Tom Maguire: Donohoe needs to heed the advice of experts at our tax strategies

  • Tom Maguire: Donohoe needs to heed the advice of experts at our tax strategies
    Independent.t. E.
    Not too long now until the next budget Paschal Donohoe or as I call it, the ‘Oscar night’ for accountants.
    https://www.independent.ie/business/irish/tom-maguire-donohoe-must-heed-expert-advice-on-our-tax-strategy-37207122.html
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Not too long now until the next budget Paschal Donohoe or as I call it, the ‘Oscar night’ for accountants.

Tax strategy group (TSG) is a governmental think tank under the chairmanship of the Department of Finance Donohoe, whose membership included staff from the divisions of the civil service. Their budget 2019 article was published recently in accordance with the obligations of Government to facilitate discussion.

In TSG was not a legislative body and the documents contain a list of options and issues to be considered in the budget process. As I’ve always said that consultations with the United States reduced tensions among us, and we will see more of this as the year progresses.

These articles apply to all of the heads of tax and some other issues, but some points stand out in particular and I recently discussed in this column: tax rate on capital gains (cgt). According to estimates TSG that “in the absence of changes in behavior”, a 1pc reduction in the amount of VKT will reduce the yield by about €34 million annually.

Here’s the thing, the behavior changes. Remember economist John Maynard Keynes said: “when the facts change, I change my mind. What are you doing, sir?”

That’s what TSG is recognized. He explains that CGT may lead to delays in the implementation of investments that have large unrealized gains. Thus, people can keep assets too long, which may reduce economic growth because it blocks the beneficial reallocation of resources from lower to higher values. This can be problematic for small start-up companies, because investors might reduce the incentive for investment in favour of new companies.

He continues that the reduction in VKT may stimulate entrepreneurship. Low taxes also increase foreign investment from those who are not directly involved in the management of companies, because their reward for the risk on unproven young companies is the ability to years.

On the other hand, TSG notes that the arguments against a rate cut is “compelling.” He recognizes the possibility of an initial increase in tax revenues from lower tax rates on capital gains, but it says it may be temporary based on high sales immediately after the change.

The reduced rate may also make sales of assets that would have occurred in any case. He continues that reducing tax rates could further undermine the progressivity of the tax system ” because relatively wealthy people typically receive income from capital.”

In TSG argues that quantification of the above will be difficult because the behavior of investors will inevitably change. He argues that lower rates will encourage investors to yield capital gain and not income, and “may be” economically inefficient schemes of concealment of income as income from capital gains for tax purposes.

Okay, I know, but there are significant anti-avoidance provisions to counter such activities. And if all else fails, then the tax benefits may be removed by the General anti-avoidance rule (GAAR), where he was to “consider” something was done primarily to achieve tax benefits. There is a whole Book on GAAR, but modesty prevents mention of its author.

So let’s play devil’s advocate here: reducing the rate could bring money into the Treasury, not tomorrow. Bringing sales forward that would have happened in any case means that there is a de facto reduction in the Treasury given the low rate, but how far in the future we expect that cash, because the cost of money over time questions?

In TSG notes, the rich can benefit, but regular readers of this column will know Nobel prize-winning economist Myron Scholes Maxim: “success is achieved when tax rules are subsidizing activities that benefit society more than they benefit the individuals involved in activities”.

There are so many causes that need money now and not in cash tomorrow and I don’t have to list them here. Cash eats good intentions for Breakfast.

Therefore, TSG described a number of options: (1) enter 30pcs rate for one or two budgets, i.e., 3pcs rate reduction (estimated cost: €102 million, which does not account for changes in behavior, i.e. €34m previously described x 3); and (2) go to 25pcs rate for two – or four-year period (estimated cost: €272 millions, i.e. €34m x 8).

Duplex, the bet is not considered because it would add complexity and could encourage the preferred types of assets, etc.

“Alternative TSG” to the changes of the rates imply a more targeted approach. They say that if a certain policy setting, the goal is to improve the conditions for the formation or maintenance of business activity, changes at the sectoral level may be more appropriate. At this level it is considered that the reduced rate of CGT can encourage entrepreneurship and innovation and TSH involves changing the topography of the entrepreneur.

Now that the terrain allows you to evaluate 10pcs CGT on the taxable income on the disposal of qualifying assets up to the limit of the lives of 1 million euros. Suggested options include increased limits up to € 5 million, € 10 million or € 15 million, or even a level somewhere between these amounts.

The relevant expenditure limit increases in the year of €49m €54M and € 56m respectively. The document notes that the costs in favor of the introduction of the Euro 15m limits the life expectancy is lower than the cost of 3pcs reduction in the overall rate. The current limit in the UK is far beyond our current, and you have to remember the basic rate of UK CGT 20pcs with 28pc of application in certain cases.

So why not combine the proposals of the TSG – i.e. to reduce speed and to improve the regime?

Tax profits of TSG explains the overall social cost (RSC) is an integral factor in our 52pc marginal tax rate on all earnings over €70,000 and 55pc Smoking PAIA income in excess of €100 000. High marginal tax rates is a virus that can infect international competitiveness. In the TSG proposes to reduce the high level of OSK (8pcs income of €70,000 plus) and increase the lower rate threshold can improve the relative competitive advantage of Ireland. It also involves increasing a standard income tax rate thereby increasing the entry point to higher income tax rates. So let’s do it.

You know the phrase from the movie “jaws”: “we need a bigger boat”. At the same time, let’s rock we.

Tom Maguire is a tax partner at Deloitte

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