Indo - "State takes in record €1bn inheritance tax as Taoiseach Micheál Martin pledges reform"

[Itchy]

The current CAT regime is relatively transparent and predictable (e.g. child with a defined threshold, tax on value above that). Moving to a CGT charge on death would instead require all assets to be valued and historic base costs established, which is often impractical in practice.

More fundamentally, it shifts the system from taxing inheritances (value received) to taxing historic gains, which can produce highly uneven outcomes. For example, long-held quoted shares with low base cost would trigger substantial CGT, whereas a principal private residence of equivalent value would (presumably) remain exempt. Two estates of similar value could therefore face very different effective tax rates depending purely on asset composition and holding period.

Valid points on the practicalities of calculating historic gains, however, this system creates its own distortions. CGT relief on death/PPR disposal and substantial tax free exemptions incentivise asset hoarding (particularly those assets with large CGT bills), as this is the path of least tax friction. This has been recognised over the years, particularly in respect of land e.g. Vacant site levy, windfall tax. I think the principle that there should be no tax advantage gained from holding an asset until death is reasonable. That way hoarding is disincentivised and capital can flow to where its utility can be maximised.

It would also create behavioral distortions around timing of disposals and estate planning, and raise liquidity issues where tax becomes payable on death without a corresponding realization event.

This is the rationale that largely underpins agricultural relief also and I fail to understand why it should be the responsibility of the taxpayer to mitigate this risk for the disponer, rather than the disponer/beneficiaries to engage in proper financial planning.

 

[patfert1]

Do you think that there is the same societal advantage/advancement from both types of work?

If my work as a carpenter or engineer or nurse or truck driver or neurosurgeon has a greater net benefit to society then do you think that it is fair and in the interest of society to tax that work at a higher rate than the capital gain I derived from inheriting a house tax free from my parents?

This is a good argument but does it lead to a conclusion that a successful cancer researcher should pay less tax in % terms than a shop assistant, because they deliver more benefit to society?
Where do receipients of social welfare who choose not to work because they get lots of money from the state fit into this picture?

 

[Purple]

This is a good argument but does it lead to a conclusion that a successful cancer researcher should pay less tax in % terms than a shop assistant, because they deliver more benefit to society?
Where do receipients of social welfare who choose not to work because they get lots of money from the state fit into this picture?

No, we can't construct a taxation system which seeks to social engineer at that level but we can say in broad terms that the labour which creates money/wealth is more advantages to society than money which creates wealth through static capital investments which do not leverage labour.

 

[C_Pike]

I think the principle that there should be no tax advantage gained from holding an asset until death is reasonable. That way hoarding is disincentivised and capital can flow to where its utility can be maximised.

It's a good argument on its own, but runs into difficulties in the implementation. Deemed disposal does the job you're suggesting, but is also a particularly negative type of a tax for all its other effects.

This is the rationale that largely underpins agricultural relief also and I fail to understand why it should be the responsibility of the taxpayer to mitigate this risk for the disponer, rather than the disponer/beneficiaries to engage in proper financial planning.

Agricultural relief is a social choice, really, based on government policy seeing smaller family farms as a desirable outcome for non-financial reasons.

 

[Sister Sara]

a conclusion that a successful cancer researcher should pay less tax in % terms than a shop assistant, because they deliver more benefit to society?

Thats debatable. There's no question of the higher skillset of the cancer researcher but the shop assistant is, and continues to be, a vital cog in operating and functioning of the economy as a whole. Without the shop assistant the economy could stumble and retract.

I have already used the shop assistant at the service station this morning to facilitate the delivery of diesel into my car, along with a slice pan of bread to make my lunch - otherwise I might not make it to work and if I did, I may be hungry throughout the day.

I have as yet, touch-wood, ever had the need to avail of the services that derive from the cancer researcher. Notwithstanding the obvious benefit of saving a persons life from illness I would suggest the shop assistant provides a greater benefit to society insofar as the day-to-day functioning of the economy, in turn, providing the necessary funding to invest in areas such as cancer-research.

As for the topic of Inheritance tax, I would agree with the sentiments of aristocracy, hoarding wealth etc and it needing reform. There is also the flip-side of someone who, in a life of relative poverty, has worked their way into a position to leave some considerable wealth to their family. I would suggest that it the provision for their family that was the primary incentive to work and investing and saving. It would be a shame to disincentive this.

In the round, I do not think there is one-glove fits all policy for this. There are numerable variables and circumstances which someone finds themselves in a position of receiving inheritance and the taxation policy should be flexible to recognise this.

 

[Purple]

There is also the flip-side of someone who, in a life of relative poverty, has worked their way into a position to leave some considerable wealth to their family. I would suggest that it the provision for their family that was the primary incentive to work and investing and saving. It would be a shame to disincentive this.

A rare case indeed and not the basis for the formulation of taxation policy.
In the vast majority of cases the family home accounts for the largest proportion of any inheritance. That holds true for the 3% of people who actually pay inheritance tax. Are we looking to reduce that to 2% or 1%?

In the round, I do not think there is one-glove fits all policy for this. There are numerable variables and circumstances which someone finds themselves in a position of receiving inheritance and the taxation policy should be flexible to recognise this.

The average after tax wage in Ireland is €36,000-€38,000. We currently allow people to inherit €400,000 before paying tax at a rate significantly below the marginal tax rate. That's 10 to 11 years worth of after tax income for the average person. Do you think that is a fair figure?

 

[patfert1]

A rare case indeed and not the basis for the formulation of taxation policy.

If there is just 1% - let's say for example purposes - of the population who rise from relative poverty (or just normal joe/jane level) to amass large wealth, it's ok to tax them heavily simply because they are in that 1%? It might be a fair social policy when looked at macro level, but is it equitable for that individual? Remember the 95% top earner rate in the UK the Beatles wrote a song about?

 

[Purple]

If there is just 1% - let's say for example purposes - of the population who rise from relative poverty (or just normal joe/jane level) to amass large wealth, it's ok to tax them heavily simply because they are in that 1%? It might be a fair social policy when looked at macro level, but is it equitable for that individual? Remember the 95% top earner rate in the UK the Beatles wrote a song about?

If we construct a taxation system so that the 1% can leave their hard earned gains to their children then the other 99% with unearned gains can avail of the same mechanism.

I'd rather see an income tax system which lets that 1% keep more of their earned wealth during their lifetime.

 

[arbitron]

it's ok to tax them heavily simply because they are in that 1%

What is the heavy tax rate in this scenario?

Currently it's 0% on the first €400,000 and then 33% on everything after that.

So if I inherit €1,000,000 from my parents I will pay €198,000 tax. Which is less than 20% effective tax rate.

 

[Nermal]

Do you think that in that scenario I worked for my capital gain

Yes.

and that work is the same as the income I derived from my labour over the same period?

It's not the same in every respect, but that doesn't mean it's not work.

Do you think that there is the same societal advantage/advancement from both types of work?

I don't know what you laboured at in this example. Perhaps you worked in a tobacco factory. Allocating capital efficiently is certainly important to the advancement of society.

If my work as a carpenter or engineer or nurse or truck driver or neurosurgeon has a greater net benefit to society then do you think that it is fair and in the interest of society to tax that work at a higher rate than the capital gain I derived from inheriting a house tax free from my parents?

I think it's hard to make a sound argument to tax them at different rates.

 

[Sister Sara]

Do you think that is a fair figure?

No, not at all. I'm just observing that tax policy should be mindful of variable circumstances in which people find themselves inheriting significant wealth that perhaps for the first time in their lives may lift them out of relative poverty.

I do actually agree that the way wages are taxed are penal relative to other forms of generated income and wealth.

 

[Fortune]

There is also the flip-side of someone who, in a life of relative poverty, has worked their way into a position to leave some considerable wealth to their family. I would suggest that it the provision for their family that was the primary incentive to work and investing and saving. It would be a shame to disincentive this.

I would be doubtful of their motivation in this case. Surely if they were building wealth for their family, they would distribute it to them while alive rather than hoarding it for themselves until death forces redistribution?

 

[Zenith63]

Surely if they were building wealth for their family, they would distribute it to them while alive rather than hoarding it for themselves until death forces redistribution?

I imagine the thinking is that if they hold onto most of their assets until death they avoid paying CGT+CAT, so their family gets more in the long run. Somebody in this position is most likely passing on “wealth” in other ways, be that paying for education, access to contacts, paid family holidays, first cars etc such that their children are already quite comfortable.

 

[Premos]

I would be doubtful of their motivation in this case. Surely if they were building wealth for their family, they would distribute it to them while alive rather than hoarding it for themselves until death forces redistribution?

Or they are just that way... Even if they have wealth to distribute

 

[Purple]

No, not at all. I'm just observing that tax policy should be mindful of variable circumstances in which people find themselves inheriting significant wealth that perhaps for the first time in their lives may lift them out of relative poverty.

Would you rather see the cost of housing go down (increased property tax) and net incomes increase (reduced income tax) so that people have a great self determination in their financial position in life?

 

[Sister Sara]

Would you rather see the cost of housing go down (increased property tax) and net incomes increase (reduced income tax) so that people have a great self determination in their financial position in life?

Pretty much, yes.

 

[murphaph1]

I see merit in allowing uncles and aunts to pass on a bit more than 40k before the tax kicks in.

 

[Purple]

I see merit in allowing uncles and aunts to pass on a bit more than 40k before the tax kicks in.

Why?

 

[faketales]

uncles and aunts to pass on a bit more than 40k before the tax kicks in.

To clarify: people to receive a bit more than 40k from uncles and aunts before the tax kicks in.

I’m not being pedantic but they currently can pass on more than 40k without tax if they have more than one niece or nephew.

 

[murphaph1]

Why?

Why not? I get that some or perhaps even most people feel that unearned income should be taxed to the hilt but compared to here (Germany) inheritances already are taxed to the hilt in Ireland unless they fall under one of the exemptions (farms, small businesses, whatever). For a brief comparison, the Cat A threshold in Germany is 400k per parent every 10 years! If 2 parents transfer 800k every 10 years for say 30 years, the child only then faces CAT and it starts at 7% after 2.4 million has been passed on tax free. Also, in Germany the family home exemption is much less strict. I do NOT have to be living in the family home at the time it is inherited. It is sufficient if I move into the home within a reasonable amout of time (not defined in law but generally a couple of years is considered reasonable) and live in it for 10 years. Why can't such a rule be introduced in Ireland? I don' think it's unreasonable to be able to pass on a single home tax free under such circumstances.

There are all manner of things that could be taxed and at least some people would find such taxes good, usually those not being taxed. There is no right or wrong, because everyone has a different perspective. Some people find flat income taxes good. They tax work the least if you make a lot of money in whatever you work at, but they arguably tax low paying work the most. Some people therefore think that highly progressive income taxes are better and "fairer" because the more you earn, the more you pay, but the high earner would say "but I pay more anyway because I make more, you are unfairly taxing my ability to make good money doing my kind of work".

I suspect a LOT of people who think it's better to tax unearned income are the same people who think a flat income tax, which arguably encourages work and especially overtime the most is grossly unfair, because they don't make 400k a year.