WHEN Brian Cowan cut the top rate of tax from 42 per cent to 41 per cent there were the usual howls that only the rich would benefit.
The truth is that it won’t make that much difference because the rich pay the amount of tax they want anyway which will be near what they think they can get a way with.
Did you know that there are people in this State earning over a million euro a year who pay absolutely no tax at all.
Nada. Zilch. Not a bean. And it’s perfectly legal.
The way this works is that the rich put their money into tax incentive schemes like urban renewal, living over the shop, holiday homes, etc. They keep investing and writing off their earnings against these tax reliefs.
Now I don’t want to wave wild allegations about but all this happens with their visible earnings. They, of course, can employ accountants to make their earnings as invisible as possible. Still within the law.
What can you do?
You could end the incentive schemes, as indeed Brian Cowan has promised to do. But at the same time there’s always a sector or scheme which manages to plead poverty like the film industry. I’ve no belief that tax incentive schemes will ever be abolished.
You could put up tax rates until even the rich can’t avoid them. What happens then is that legal avoidance becomes illegal evasion and the culture and the accompanying options spread like wildfire.
We’ve been there. High income taxes don’t work for anybody and it’s usually the workers who end up paying them. The wealthy can always find a way around it. Not only that but we found out to our cost that over-taxing work is a disaster.
At the other end of the tax spectrum we have the minister boasting about all the low paid who pay no income tax. This is true as long as you buy the implication that they are not paying tax.
Which is nonsense. We have one of the highest rates of VAT in the EU. Furthermore we have huge duties on tobacco and alcohol on which poorer people spend a much greater proportion of their income on.
So the whole income tax system is a bit of a three-card-trick. Most people don’t actually know what percentage of their income they pay in tax.
The best way around all this would be to levy a flat tax of around 20 per cent. This would apply to all income from the first euro to the last. This would increase the incentive to work for most middle earners who wouldn’t have to face being hit with a 40 cent in the euro rate.
Low earners could be compensated through the social welfare system and high earners could be offered interest or other gains for investing in specific industries.
We would have an income tax system which would be open, transparent and very easy to administer. Many Eastern European countries have implemented flat taxes without the sky falling in. We should give it a try.