December 11th Afternoon: The Recession Diaries

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Did anyone catch it?  Stephen Collins did but he didn’t give us the maths.  When Minister Lenihan introduced the Finance Bill he made a small amendment in the new income levy, imposing an extra one percent on incomes above €250,000.  In doing so he put forward two statistics:  first, that this would net the state coffers €60 million.  Second, it would affect 12,000 ‘people’ who earn over that quarter of a million threshold (I put people in quotation marks because it is not clear whether this refers to individual taxpayers or taxpaying units, which could include some couples being taxed jointly).  So what does this say about the incomes of these super-wealthy?

One percent earning €60 million gives us an income base of €6 billion.  That’s not the entire income base because it only attaches to income above €250,000.  When the income of the wealthy 12,000 below that threshold is calculated, we have a total income base of €9 billion.

So, 12,000 people earn €9 billion a year.  That’s an average income of €750,000 each.  That’s a lot of Dom Perignon a year, a lot of get-aways to St. Tropez, a lot of faxes to the Cayman Islands.  That total income could maintain over 230,000 households on the average industrial wage.  Where are the Irish Maoists when you need them?

Of course, this only tells part of the story.  The Bank of Ireland Private Banking tells another.  According to the Bible of the rich, the top one percent own 20 percent of all wealth in this country.  If my calculator serves me right, that means those 12,000 people collectively own approximately €160 billion in assets.  So, this super-wealthy class has an average income of €750,000 per year and an average asset base of €13.3 million.  Man, it must be hard to live.

[Note: it’s an exact deduction  The top one percent in the Bank of Ireland report would amount to approximately 15,000 households, whereas the Minister’s reference is to 12,000 people. But the calculation is only out by a small amount and what’s a million here or there between friends?.]

Shortly after the October budget, the Taoiseach, when asked why a new tax rate on the super-wealthy wasn’t introduced, claimed that the Government was concerned not to unduly penalise sources of investment.  In ordinary speak, if the super-wealthy were hit by tax they might stop investing in enterprise and growth.  The Taoiseach needn’t have worried.  Again, according to the Bank of Ireland:

  • 72 percent of wealth is held in property (€24 billion in commercial property)
  • 10 percent in cash
  • 7 percent in pensions
  • 6 percent in investment funds and direct equity
  • 5 percent is in business equity

While this breakdown wouldn’t necessarily reflect the portfolio of the super-wealthy (much of the residential property would be owned by income groups you wouldn’t describe as wealthy) 82 percent of all wealth is either held in property or cash.  Of the 18 percent made up of pension, investment and business equity, how much is invested in the Irish economy?  Though this is not a direct comparison, since this covers the entire economy and not just ‘households’ there is about €50 billion worth of investment (gross fixed capital formation) in the economy, while Irish ‘residents’ held €441 billion (gross) in foreign equities – €24 billion in tiny Luxembourg.

So what in the world do these super-wealthy do?  If they were entrepreneurs investing into the Irish economy ,setting up businesses, employing people, paying taxes – adding to the sum total of our wealth; well, we might not be so hard on them.  But the super-wealthy are no such thing.  I discussed this in a previous post on foot of a Revenue Commissioners’ reply to a parliamentary question asked by Paul McGrath, TD.  In summary, 80 percent of those with income exceeding €200,000 in 2003 were involved in (a) medical occupations, (b) property/construction, and (c) legal profession.  Nearly 15 percent were landlords.  These are not, in the traditional use of the term, the entrepreneurial class.

Now, I’m not one to argue for a simplistic  ‘soak the rich’ programme.  But that doesn’t mean we have to tolerate simplistic arguments about the ‘investing’ class, the ‘entrepreneurial’ class and how we had better not tax them because it would hurt our economy.  Nor should we give too much credence to the idea that if you tax wealth it will flee the country (how does a house flee?).  Most of the wealth is based on property, held by property/landlord interests and traditional professionals.

There is a lot of ‘economic fat’ there to tax without cutting the arteries.  So in arguments over how to finance an expansionary programme, let’s not overlook these people.  I’m sure they’re just waiting for someone to call and ask them to do their patriotic duty.

Let’s knock on their doors and give them a chance.

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