Paul Kehoe
Question:40 Mr. Kehoe asked the Minister for Finance his views on the concept of a minimum tax to be paid by high income groups irrespective of the tax shelters which they may avail of. [30156/03]
Written Answers. - Tax Code.
The concept of a minimum tax as one possible way in which to limit the opportunities for high earning individuals to reduce their tax bills to very low levels has been considered on a number of occasions. In particular, it was considered at the time of the 1997 Revenue Commissioners' report on the effective tax rates for high earning individuals based on the tax years 1993-94 and 1994-95 but the conclusion at that time was that the problem would not justify such a global approach and that such an approach would be likely to encourage tax planning rather than discourage it. The issue was also reconsidered more recently including in the context of this year's budget.
The advantages of such a tax are that it would help to ensure that everyone would pay a reasonable amount of tax and it would not interfere unduly with the tax incentive schemes provided the rate of tax is carefully chosen. However, there are a number of disadvantages. Implementation would require complex legislation and decisions would have to be taken as to what should be included in total income for the purposes of this new tax. For example, income could include all profit before losses, capital allowances, pension payments etc., were taken into account. Alternatively, some or all of these items might be allowed before the total income for this tax purposes was calculated. It is not clear how losses or normal business expenses should properly be treated. The choice of an appropriate tax rate could be difficult. A minimum tax rate system would normally involve a rate of not more than the standard rate of tax; however, some might argue this is approving a lower rate of tax than might apply if the normal system applied. By setting a minimum acceptable tax rate, some who now pay a higher rate might see such a rate as a target to be attained and reduce their tax payments to this target level.
In view of the results of the Revenue Commissioners report on the effective tax rates for high earning individuals in the tax year 1999-2000 the final disadvantage would seem to be the decisive one. Almost 79% of the high earning individuals on whom information is available for the year 1999-2000 are already paying at a rate higher than 20%, indeed 62% are paying at over 35%. If a minimum income tax were introduced, this group of taxpayers would be likely to request their accountants to take steps to reduce their tax bills towards the minimum. Thus, such a tax would be likely to increase tax planning rather than reduce it.
On balance, I am satisfied that it would not be appropriate to introduce such a minimum tax at this time given the results of the 2002 survey which indicates that the effective tax rate of high earners has increased since the last survey was carried out in 1997; and that I have taken steps to further limit the opportunities for high earners to reduce their taxable income to very low levels. In my 1998 budget, I capped the amount of annual capital allowances on such buildings that could be set off against non-rental income and, in the case of hotels throughout most of the country, I abolished in total the offset of the capital allowances against non-rental income. In the 2003 and 2004 budgets, I have introduced measures to phase out a significant number of property based reliefs.
It is worth noting that recent reports published earlier this year have raised further doubts about the effectiveness of the alternative minimum tax introduced in the United States in 1969 to sweep more wealthy people into the tax net, given that figures contained in the spring 2003 IRS income statistics bulletin revealed that the proportion of federal income tax paid by the top 400 earners in the US has fallen. The average rate was equivalent to 22.3% in 2000 down from 26.4% in 1992 and 29.9% in 1995.