Fianna Fail and Fine Gael competing over tax cuts. Let’s look at two of them.
First up is Fianna Fail’s proposed cut in the capital gains tax rate – from 33 percent to 25 percent. They claim that this will:
‘. . . help to incentivise investment and free up more money to be put into new companies, creating more jobs and broadening our tax base.’
Leaving aside the non sequitur (a tax cut broadens the tax base? really?) there are three issues here.
First, most of the capital gains tax receipts come from companies, not individuals. So this is actually a corporate tax cut. And there is no guarantee that a company that sells an asset will use the proceeds to re-invest in new companies.
Second, the tax cut will be available for all activities – productive or not. I make a killing in the currency market, swapping Japanese yens and Aussie dollars . Not terribly productive (indeed, these types of activities on a large scale can be quite disruptive) but I get the tax cut. Given that 25 percent of capital gains tax comes from the real estate sector, this is a tax cut for the buying and selling of houses and property. What could go wrong with that?
Third, capital gains tax has little to do with start-ups – it occurs when you sell the asset; in other words, when you exit an activity. So here I am with a great idea that I want to turn into a business, I believe it will make me serious dosh, I will be my own boss, I will drink with the beautiful people in boutique hostelries. I estimate that after three years I can sell my business for a neat €10 million. However, I demur. Why? Because Fianna Fail wasn’t elected. Instead of netting €7.5 million under a Fianna Fail tax regime, I will only net €6.7 billion under the Fine Gael regime. Not worth it. I stick with my current job and a marginal tax rate of nearly 50 percent.
The above may be a bit extreme but you get the point. And what’s the price tag for Fianna Fail’s tax cut? €267 million. That’s a fair bit for very little.
Paschal Donohoe called this tax cut: ‘the dumbest tax change I’ve seen’.
Maybe. But Fine Gael is making a strong challenge. Let’s turn to the second ‘dumb’ tax cut: Fine Gael’s proposed cut in the inheritance tax.
Currently, daughters and sons receive a tax-exempt threshold on inheritances from their parents. This is worth €335,000. Inheritances above that are taxed at 33 percent. Fine Gael is proposing that the first €250,000 above the tax exempt threshold will be taxed at 20 percent.
For instance, I inherit €750,000 from my parents. Currently my inheritance tax bill would be €137,000 – or 18 percent of the inheritance. Pretty low already. Fine Gael would drive that down even further. Under Fine Gael’s proposal my tax bill would be €104,000 – a cut of nearly 25 percent. I now pay only a 14 percent tax rate. I get an extra €33,000. And for what? This is not ‘earned’ income. I didn’t work for this money. I get this money for the simple reason I am the son or daughter of my parent. And only if I’m in the highest income group.
This tax cut will cost only €40 million but my question regarding the tax cut is ‘why’? My second question is ‘why’ ? That’s also my third question. This tax cut give no benefit to the productive economy, does not benefit the overwhelming majority of people. It is highly, highly regressive
Calling Fianna Fail’s capital gains tax cut ‘dumb’ while producing this inheritance tax cuts – well, Paschal should be aware of stones and glass houses.
It’s hard to know who wins the ‘dumbest tax cut’ award. Each has their own merits. While Fine Gael’s tax cut is the most venal, from a social equity perspective,, Fianna Fail runs strong if only for the price tag. If we see this election as a two-way race, this is what we are reduced to.
Maybe we should look at more progressive choices.