April 2nd Afternoon: The Recession Diaries
Warning! If you are lucky enough to be invited on to a national radio programme - for example, the Pat Kenny show - to discuss the economic crisis, whatever you say don’t suggest that those on higher incomes with substantial wealth should pay a little bit more tax. If you do, you will be attacked, labelled, name-called and generally treated as if you were something that people scrape off the soles of their shoes. That’s what happened to ICTU’s chief economist Paul Sweeney. And he only suggested a minor increase. Still, he was roundly abused.
The subject was inheritance tax. Paul, who was joined by Fintan O’Toole, Jim Power of Friends First, and Moore McDowell, UCD economist on the panel, really got the passions going by pointing out the obvious:
‘I would hesitate about raising taxes too much in a deep recession and the deflationary impact . . The key on tax-raising . . . is that you really have to hit the wealthy people. You talked about income but let’s talk about wealth. In Ireland, inheritance tax is really quite low.’
What an understatement. Inheritances are covered under the Capital Acquisition Tax. It is a tax on those receiving the inheritance not on the deceased’s estate. There are three different classes of beneficiaries with different tax-free thresholds (spouses are fully exempt):
- Class A - €521, 308: sons and daughters, stepchildren and grandchildren under the age of 18 whose parent is dead. Also, parents who receive on the death of a child.
- Class B - €52,121: brothers, sisters, nephews and nieces, grandchildren and great grandchildren.
- Class C - €26,060: all those not in the above categories (or, ‘strangers’).
The inheritance above those thresholds is taxed at a flat-rate of 22 percent (compare that to the marginal tax of a low-paid worker - 27 percent). There are a number of substantial reliefs for those inheriting businesses and farms.
That’s the basic framework. It certainly isn’t onerous. Let’s crunch some numbers.
If I inherit €750,000 from my deceased parents, the first €521,308 is exempt so I’m only taxed on the remainder. I end up paying a little over €50,000. Or a 6.7 percent tax on the total income I received. Hardly penal.
Taking Paul’s observation as inspiration, let’s increase the tax rate to 40 percent (the level that pertained before Charlie McGreevy cut it and still well below the marginal tax rate on an average industrial income). How much would I pay? 12 percent. In other words, on my €750,000 inheritance, I would keep after-tax, €700,000. Still not bad.
Let’s go one step further. On top of returning to the 40 percent rate, what if we cut the tax-free thresholds by a quarter? I’d end up paying 19 percent of the total inheritance on tax.
Now, we can argue the toss until the sun goes supernova but if I get €750,000 for essentially doing nothing (that’s why inheritances are called ‘unearned income’) and, after tax, I end up with over €600,000 - I certainly wouldn’t feel hard-done by. Look at it another way. If I get up early in the morning, ambitious, brimming with ideas, work hard until late (maybe, on the way, exploit a few workers) and earn €750,000 per year for my efforts, I’d end up paying a lot more in income tax - on average over a third. Now compare with that with current 6.7 percent under inheritance tax.
So what was the panel reaction to Paul?
Paul: It’s a fairly well agreed principle in international taxation that insofar as you can . . . you should tax income from all sources in the same way. So if you’re taxing work at 41 percent at the margin so, too, we should take taxes on inheritances . . it (inheritances) used to be taxed at 50 percent. It was reduced dramatically in a very regressive move as part of McGreevy’s irrational exuberance that got this trouble into the trouble we’re in today.
McDowell: Paul, you really love sticking it to people who have a few bob. You really take pleasure out of it.
Power: Yeah, absolutely. You’re straight out of the 70’s - an unreconstructed Stalinist.
Stalinist? Dictator? Mass murderer? Wow - increasing ultra-low tax rates on inheritances is now tantamount to calling for the mass starvation of Kerry Kulaks. Is this what national debate comes down to? Name-calling? Apparently. And on the way, a fair bit of misinformation was propounded. Pat Kenny sounded horrified:
‘The notion that someone owns a house and cannot keep it within the family . . . because if you’re suggesting that the kids in order to stay living in that house would have to pay tax . . . . kids who still need a roof over their heads and it happens to be the family home . . . and they have no where else to live . . . ‘
Well, eh, no Pat - sons and daughters who live in the family home that is left to them by their deceased parents pay no tax at all on that home. That home is wholly exempt. Therefore, it’s not an issue. All that horror can be parked.
The fundamental principle should be that all income, regardless of source, should be taxed equally. Any exceptions or exemptions must be justified on the grounds of economic efficiency and / or social equity - which is why we have capital allowances and don’t tax the income of the lowest paid.
Unearned income deserves special attention. It’s bizarre that this type of income should be privileged over income from labour or productive investment (e.g. setting up an enterprise that employs people).
Unlike income tax, we don’t know how much gross income is transferred under inheritances. A friend at the Department of Finance did a back-of-the-envelope job and guessed that nearly €13 billion was transferred through inheritances each year. Yes, this is a guess, an educated one, but a guess nonetheless.
More data on the extent and type of transfers (e.g. property, houses, cash, equity, family possessions, etc.) that are made under inheritances would help us frame a more progressive tax framework and prevent inequities.
But for illustrative purposes, let’s say the amount transferred is €10 billion. So here’s my proposal, comrades.
- Tax gross income from inheritances at the same effective rate as income tax. The effective tax rate on income from work is 15 percent (the percentage of revenue from taxing all income under the income tax code). So, increase the effective tax rate on inheritances to 15 percent. Align tax rates, exemptions, reliefs, allowances etc. to ensure economic efficiency and social equity - but at the end of the process, ensure you get 15 percent in revenue from taxing inheritances.
If this were done, the tax yield would increase from the current €380 million (or less than a 3 percent effective rate) to €1.5 billion (or 15 percent). This would have very little deflationary effect on the economy. More importantly, it would help fund a stimulus programme to employ thousands and save thousands more from poverty.
This is what is meant by tax equity. This is what Paul was pointing out on the Pat Kenny show. He has opened up a vital debate on the nature of taxation and the gross inequalities in society. Is that Stalinist?
If so, then call me ???????.
NOTE: Fair dues to Paul for apologising over his remark on the show. It takes an honourable person to do that. Of course, I note that Jim Power, who engaged in name-calling on the programme, has yet to apologise. I guess that’s the difference - not only in politics, but also in character - between the two.
Discussion
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Comment by: M. L. D.
Apr 5th 2009 at 09:04
What a pile of horse manure! This is the equivalent of saying we should pay tax on previously taxed income! The income of inheritances was earned - it was earned by the people who choose to bequest it as a gift to their loved ones to make their lives easier in a harsh economic environment. If the government want to increase their available spending power, they would do better to look at how they have squandered the tax payer’s money in the past and plug these holes. Where did that non-so-long-ago surplus of billions actually go? What about making the governemnt publish their accounts to each and every tax-payer, just like corporation must do for their share-holders?
Comment by: Hugh Green
Apr 5th 2009 at 19:04
This is the equivalent of saying we should pay tax on previously taxed income! The income of inheritances was earned - it was earned by the people who choose to bequest it as a gift to their loved ones to make their lives easier in a harsh economic environment.
Suppose I buy a house for 50K and when I pop my clogs it’s worth 250K (which isn’t beyond the realms of possibility). What did I do to ‘earn’ the extra 200K, apart from not sell the place? And in what way is the 200K previously taxed income?
Comment by: M. L. D.
Apr 5th 2009 at 20:04
Look, get real here. The hypothetical 50k you mention, yes, the house might well be worth 250k by the time I pop my clogs and you say I didn’t earn the extra 200k - who do you think paid for the maintenance and upkeep on that property, paying tax on this in the process, to cause it to appreciate in value to this degree? I am someone who has worked hard all my life, paying the exorbitant taxes the state levied on me without complaint in the process, to build up something worth leaving to my children. Now I feel that there is simply NO incentive for anyone to work hard to accumulate a nest-egg worth leaving their children. I wish to God I’d simply frittered away the dosh, preferably on foreign shores! Maybe I still will before those clogs get popped to stop the greedy government getting their mitts on it a second time around……………..
Comment by: WorldbyStorm
Apr 5th 2009 at 22:04
There’s no correlation between maintenance and improvements on the hypothetical house that in any sense balances out with the increase in value posited. Indeed how precisely does that transfer into your actions, or mine, since I too own a house, ‘appreciating its value’ in such a way? House prices rise, or fall, on economic issues way beyond such things. I’ve always been told that signficant home improvements aren’t worth making if one wants to get a good return on resale.
As for exorbitant taxes and ‘greedy government’. I’m not sure we’ve lived in the same state in the last four decades… and certainly not in the past 15 years or so…after all, this is the country which has had the PD/FF approach of cutting taxes (and decreasing personal taxation since around 1994ish).
Comment by: Conor McCabe
Apr 6th 2009 at 12:04
you see, that’s the problems with the youth of today. They think buying a mortgage for a house and sitting in it for thirty years makes you an entrepreneur, or that watching a housing market balloon (and crash) through the influence of international credit markets and domestic financial cartels makes for a sustainable economy.I dunno. The idea that in a capitalist economy property appreciation is a standalone activity is at about the same level of thinking that if we put all of our money in the bank we can collectively live off the interest. Absolutely no understanding that it’s the economic activity outside of bloody appreciation that makes appreciation possible in the first place! And, if that’s not there, ‘cos the government has decided to tax productive income and wealth as opposed to unproductive forms of wealth (of which in Ireland there’s an obscene pool), then your house is not going to appreciate, no matter how many levels of decking or M&S curtains you tag on to it.
Maybe we should just go back to Haruspicy and be done with it.