Laughing Last and Laughing Long

One of the reasons put forward as to why we shouldn’t introduce a tax on the highest income earners is that it would be a disincentive to work and enterprise, would penalise those making a profound contribution to our economic development; would punish the risk-takers, the job creators, the wealth generators. To introduce such a tax would catapult us into a dark age of state socialism, economic meltdown and quasi-feudalism.

Whenever I hear this argument I don’t just chuckle; I don’t just chortle or guffaw or giggle. I laugh out loud. I fall on the floor laughing. I laugh so loud and so long I’m in tears. I have to be careful not to think of this argument when in a pub or restaurant or cinema because I will immediately go into hysterics and it can be quite embarrassing. Already I’m wiping my eyes.

I previously discussed the 5:40 club – the economic 5% elite who own 40% of all the wealth (or the 1:34 club – the top 1% who own over a third of all financial wealth). Is there anyway of knowing who these folk are, what risks they take, what jobs and wealth they generate? Thanks to a parliamentary question asked by Paul McGrath, TD and the answer provided by the Revenue Commissioners, we can now get an insight.

The Revenue Commissioners provided the numbers of income earners with gross income exceeding €200,000 and their economic activity.

In 2003 there were 8,161 people earning this amount and more. Excluding the cases where no economic sector, was identified nearly a third of the top earners work in the broad medical area. This includes not only practicing doctors in highly-skilled disciplines, but also chemists, dentists and private hospital directors and managers.

The second largest category is - surprise, surprise - property and construction related activities. While a small section are made up architects and engineers, with an even smaller group compriseing builders and engineering contractors, the largest sub-grouping is landlords who make up well over half, in addition to property developers and vendors.

The third largest grouping is lawyers and solicitors – a traditional professional class.

These grouping, taken together, make up over 80% of the top income earners. The remainder are made up of large farmers, bankers and pension fund managers, insurance executives, accountants and tax consultants.

When we talk about ‘risk-takers’ and ‘wealth-generators’ we don’t usually have these groups in mind. Of course, we want highly skilled surgeons and architects whose buildings don’t fall apart. A very small proportion oversee infrastructural projects which are essential to economic modernisation. There may be a handful involved in ‘business and management consultancy’ which can assist our managerial capabilities (when they’re not proposing to outsource, downsize and asset-sweat everything in sight). But the appellation ‘entrepreneur’ can hardly be applied to the vast majority of these groups.

More interesting is the fact that most of these top-earners are reliant – to a greater or lesser extent (and for some it is much greater) – on public subsidy for their earnings:

• Medical: GPs and consultant doctors benefit to a significant extent from public subsidy in the form of medical cards, VHI tax relief and use-of-public-resource subsidies, while chemists also benefit directly from GMS prescriptions and, indirectly, through tax subsidies for prescription medicine. Private hospital directors are certainly public-money reliant. It is arguable that very few in this category earn their income wholly in the ‘private’ sector.
• Property/Construction: There is little doubt that the Government-fueled property boom was a significant contributor to top earners in this sector: laissez-faire policies in land prices, cuts in stamp duty and capital gains, tax subsidies to the home-owner sector, etc. Even large building and engineering contractors work ‘public’ contracts.
• Legal: It is likely that higher-income lawyers take up a disproportionate amount of legal-aid subsidies.

Not only is a large section of top-income earners reliant upon direct and indirect public subsidies; they have also been major beneficiaries of the income tax cuts pursued by Fianna Fail. Had tax rates prevailing in 1998 (24% for standard rate, 46% for higher rate) applied today, someone on €200,000 would be paying over €35,000 more in tax. That is a considerable boost for top earners.

Nor should we discount the rising costs of tax subsidies to the highest earners – in particular, pension relief which is, for many, little more than a tax shelter. The state spends more on private tax relief than it does on social welfare pensions and, according to a recent study by the ESRI, nearly 80% of that expenditure on private pensions goes to the top 20% income earners.

So where does this leave us? We have very high earners based primarily in traditional professions and the property sector. These are not, in the main, the entrepreneurs we seek to reward – the men and women who come up with an idea, turn it into a business, employ people, create profit and wealth and contribute to the economy (this image is highly debatable in the first place). These are citizens whose living standards are boosted by public subsidy, tax breaks and tax expenditures. They are not, primarily, the risk-takers, the job creators. They are, well, just wealthy – making up a good proportion of the elite 5:40 club.

The Left should have no truck with a ‘get the rich’ programme. But it should start a convoy of ensuring that everyone contributes to the needs of society in proportion to their means. This is clearly not occurring – as the recent Revenue Commissioners’ report on the top 500 income earners shows. There will be different vehicles in this convoy involving a rationalisation of tax expenditures, socialising many of the goods and services (e.g. health, housing, etc.) that are now produced for private profit, etc.

And one of those vehicles will be new taxation measures. Currently, a single person earning a below-average wage pays the same top rate of tax as a multi-millionaire landlord. Indeed, that below-average earner pays a higher marginal tax rate (income tax plus PRSI) than that multi-millionaire landlord. That is highly inequitable.

There are any number of new taxes that could be introduced:

• A new tax rate of 45% on incomes above €200,000. This could be a nice earner for the Exchequer. However, there are limits to the benefits in this – after all, that’s why tax accountants and consultants become top-income earners, blowing gaping holes in the tax code for the benefits of their clients.
• A wealth tax on ‘property’ worth more than €1 million. This would broaden the tax base beyond income and reach into the wealth holdings of the 5:40 club. However, there have been considerable problems in other countries with such a tax: it can become extremely complicated with all manner of exemptions, and become an incentive to site financial assets outside the country where possible.
• A property tax on the value of houses above €1 million. While not as broad-based as a wealth tax, it has the advantage of taxing an asset that cannot be hidden or exported abroad. But be ready for the political blowback from the wealthy sectors who will beat a populist ‘thin-edge-of-the-wedge’ drum.
• The ESRI suggested that standard-rating pension contributions would not only pay for a €50 per week increase in the state old-age pensions, but would earn an additional €670 million.

There are any number of ways to catch the mouse so we shouldn’t worry too much about the colour of the cat. And the great thing about all this is that regardless of what vehicle, what colour cat we use to re-transfer some of the tax burden back on to those who can afford it, we can be confident that we won’t be penalising the risk-takers, the job creators – those entrepreneurs that right-wing commentators naively put so much faith in.

Comments

[WorldbyStorm]

Well now. That certainly sets the record straight. I love the way these narratives enter into the public consciousness. I actually have enormous respect for those who do take risks, bet the farm, start up a company. But they're not there, are they?

[Jim]

Yes agree, surprising stuff that really should be shouted from the rooftops. It has been pointed out by many over the years that a central underlying difficulty with a universal health insurance is a lack of willingness on the part of the medical profession to accept salaried work. I doubt many non-medics would have guessed their place in these stats.

[Tomaltach]

Very insightful, but one crucial question.

You said "excluding the cases where no economic sector was identified, nearly a third of the top earners work in the broad medical area". What percentage were the cases where no economic sector was identified? If these cases are very numerous it undermines the subsequent analysis because it essentially means there are too many cases about which we don't know enough to comment.

[Michael]

Tomaltach - about 1,800 cases were not identifiable by sector - or about 22% of all over-€200,000 earners. I suspect that its not so much the sector that couldn't be identified (for the NACE codes have a category for 'miscellaneous' or 'not known') but rather that the income came from different economic activities. For instance, a highly paid PAYE employee (e.g. a company director) may also receive income by way of rents or directorships in other sectors). Though I can't say for certain, I suspect a similar pattern concerning the non-entrepeneurial source of income is at work among the 'unidentifiable' categories.