Irish Government Tax Consultation: March 2023
The Irish government has opened a comment period - running until April 5th - on Irish personal taxes. Here is a draft of my submission.
Any comments are appreciated. I plan to submit on Monday.
In Brief, I:
Propose applying normal capital gains rules and rates to index funds, adjusting the cost basis of investments for inflation, and establishing a simpler pension scheme.
Highlight the uncompetitive nature of the Irish personal tax system compared to the US and UK, and suggest focusing on housing supply and planning system improvements.
Discuss the progressivity of the Irish personal tax system, but suggest a more gradual increase in tax rates and additional tiers would complicate matters and reduce government revenue.
Recommend redefining property tax as a land tax and gradually increasing the land tax while reducing personal income taxes to increase competitiveness and redistribute wealth.
Emphasize property and housing as the key issues within the Irish personal tax system, and suggest focusing on these areas to improve income redistribution and economic health.
I’m writing this as an individual. I am an entrepreneur living in Dublin.
Q1: Do you have any suggestions on how the personal tax system could be reformed or enhanced, while broadly maintaining the yield and ensuring it continues to provide a sustainable and stable source of revenue to the Exchequer to fund public services?
Suggestion 1: Apply normal capital gains rules and rates to index funds, provided they are not reinvesting untaxed income/dividends.
Currently index funds held outside of pension schemes are subject to punitive treatment relative to direct investments in stocks:
There is taxation of unrealised gains after 8 years.
Taxation is at a higher rate of 41% instead of the 33% capital gains rate.
Unlike with stocks, losses on one index fund cannot be offset against other index funds.
This punitive treatment incentivises Irish people to either pick individual stocks, which comes with risks OR invest in property or low yielding deposit accounts.
The cost to the taxpayer of losing taxes declared on Form 11 tax returns at 41% per rule 322 (c) would be a maximum of approximately 27M Euro using 2020 numbers from revenue [source: correspondence with revenue]. A significant portion of this “loss” would be taxed instead under normal income and capital gains rules.
Suggestion 2: Allow for the cost basis of investments to be adjusted for inflation.
High recent inflation is imposing a real tax rate on capital that is higher than 33%. Property owners pay tax not just on capital appreciation but also on inflation. As an example:
Take an investment of 100,000 Euro that appreciates to 200,000 Euro over ten years.
Consider annual inflation of 5%, which compounds to 63% over 10 years.
The inflation adjusted value of the original investment would be 163,000 Euro.
The real gain in the investment (in 2023 Euro) would be 37,000 Euro.
The capital gains tax due, if disposed after 10 years, would be 33% x (200k - 100k) Euro = 33,000 euro [in 2033 terms].
The effective capital gains rate is therefore 33,000 / 37,000 Euro = 89%.
This emphasises how - not allowing for an inflation adjustment of cost basis - is a very strong penalty on investment when in an inflationary environment.
It is not uncommon internationally to allow for cost basis adjustment for inflation. Doing so now will help mitigate the negative impact of inflation on Irish investment.
Suggestion 3: Establish a simple pension scheme
Allow individuals to invest up to 10,000 Euro per year of after-tax money into tax-free savings accounts.
Make this amount automatically inflation adjusted each year. i.e. if there is 5% inflation this year, individuals can invest 10,500 Euro next year.
Allow individuals to withdraw any amount up to the inflation adjusted amount of what they have invested at any time (since tax has already been paid on the principle).
Allow the withdrawal of any amount after 65 years of age.
The idea is to have a simple pension plan with simple rules. Complicated rules mean individuals and families need to rely on more help from tax and financial professionals which results in higher fees. Average index fund fees are single digit basis points. Average pension fund fees are likely above 1% in Ireland. With simpler rules and plans, government can narrow this gap.
Suggestion 4: Phase out mortgage interest relief for rental properties
The real estate market in Ireland is constrained by supply. In such a market, it is reasonable to assume that a very high percentage of mortgage interest relief simply flows through to increases in real estate prices. Since property is supply-constrained, planning reform is a more effective way to help first time buyers, and buyers in general.
In 2020 there was over 300 million Euro in mortgage interest relief provided to renters. Removing this relief would pay for eliminating the costs of Suggestion 1 many times over. Additional savings could be employed to reduce the lower income tax rate (the 20% band) a little bit.
I offer this suggestion with reluctance because of the inhospitable environment for individual landlords. The low supply of housing has resulted in an environment where landlords and renters are increasingly being pitted against each other. There is understandable pressure for regulations and support that protect tenants. This, combined with the 50%+ marginal rate paid by many landlords on income, is accelerating the exit of individual landlords and the corporatisation of Irish real estate. The core of this issue is the shortage of housing supply. The solution requires transparent and high-throughput planning processes.
Q2: Does the personal tax system sufficiently support a competitive economy to incentivise and encourage work?
I previously spun out a startup from MIT in Boston and sold that business in 2021 to a multi-national. I now run a startup in Dublin that is an Irish company. This gives me some perspective on the relative competitiveness of the two locations from a personal tax perspective.
The Irish system is uncompetitive compared to all states in the US and also uncompetitive compared to the UK. With income tax, USC and PRSI, the effective marginal rate above 70,000 Euro is 55%. In Boston, when I earned a similar salary, I paid less than 25%, including health insurance and state tax.
Ireland and the US are different in terms of what they offer. Indeed, the US itself has large differences between its states. However, the high rate of income tax in Ireland makes it less attractive to hire staff in Ireland for startups relative to the US or the UK or Switzerland.
I don’t believe Irish people want to trade off the public services for lower taxes in the same way as many US states do. However, I believe there is a better trade-off that involves:
Lower employment taxes at the lower end to better support low and middle income families with expenses
More moderate employment taxes at the higher end to improve international competitiveness
Fewer housing subsidies - particularly mortgage interest relief on rentals.
A shift from property tax to land tax. Discussed further below.
Given paying rent and mortgages are big pain points for many Irish people, tackling the shortage of housing, particularly affordable housing, is intertwined with personal tax policy. The biggest thing that could be done for individual and family financial wellbeing is to increase the throughput of the Irish planning system so that the average case time is no longer than six months. Setting up a transparent system of planning boards to achieve this probably should be the highest priority.
Q3: Do you have views on the progressivity of the personal tax system?
The top tax rate comes into play at a low level of income, certainly compared to the US or the UK. Perhaps there could be more tiers and a more gradual increase. However, I suspect that would significantly reduce government revenue.
Ireland already has high VAT rates, so I don’t see an opportunity to move some of the personal tax revenue there. Corporate tax rates are low, although being increased a little. I suspect that increasing corporate tax rates would hamper a unique aspect of Ireland’s competitiveness for businesses.
Suggestion 5: Redefine property tax as a land tax, and gradually increase the land tax while reducing personal income taxes in the opposite direction.
A land tax is more efficient than a property tax because it avoids the disincentive to build or upgrade, while taxing what is in limited supply, i.e. the land. It may sound more complex to administer, but there are standards for a land tax, and it is used in countries such as Denmark.
As a first step, the property tax could be swapped for a land tax in a revenue neutral way.
Then, over time, the land tax could be increased in order to achieve a modest reduction in personal income taxes.
There are a number of key benefits to this:
It makes little sense to tax employment when we want more employment. This is particularly true at the lower end of the salary scales where the argument for redistribution is not relevant.
The Irish system of taxation (via rental mortgage interest relief, first time buyer subsidies and capital gains exemptions on primary residences) funnels capital - both public and private - into an industry that is supply-limited. Substantially all of these subsidies likely flow through to housing price increases.
Planning reform aside, it would be better to deter capital from going into the zero-sum game of land investments. Instead use land tax revenue to deliver lower personal income tax rates. This would boost Ireland’s competitiveness and provide for a more robust market for employment. Further, it could be done in a redistributive way.
Q4: Do you think the personal tax system operates as an effective means of income redistribution?
The biggest problem is property. Property serves as a means of capital and wealth accumulation but does so in a way that is not beneficial for greater society. The tax system could be more redistributive were tax to be shifted from labour to land.
Q5: What are the key areas in the personal tax system for future policy consideration?
No further remarks.
Probably late to submission—but overall this is great.
-hypostatize the “loss” offset in Section 1 and 4 as ~57x (cap gains taxed @ 33% [or whatever the effective income/cap gains rate is on avg] v 41% is really only a loss of like 5.2M euro)
-maybe instantiate the take-home difference in salaries between US/Ireland in Q2, Section 4 and highlight that cost of living really is commensurable, esp. in Dublin. A reflexive reader might just say that higher US cost of living/less public benefits warrant the higher Irish rate. This isn’t true at all in my view (USian in Ireland).
-Q4 I’d considering adding mention that Ireland is way right-shifted on the Laffer curve, and that counterintuitively more moderate/competitive employment taxes could engender greater and more sustainable redistribution potential.
Also, I’m not personally a fan of LVT/cap gains exemptions on primary residences as an Irish homeowner, but this is well argued & ultimately you’re right.