How high will marginal income tax rate go?

3DataModem

Currently at about 52%... historically topped out at 65% (in 1980's).

Is there some magical maximum that you think the government will never breach? How high?

beeftotheheels

3DataModem wrote: »

Currently at about 52%... historically topped out at 65% (in 1980's).

Is there some magical maximum that you think the government will never breach? How high?

There is no magical max figure set in stone however there are a couple of issues which need to be considered when upping the top rate.

1. "Rich" people tend to be mobile, especially if their income is disproportionately from investments rather than salary. So, if I make my money playing the equities and currency markets and would have to pay 52% tax in Ireland why wouldn't I move to Switzerland and pay very little tax? I can get easy flights home, and Switzerland will give me a very competitive tax rate on my investment income.

2. Even if "Rich" people chose not to leave for Switzerland, we have a 25% capital gains rate which is a lot lower than the marginal income tax rate. So, If I'm a "rich person" and I want to take cash out of my business and I have the choice between 52% and 25% then I will possibly pay a large sum of money to a professional advisor to have them ensure that my "income" is "capital" for tax purposes. The higher that the tax rates are, the more it pays to engage in tax planning.

3. If I'm a wet liberal "rich person" who wants to stay at home, and doesn't want to engage in tax planning, a rate in excess of 50% will still alter on what I do. Say I had a company making IT widgets, which has a load of cash, and I think I want to take out that cash to buy a share in my local shop which is cash strapped but which I view as being necessary for the local community, a long terms good investment etc... The IT company may not be able to invest in a sweet shop, especially if it has outside investors. But if the government takes over 50% of the cash that comes out, even though it is coming out to be reinvested in another local business, then Mr W. Liberal may decide not to make the investment and leave the cash where it is.

In terms of migration what is the rate? Who knows, depends on the profile of the taxpayer. Some HNWs have been known to go to avoid paying CGT at 20/ 25%.

If we follow the lead of the UK, which had high net worths back in the 70s and 80s when we didn't, they saw the issues with migration and tax planning when their top rate was in the 60s, and have generally kept the top marginal rate including all contributions, somewhere in the 40s since. They did increase it to 50% tax (plus NI contributions) 2 years ago but are now moving this back down, so they seem to have concluded going a bit above 50% is a trigger point.

I think also if you think about yourself, and you were brought up in a system where the top marginal rate was just under 50% you tend to accept that. Once it goes much above 50% then you start thinking "Why should I work so hard when the government is taking over half the fruits of my labor".

Some HNWs will just pay their tax, the wet liberals and the likes of Mr O'Leary (who I don't think I would count as a wet liberal yet all publicly available docs tend to suggest he doesn't engage in much tax planning in relation to his personal affairs although it is difficult for a CEO of a quoted group to do so compared with someone who is not an employee).

One other point:

A bigger problem we have in Ireland, thanks to FF, is a very small tax base so that the "average" person pays a lot less income tax in Ireland than in the UK/ France/ Germany etc

http://www.oecd.org/document/60/0,3746,en_2649_34533_1942460_1_1_1_1,00.html#tbw

So, we have progressive taxation like many jurisdictions, but we back load it taking a lot more lower income families out of the tax net than other jurisdictions. There are a lot more "average" households who we could, and probably will, tap for a bit more tax than there are rich households. I expect to see the EU/ IMF cotton onto this, this is clearly what the Universal Social Charge is aimed at. A lot more "average" households involves a lot more votes to win or lose (hence the mess FF created), but this is one are where we are very much out of step with our European partners.

I'm a wet liberal who agrees with progressive taxation, and if you told me tomorrow I'd have to pay an extra 2/3% on my top slice on income I'd be fine with that although I know others who wouldn't be.

But I think our system is too progressive, so a little more tax from the average house will make a real difference to our coffers, and a little more tax from the higher rates will help appease the average householder, while having a much more limited impact on our tax take. This is because there are far fewer "rich" people than average households, some "rich" people will leave, and some of the rest will engage in tax planning or alter their behavior.

Tora Bora

Doubt if we will see much more by the way of increases in income tax.
Instead we will face charges for services going up and new ones introduced. Prepare to pay to have a fart:cool:

3DataModem

beeftotheheels wrote: »

There is no magical max figure set in stone however there are a couple of issues which need to be considered when upping the top rate.

1. "Rich" people tend to be mobile, especially if their income is disproportionately from investments rather than salary. So, if I make my money playing the equities and currency markets and would have to pay 52% tax in Ireland why wouldn't I move to Switzerland and pay very little tax? I can get easy flights home, and Switzerland will give me a very competitive tax rate on my investment income.

2. Even if "Rich" people chose not to leave for Switzerland, we have a 25% capital gains rate which is a lot lower than the marginal income tax rate. So, If I'm a "rich person" and I want to take cash out of my business and I have the choice between 52% and 25% then I will possibly pay a large sum of money to a professional advisor to have them ensure that my "income" is "capital" for tax purposes. The higher that the tax rates are, the more it pays to engage in tax planning.

3. If I'm a wet liberal "rich person" who wants to stay at home, and doesn't want to engage in tax planning, a rate in excess of 50% will still alter on what I do. Say I had a company making IT widgets, which has a load of cash, and I think I want to take out that cash to buy a share in my local shop which is cash strapped but which I view as being necessary for the local community, a long terms good investment etc... The IT company may not be able to invest in a sweet shop, especially if it has outside investors. But if the government takes over 50% of the cash that comes out, even though it is coming out to be reinvested in another local business, then Mr W. Liberal may decide not to make the investment and leave the cash where it is.

In terms of migration what is the rate? Who knows, depends on the profile of the taxpayer. Some HNWs have been known to go to avoid paying CGT at 20/ 25%.

If we follow the lead of the UK, which had high net worths back in the 70s and 80s when we didn't, they saw the issues with migration and tax planning when their top rate was in the 60s, and have generally kept the top marginal rate including all contributions, somewhere in the 40s since. They did increase it to 50% tax (plus NI contributions) 2 years ago but are now moving this back down, so they seem to have concluded going a bit above 50% is a trigger point.

I think also if you think about yourself, and you were brought up in a system where the top marginal rate was just under 50% you tend to accept that. Once it goes much above 50% then you start thinking "Why should I work so hard when the government is taking over half the fruits of my labor".

Some HNWs will just pay their tax, the wet liberals and the likes of Mr O'Leary (who I don't think I would count as a wet liberal yet all publicly available docs tend to suggest he doesn't engage in much tax planning in relation to his personal affairs although it is difficult for a CEO of a quoted group to do so compared with someone who is not an employee).

One other point:

A bigger problem we have in Ireland, thanks to FF, is a very small tax base so that the "average" person pays a lot less income tax in Ireland than in the UK/ France/ Germany etc

http://www.oecd.org/document/60/0,3746,en_2649_34533_1942460_1_1_1_1,00.html#tbw

So, we have progressive taxation like many jurisdictions, but we back load it taking a lot more lower income families out of the tax net than other jurisdictions. There are a lot more "average" households who we could, and probably will, tap for a bit more tax than there are rich households. I expect to see the EU/ IMF cotton onto this, this is clearly what the Universal Social Charge is aimed at. A lot more "average" households involves a lot more votes to win or lose (hence the mess FF created), but this is one are where we are very much out of step with our European partners.

I'm a wet liberal who agrees with progressive taxation, and if you told me tomorrow I'd have to pay an extra 2/3% on my top slice on income I'd be fine with that although I know others who wouldn't be.

But I think our system is too progressive, so a little more tax from the average house will make a real difference to our coffers, and a little more tax from the higher rates will help appease the average householder, while having a much more limited impact on our tax take. This is because there are far fewer "rich" people than average households, some "rich" people will leave, and some of the rest will engage in tax planning or alter their behavior.

Good post... thanks for your opinion and insight.

I fecked off to low-tax-land last year and intend on staying another two or three years, but probably will come back at some stage, so just thinking ahead.

beeftotheheels

One other point to note, I alluded to it but didn't fully make it.

Last time we saw very high income tax rates (in the 70s/ early 80s) there was no Ryanair. So, if you moved to Switzerland, or some other Switzerland, you had to be prepared to be there a lot missing family events etc. You'd probably make the effort to come back for the big ones like weddings, but not the small ones if you had to fly to London, change from Gatwick to Heathrow, to fly back to Ireland which cost you a lot more in real terms.

Nowadays, you could move to Switzerland, take a direct flight back almost every weekend, and manage to avoid being Irish tax resident while not missing any family/ friend events.

International calls are not the big deal they once were, the internet etc makes retaining communication with those at home a lot easier.

This means that the trigger point has probably come down from what it would have been in the 1970s in that it costs (in both financial and emotional terms) a lot less to migrate to reduce your tax burden - hence some have gone to save as little as 20% tax.

macannrb

I think that sums it up very well Beef to the heels

AFAIK most cantons in swizterland have flat tax rates of 20% so there is a big difference.

I think there are successful high tax areas like Finland where taxes are massive in comparision to here, but all the basic services are provided for so people are willing to pay these high rates.

I am not so sure about how willing I would be if I knew all my taxes were going on interest on loans FF racked up, and getting very little services in return

3DataModem

macannrb wrote: »

I am not so sure about how willing I would be if I knew all my taxes were going on interest on loans, and getting very little services in return

That's exactly it. I'm in a pretty dull part of the world, but the public services / tax situation rocks. Family may relocate to Ireland in a few years which leaves me about 2h15m door to door from office in Isle of Man to house in Dublin.

beeftotheheels

macannrb wrote: »

AFAIK most cantons in swizterland have flat tax rates of 20% so there is a big difference.

Switzerland can be highish tax on employment income, but you can get a lot lower than 20% on investment income.

macannrb wrote: »

I am not so sure about how willing I would be if I knew all my taxes were going on interest on loans FF racked up, and getting very little services in return

And you raise a very valid point. I personally would view paying ones personal tax as an almost moral issue (esp when contrasted with corporate taxation). Individuals need roads and schools and hospitals and should pay for that. People who earn more should pay more. I personally would not engage in any tax planning and I mean this literally, nothing beyond the reliefs which are readily available to all.

I don't judge others for structuring to mitigate their taxation obligations, but I personally wouldn't do it.

However, where does the moral argument stand when the money is not being spent on schools or roads or hospitals but on debt caused by a reckless past?

I think it depends. D McW for example, could claim that he was shouting about the bubble for years and being ignored so his moral obligation has been extinguished. To be clear, he hasn't claimed this, but if he did I would have some sympathy with the argument.

On the flip side, he (and others who thought it a daft bubble and didn't vote FF) profited from the Celtic Tiger years through sales of books etc telling us it was a bubble, so maybe he should feel a moral constraint to stay here and pay his taxes and try and get us out of this hole.

In my case, I didn't live in Ireland through much of the bubble so I didn't benefit, yet now have to pay, and am sure I am not alone in this.

The moral aspect does get muddier though at this time when we desperately need the revenue. It is so much clearer if the money is going on a functioning society.

beeftotheheels

3DataModem wrote: »

That's exactly it. I'm in a pretty dull part of the world, but the public services / tax situation rocks. Family may relocate to Ireland in a few years which leaves me about 2h15m door to door from office in Isle of Man to house in Dublin.

What would you think of an optional tax (and this is more a moral question than a technical one)? Say your family move back, but you the main bread winner stay offshore where you work. But your family need (I'm assuming) roads and schools and hospitals.

If it were provided for in the legislation, would you be prepared to make a voluntary contribution towards the society they live in at a rate you consider acceptable? Kind of like a charitable contribution to Ireland.

I mean, in theory you could do this by transferring x income generating assets to the family so they paid tax in Ireland, but negative tax planning strikes me as just daft.

Just to be clear, I'm against any notion of having a US model which taxes citizens where ever they live. You should have no obligation to pay tax here if you don't live here (other than under existing anti-avoidance rules). Purely asking about a voluntary contribution.

earlyevening

Just on a point of information, the marginal tax rate is 55% on the self employed.

They pay 10%USC on income over 100k. (+41% tax, 4%PRSI)