethings, it depends when houses were purchased. A lot of people bought houses in 2004-2008 that are only now (in Dublin) just about worth more than we paid - and we paid 9% stamp duty. Everyone looks at property price increases from 2012, the low of the market. Some of us have not had huge net worth benefit from property price increases (although did benefit from low interest rates).

 

[faketales]

If, instead of stamp duties, we'd had an annual property tax, like a grown-up country, the fall would have been nothing like 60% (though it would still have been more than 7.4%).

Where does the 7.4% come from.

In most places property tax rate is set of what budget is required from it.

If a city needs €1bn from property tax, has 1m residents with an average home value of €100,000 then you set property tax a 1%.

If there is a cash, the average property value drops to €50,000 but you still need €1bn you set the rate to 2%.

You basically start with what you need and figure out how to get it as opposed to setting tax rates and seeing what happens.

Earnings can change quickly but you house value will be based on a known previous date.

 

[TomEdison]

Where does the 7.4% come from.

It was the fall in income tax receipts in the year after the 2008 crash.

If a city needs €1bn from property tax, has 1m residents with an average home value of €100,000 then you set property tax a 1%.

If there is a cash, the average property value drops to €50,000 but you still need €1bn you set the rate to 2%.

You basically start with what you need and figure out how to get it as opposed to setting tax rates and seeing what happens.

That's politicallly difficult; you're putting up taxes (doubling them!) at a time when people are already in economic shock. So the politicians will look at alternatives like, e.g., borrowing more, cutting back on spending and services, putting put different taxes. etc. But, yeah, you're basically right; the authorities will generally respond with some combination of more borrowing, less spending and a mix of increases, including some increaase in property tax.

(One other factor: putting up property taxes makes the crisis worse. The more burdensome the ownership of property is, the more property values decline.)

 

[Purple]

For 50 somethings, it depends when houses were purchased. A lot of people bought houses in 2004-2008 that are only now (in Dublin) just about worth more than we paid - and we paid 9% stamp duty. Everyone looks at property price increases from 2012, the low of the market. Some of us have not had huge net worth benefit from property price increases (although did benefit from low interest rates).

If you bought then and there was no QE and bail out then you’d still be in negative equity.

 

[blackdog]

If you own a house worth a million euros and have a pension fund worth in excess of a million euros then you are wealthy. You mightn’t have a high incomes but that’s a different thing. Such a person isn’t taxed on their wealth and pays very little income tax. Those are the people who are under taxed.

Referring to the house worth a million.

How is the owner - say a person in their late forties with kids in school and a job that ties them to Dublin - supposed to monetise that wealth?

Perhaps the answer is that the person should be taxed to the point that they are forced out of their house and to move, say, a cheaper location in the midlands with a two hour commute, upending their kids and the rest of their lives. Move the livestock to more convenient pasture, so to speak. I'm not dismissing that - but I think we should be very clear about what kind of society we are trying to build through tax incentives.

Two tangential points:
- In my view, a principal private residence should be viewed as an expense and liability (opportunity cost of capital, property tax, insurance, maintenance and upkeep), not an asset, unless your worldview is that espoused in the previous paragraph.
- Those in charge of governance over many decades have built a society where the vast majority of people's wealth is tied up in principal private residences. Are the citizens now to be punished for that explicit policy? Again - you can say "well they voted for it" - but that is too simplistic.

 

[Purple]

Referring to the house worth a million.

How is the owner - say a person in their late forties with kids in school and a job that ties them to Dublin - supposed to monetise that wealth?

They are not. Most wealth is tied up in Capital Assets which have a use value.

Perhaps the answer is that the person should be taxed to the point that they are forced out of their house and to move, say, a cheaper location in the midlands with a two hour commute, upending their kids and the rest of their lives.

I don't think that would be in any way desirable.
I'd rather see less income tax and more indirect taxes so that those who work are better off.

I'm not dismissing that - but I think we should be very clear about what kind of society we are trying to build through tax incentives.

I agree. My view is that we should be building one based on equality of opportunity. If that's the desired objective then we should incentivise hard work rather than inherited wealth.

Two tangential points:
- In my view, a principal private residence is an expense and liability, not an asset.

In that case you are factually incorrect.

- Those in charge of governance over many decades have built a society where the vast majority of people's wealth is tied up in principal private residences. Are the citizens now to be punished for that explicit policy?

That's the case in every developed country in the world. In Irelands case that is more pronounced because we have a very progressive income tax system, less attractive tax treatments of investments, very few deductions against income tax for other taxes and very low rates in property tax.

 

[TomEdison]

In my view, a principal private residence should be viewed as an expense and liability (opportunity cost of capital, property tax, insurance, maintenance and upkeep), not an asset.

We can make certain that it is so regarded by taxing capital gains on the PPR at 100%. Is that what you think we should do? I'm guessing not but, we then we have to ask, why not?

Those in charge of governance over many decades have built a society where the vast majority of people's wealth is tied up in principal private residences. Are the citizens now to be punished for that explicit policy? Again - you can say "well they voted for it" - but that is too simplistic.

I don't think property taxes are a punishment. The truth is that property derives much of its capital value from services and facilities provided at the expense, or partly at the expense, of taxpayers. While you can argue the pros and cons of property taxes by which property owners pay, at least in part, for the services that enhance the value of their property, but I don't think we can reasonably call them a punishment.

As you point out, a huge amount of private wealth in society is tied up in principal private residences. If you think about it, that's not a good thing — society would be much better off if that wealth were deployed in more productive ways, generating activity, income, profits.

One way to bring this about would be to make PPRs less attractive as an investment, and certainly to stop favouring them over other investments. So you could, for example, abolish or limit the CGT exemption for PPRs. That way, people wouldn't be incentivised to invest their surplus income in bigger and better houses rather than in more productive assets. Another is to tax homes to more realistically reflect the cost of servicing them with roads, sewage, street lighting, water supply, etc, so that your investment in your PPR isn't subsidised by non-home-owning taxpayers.

Of course, these measures would be hugely controversial. But you make the point yourself that "those in charge of governance . . . have built a society where the vast majority of people's wealth is tied up in principal private residences". Incentives, subsidies and subventions of this kind are how they have done that. And it's a state of affairs that is now causing us signficant problems, of which the housing crisis is the most prominent. So how would we go about changing that state of affairs, if not through measures like these?

 

[Fortune]

Such as?

Pensions, rent a room scheme, etc