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 товарищ.

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.

Comments

[Yvonne]

I was reading Michael Smith's editorial in April/May issue of Village Magazine on the bus home this evening. He asks, amongst other things, why we continue to tax the good things in life (including work) while failing to tax bad things like unstainable development, pollution, traffic congestion etc. Reading your post on top of that - I didn't hear the interview and was skeptical enough about the potential of non-income taxes to generate the amount of revenue to ensure the sort of social protections and public services we need - has drawn into sharp focus for me how accepting we PAYE workers are of income tax. I've always just taken it for granted, happy to be contributing and willing to contribute more if it it meant decent health care, education etc for all but now that you draw my attention to it, I see it's infinitely more ridiculous to be taxing work than inheritance and should certainly not be privileged.

[Fergal]

Hi Michael,
There is another element to inheritance and it's to do with "equality of opportunity".I suspect that every single party in the state supports "equality of oppotunity".How can we be remotely serious about equality of opportuniy if the super rich can continue to pass on the pot of gold?Social dominance can simply be handed down from generation to generation and talent stifled(and with it parts of the economy).What's the solution?Abolish inheritance altogether,provide wonderful public services for all and impose penal rates of income tax on the parasitical class thus making future inheritance impossible.

[Alec]

Michael, you state that 2If 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".

Why is this not deflationary. That income you are taxing would have gone into the pockets of individuals and spent. You are removing it in tax. So, is that not a deflationary move?

[Sam]

Hi Michael, Liked your article on taxing inheritance but felt you let yourself down in one part. You produced a very telling comparison between 750,000 inherited or made in the economy. But the reference to exploit a few workers was not needed - indeed it weakened your argument. The businessman who makes this money contribures to society both in his taxes and in providing employment. This seems like a good thing and we need more of it.

[Yvonne]

Sam, I disagree. The businessman or woman may be contributing to society by paying his/her taxes but the 'provision' of employment is rarely a charitable act. Businesses for the most part exist to make a profit and require labour to generate that profit. Indeed for all its touchy feely language strategic human resource management is implicitly about getting more out of people for less. It might talk about empowerment, engagement, and partnership but it is essentially about getting the employee to shift his/her view of themselves as trading labour for wages to believe that they have a higher stake than they actually do. There are lots of employers using the recession now to reduce pay and conditions, and there are lots of employees who feel that they have little choice but to accept. Who after all wants to be unemployed?

[Michael Taft]

Sam, Yvonne - you're both right. I take your point, Sam, it was a throwaway comment, not germane to the disucssion. If I want to make an argument that the wealthy exploit workers, I should dedicate a particular piece to that proposition.

But, yes, Yvonne, you're right. And I will do that dedicated post in the near future.

Alec, it is arguable that inheritance taxes are less deflationary is based on the idea that no one relies on inheritance taxes for the day to day expenditure. It is a once-off payment which most people are likely to sink into savings, investments (but not necessarily productive ones), etc. However, we rely on income from labour and for many of us, especially those on low-incomes or with families, a reduction in the disposable income will mean a reduction in spending; hence, deflationary. Let's put it into concrete terms. Say I get a €4000,000 cash inheritance. I'm likely to spend some of it (some it outside the state, as on a world cruise to exotic beaches). The rest I will save, invest, put away in some form for future consumption (or place it in a pension plan). Under the current regime, I'm not taxed. But if I'm taxed at an effetive 15% rate, it would leave me with €390,000. My domestic consumption is not likely to be dramatically altered. That's what I mean by less deflationary.

Fergal, you're speaking to my inner Leveller when you suggest that all inheritances should be abolished. But in this world I would be satisfied with inheritances being taxed at the same effective rate as income. When that's achieved, then we can start turning it into a more progressive rate. That would be quite an achievement.