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

I am drafting my submission to the Commission on Tax and Social Welfare and I want to tease out this issue.

I don't know why investment income is taxed at different rates to capital gains.

In the UK, there is a high annual exemption from capital gains tax - £12,300 in gains and the rest is taxed at the marginal rate.

This seems like a better model, although the £12,000 annual exemption is too high.

It shouldn't matter to me if I get my income from my Ryanair shares through a dividend or through selling some Ryanair shares.

It shouldn't matter to me whether I invest in companies like CRH which pay dividends or Ryanair which don't.

Brendan

There are a few approaches to this

1) The existing approach.
A low income person could end up paying a lot of Capital Gains Tax.
A person with a big capital losses could have paid a lot of income tax on their dividends, although the source of losses and dividends is the same.

2) A unified rate for investment income and capital gains

This seems more logical. It would make no difference to an investor whether they invested in companies which pay dividends or companies which reinvested their profits. In the latter case, they would just sell shares if they needed "income".

If this is the right approach, it seems to be assumed that the tax rate on "unearned" investment income should be lower than the tax rate on earned income. I am not sure why that is the case, so the third option is:

3) The same rate on all income and capital gains

This seems the fairest of all.

A person's capital gains would be added to their income from their employment and taxed at their marginal rate.

A low income person who gets some capital gains might pay no CGT.
A top rate tax payer would pay Income Tax, USC and PRSI on their Capital Gains.

One major issue - and I haven't teased out the implications - is that people have huge discretion over when to sell an asset to make a gain or realise a loss.

Most of us have very little ability to time our normal income.

No.

First of all, there is no call for it to be changed. There is no noise about people paying income tax on investment income. The noise is coming from exit tax and deemed disposal on ETFs. Given the revenue just did a review of this, I don't think that will change.

It favours the better off. Elon Musk famously claims that he doesn't draw a salary from Tesla. That's because he doesn't need to. If you are a professional landlord or have many sources of passive income so you don't have to work, you will also be paying less tax on your investments than people who have to go to work in the morning. This would clearly be a big tax break on the wealthy. It will obviously mean less income for the Exchequer, which means reduced services, for those who need it, which isn't the wealthy who got the tax break!

Taxation on income in this country is far too high. You shouldn't have to pay over half your income to the government. But any changes in taxation, should be something that all can benefit from (with our low standard rate band, lowering the higher rate isn't exclusive to the wealthy) and not just those with the assets to avail of these breaks.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

Steven Barrett said:

First of all, there is no call for it to be changed. There is no noise about people paying income tax on investment income. The noise is coming from exit tax and deemed disposal on ETFs. Given the revenue just did a review of this, I don't think that will change.

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Hi Steven

There is a Commission on Tax and Social Welfare looking for submissions.

So the fact the Revenue has clarified its interpretation of the law is not very relevant.

I don't know why they are taxed at different rates. Unless I see a good reason for it, then I will call for them to be changed.



Brendan

Steven Barrett said:

If you are a professional landlord or have many sources of passive income so you don't have to work, you will also be paying less tax on your investments than people who have to go to work in the morning.

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Why is that? Is rental income not subject to the same income tax rates as salary?

Steven Barrett said:

It will obviously mean less income for the Exchequer

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Taxing income and capital gains at the same rate would only mean less income if the income tax rate were reduced to the CGT rate. But I am just trying to understand the principle of why they are taxed differently.

If we agree that they should be at the same rate, maybe that rate should be 50%.

Brendan

The Mirless report which Protocol references in another thread seems to propose taxing gains and income at the same rate. (It's a complicated report with a lot of acronyms so I am not 100% sure that this is their conclusion.)


This neutrality is only achieved if the rates of tax applied to above-normal
returns are set not at current income tax rates but at rates equal to the
income tax plus full (employee and employer) National Insurance
contribution rates. Otherwise, a substantial incentive remains to transform
earned income into capital income. Of course, for the RRA, this rate
schedule would apply only to returns above the normal return. So whilst the
proposal might seem to involve a punitive increase in rates relative to the
current system, the reality is that the RRA allows these rates to be aligned
whilst ending the taxation of the normal return.

They seem to be suggesting that returns above inflation (or the rate on deposit accounts) should be taxed at income tax rates.

Brendan

50% tax rate on any gain made is absolutely crazy.

Why would anybody in their right mind invest in an asset class such as equities where the downside is you could easily lose your money?

Why would you realise any gains until your income is zero or very low for example when in retirement on a meagre pension?

It's bad enough paying 33% on any gain above €1270....

Mirrless thinks CGT in the UK is rife with problems, very unsatisfactory.

They seem to suggest that normal returns on risky assets should be tax-free, but capital gain returns above the risk-free rate should be taxed at marginal income tax rates.

Bluefin said:

50% tax rate on any gain made is absolutely crazy.

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But surely 50% tax rate on earned income is crazy as well?

Why should investment income be different from earned income?

Or tax it at the marginal rate after allowing for inflation.

Brendan

Brendan Burgess said:

Why is that? Is rental income not subject to the same income tax rates as salary?


Taxing income and capital gains at the same rate would only mean less income if the income tax rate were reduced to the CGT rate. But I am just trying to understand the principle of why they are taxed differently.

If we agree that they should be at the same rate, maybe that rate should be 50%.

Brendan

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They are at present. I had presumed that you were looking at moving investment income down to CGT rates and not CGT rates up to income tax rates...which I would also be against.

Brendan Burgess said:

But surely 50% tax rate on earned income is crazy as well?

Why should investment income be different from earned income?

Or tax it at the marginal rate after allowing for inflation.

Brendan

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In general we should be encouraging wealth creating activity so work should have lower taxes than at present since it creates real wealth and investment incomes should have higher taxes than at present because it doesn't create real wealth but I don't think they should be the same rate.

It would be great to include something to improve how ETFs are taxed, as part of this submission.

MrEarl said:

It would be great to include something to improve how ETFs are taxed, as part of this submission.

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Purple said:

work should have lower taxes than at present since it creates real wealth and investment incomes should have higher taxes than at present

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Work is taxed at 40% Income Tax +8% USC - or 48% (or 52% if you include PRSI)
Capital Gains are taxed at 33%

They won't be that far apart if you lower one and increase the other. So you might as well make them the same.

Brendan Burgess said:

Work is taxed at 40% Income Tax +8% USC - or 48% (or 52% if you include PRSI)
Capital Gains are taxed at 33%

They won't be that far apart if you lower one and increase the other. So you might as well make them the same.

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Fair point.

Brendan Burgess said:

Work is taxed at 40% Income Tax +8% USC - or 48% (or 52% if you include PRSI)

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Add employers Prsi to that.

Brendan Burgess said:

But surely 50% tax rate on earned income is crazy as well?

Why should investment income be different from earned income?

Or tax it at the marginal rate after allowing for inflation.

Brendan

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Hi Brendan

Could you please tell us what rates are you proposing.

Income rates
CGT rate
CGT allowance
PRSI
USC
Tax Bands

Are you proposing classifying taxing all income at same rates?

Have you thought about unattended consequences of merging both taxes to same level?

When Charlie reduced CGT, the state took in far more tax.

Are people more likely to sell assets (discretionary spending) when CGT is lower than leave them sit there to pass to the next generation?

Would high net worth individuals not moved to a more favourable jurisdiction to avoid punitive tax levels?

Government will only tweak income tax levels as we are more likely to see a much larger state in the future as people are demanding more services.