October 15th Early Evening: The Recession Diaries

Well, at least the business sector was happy.  Not that there wasn't the odd whinge - business spokespersons are forever whinging.  ISME, especially, was in 'bemoan' mode. 

'The decision to increase excise duties, particularly on petrol is deplorable and will further add to business costs. Taken together with the increase in VAT, inflationary pressures will still be evident in the economy, which will negatively impact on consumer demand.'

Negatively impact on consumer demand - that's a bit rich coming from an organisation which demanded all means of reducing consumer demand: wage freezes even more severe than what is contained in the proposed pay agreement, public expenditure cutbacks, job losses (no better guarantor of reduced demand than cutting jobs), etc.  Sometimes its best to just shake your head and read on.

But more measured (and intelligent) business commentary was favourable.  Mike Hayes of KPMG, for instance: he welcomed the confirmation of the low corporate tax rate, as if that were ever in any doubt; the increase in the R&D tax credit, the remission of tax for start-up companies, the cut in commercial property stamp duties, etc.  He even seemed relieved that the capital gains tax was only increased by 2 percent (as opposed to a 'knee-jerk reaction of imposing a significant increase').  The only thing that bugged him was increasing the betting tax - apparently ol' Mike thinks that gambling is an important indigenous growth sector.

What does the business sector have to 'give up' for this?  Not much.  No recognition of the rights of their workers to bargain collectively, no commitment to provide universal pensions to all employees, no profit-sharing schemes, no commitment to transparency (as in publishing profit statements).  All in all, a pretty sweet deal.

But there's always a but:  the Indo is concerned about the double whammy that owners of holiday homes will be facing.  The 2 percent increase in Capital Gains Tax and the €200 a year 'annual property tax' is going to hit and hit hard.  The Irish Auctioneers and Valuers Institute is particularly up in arms:  'a stealth tax on investment properties' is how they described this act of radical redistribution.  Good grief:  those selling their property will still experience a lower marginal tax rate than someone on low pay (22 percent as opposed to 27 percent). A €200 levy is not a stealth tax: it's pretty visible, and pretty meagre.  Still, given that the Institute of Professional Auctioneers and Valuers has called the tax 'penal', maybe the low-paid could take up a collection for the hard-pressed, hard-working owners of investment properties.  It's only fair.

Still,there is one group who have escaped all sacrifices - penal or otherwise:  the indolent off-spring of the indolent rich, those young men and women who lay about in their underwear all day strumming their guitars, getting stoned, watching Star Trek reruns and waiting for mumsy and daddy to pop their clogs so they can get their inheritance and buy ever more top-brand underwear.  Inheritance tax wasn't touched at all.  No 1% levy, no increase in the tax rate; while personal tax credits were cut in real terms, the thresholds for gifts and inheritances were indexed by the rate of inflation (it's now over €500,000 tax free).  That most unearned of incomes is now one of the least taxed of incomes.

And that's the way it is in Fianna Fail-land. 

Comments

[Smoke]

Glad to see you back. Your posts are consistently thought provoking and provide material thats facilitates over-due re-calibration of my ideological compass .. Inherheritance taxes or the absence of same seems to be a particular bugbear of yours. Personally I don't agree with them insofar as I'd like my dependents (partner and young child) to be cared for in the event of my untimely death. The argument that any inheritance represents an unearned gain doesn't carry weight with me. I've earned the wealth, and have already paid taxes on it. Why should the state tax my labour twice? How is that fair?

[James]

Forgive me for offering my own answer even though I wasn't asked, Smoke:

1) all sorts of stuff gets taxed twice (e.g. your wage gets taxed under income tax and then again by VAT when you spend it) - I'm not sure one can design a tax system based on the principle that money should only ever be taxed once as it sloshes around the economy in different guises.

2)"I've earned the wealth..." - unless you mean "earn" as synonomous with "recieved" (as opposed to being synonomous with "merit" or "deserve"), this claim needs to be defended. Many market incomes (think the very high and the very low) would appear not to be especially merited.

3)"Why should the state tax my labour twice?" Your dead and gone at this stage, so really you can't be taxed at all. To be fair, it might make more sense if beneficiaries of inheritence were taxed rather than the estate being taxed directly - this would mean that the rate would depend not on the size of the estate but rather on the position of the recipients.

[Michael Taft]

Smoke, thanks for your kind comments and I fully take on board your comments regarding inheritance tax. Let me state at the outset that I have been a beneficiary of a small inheritance, one that was helpful for me at the time. So I am in full agreement with the legitimacy of all parents, partners and spouses to help out their family. The state shouldn't be penalising that. But let me put forward a few points to see if we can find some common ground on this question.

First, we have little data on inheritances, for the reason that most inheritances are disregarded for tax purposes (e.g. they fall below the tax exemption thresholds). I asked a Finance Department official if they know how much gross inheritances are transmitted per year and all she could do for me is a back-of-the-envelope. The figure was €13 billion per year. Now if this figure is broadly correct that would mean the effective tax rate on inheritances is less than 2.5%. Were, through reforms, that effective tax rate was brought up to 10% (hardly onerous), that would mean an extra €1 billion in tax revenue. That's a fair bit of money to raising the living standards for all people today.

Second, spouses are exempt from all inheritances, as they should be. We should be arguing that partners should be exempt as well (currently, they are not).

Currently, a son or daughter may receive an inheritance worth €521,000 before paying tax. So for a son/daughter receiving €800,000, their tax will represent less than 7% - again, not onerous. There are a number of valid exemptions from even this (e.g. for a child who is incapacitated or in need of medical care).

However, the real issue is not the transfer of small wealth within low and middle income families. The fact is that accountants can drive huge holes through the tax code to create safe shelters for outrageous amounts of money - and that is the issue that is paramout for me. I accept that I didn't make that distinction clear. But the super wealthy - the top 5% - own 40% of all wealth in society. According to the Bank of Ireland, this top 5% owns over €320 billion. That, and the wealth of higher income groups, should be the target of a progressive tax regime.

One financial advisor told me that if anyone pays inheritance tax, they should fire their accountant. It's not the transfer of relatively small amounts of wealth (cash, property, etc.) that we should be concerned with but rather, the wealth that a handful of people are able to shelter from tax.

In that respect, I hope that I've come some way towards meeting your valid objections. In future, I'll be sure to make this distinction.

[Smoke]

Thanks for the response. I'm all for eliminating tax shelters and loop-holes. I believe it's proper that the state should tax economic activity (given that it's providing some of the resources that allow that activity to happen in the first place).