I'm listening to Matt Cooper interviewing Vincent Browne on tax loopholes with the latter revealing that he is utterly, genuinely baffled as to why the Capital Gains tax rate here was cut from 40% to 20% back in 1998. This is what happens when you put your blinkers on. It oughtn't be too difficult for a journalist of Browne's stature to find out how much money was raised by the 40% rate and how much is raised by the 20% rate. Perhaps he naively imagines that the total amount, following the 50% reduction was cut in half. In fact, the 40% rate raised about €170m per year, while the 20% rate raises about €2bn. That's billion with a 'b'.
It just so happens that taxes on capital have a significant effect on economic activity and reducing such taxes (especially from a rate as high as 40%) does lead to a huge increase in economic activity, the byproduct of which is that tax revenues go up. Now, I personally don't think it's such a great idea that the government collect and spend vast sums of money but it is patently clear from all of his punditry that Browne does. By his own logic, he should favour the lower rate, perhaps even arguing that there was room for a further reduction (if it promised to raise more revenue). Instead he appears to believe that it should revert to the higher rate (with ensuing reduction in revenue). Apparently, punishing his fellow rich people is more important. Somehow, I'm reminded of Gore Vidal's words.
Just for clarification, and at the (typically high) risk of being pedantic, although what you say is perfectly consistent with economic theory, there isn't any evidence that the cut in corporation tax rates were either the sole or primary reason behind the Irish economy growing sufficiently to increase the take by that amount. I know that's not exactly what you're saying, but I think it's implied.
That's not to say that the cut wasn't the primary/sole reason. We just don't know.
So, while VB is almost certainly mistaken if he thinks that a return to a 40% rate would not lead to a fall in the tax take (imagining for a moment that he does believe that), he may not be wrong in thinking that the drop in the rate in the past was not good for society (however he defines that good).
Though we may doubt it, since we don't know what caused the boom for sure, it might have happened anyway.
Posted by: Ciarán | March 24, 2006 at 10:09 AM
Well seeing as we're risking pedantry I'd first point out that we're talking about capital gains tax here and not corporation tax.
The next point is that I think it's safe to dispose of the question of the effects of the cgt. At the margin, a lower rate encourages more economic activity, more trade. This is a net benefit to society. If I sell you something you want, you are better off by that thing, I'm better off with the money to go and buy the thing I wanted instead. If the CGT rate is set that it's not worthwhile for me to sell the thing, I'm stuck with something I no longer want and you don't get the thing you want. Sure, you still have your money, but money isn't intrinsically valuable. It's only useful to buy the things we want. There's also the issue of compliance - a higher rate makes it worthwhile going "off the books". So, I don't think we should be surprised that more tax is collected by the 20% rate than the 40% rate, even if we're not going to attribute the entirety of the difference to the rate cut and we shouldn't be surprised to see greater economic activity at the lower rate. Some have even argued that, given its direct effect on economic activity and growth, it would be better to actually abolish CGT entirely and substitute some other form of taxation. The link above has more details.
Now, we could take refuge in the fact that we can't (ever?) know with absolute certainty how much the CGT cut contributed to the boom. But one thing about which we can be reasonably confident is that it didn't hurt it. Further, there's no theoretical or empirical basis for believing that a higher CGT would have had no negative effects. So we're left with the notion that:
he may not be wrong in thinking that the drop in the rate in the past was not good for society (however he defines that good).
I don't think it's even possible to define one's way out if this, unless we're going to rank Vincent Browne's sense of schadenfreude as a higher good for society than prosperity. This is a negative sum game. A higher CGT rate means society is poorer overall.
Posted by: Frank McGahon | March 24, 2006 at 10:51 AM
Well seeing as we're risking pedantry I'd first point out that we're talking about capital gains tax here and not corporation tax.
Well that is a far more useful bit of pedantry than mine! Sorry for the misreading.
Of course I don't disagree (having read your piece properly) that CGT creates incentives against economic activity. My point was that you supply a correlation between the reduction in CGT and the rise in the tax take as causation when that causation hasn't been proven. Correlation is not causation.
As for 'a higher CGT rate means society is poorer overall,' well I'll weigh in pedantically again (it is Friday after all)! Changes in tax rates might lead to changes in economic activity with the society becoming poorer or richer as a result (maybe). But are you actually claiming a correlation between CGT and national income/GDP or whatever? I doubt that correlation exists.
All this is not to reduce the twit-itude of VB of course!
Posted by: Ciarán | March 24, 2006 at 11:00 AM
I suppose what I'm saying is that while we can't know for sure the precise contribution of the lower CGT rate to growth/the boom, we have good reason to believe that it has had some sort of positive effect and we have no reason to believe that it has had a negative effect.
but are you actually claiming a correlation between CGT and national income/GDP or whatever? I doubt that correlation exists.
It's actually a causation rather than a correlation I'm claiming. There are numerous contributory factors to, let's call it, our prosperity but I'm saying that tax rates and particularly CGT rates do have an effect and you can't just dial up the CGT and expect trading to continue as if there was no difference. I don't think it's a stretch to say that if you raised CGT, you would see less economic activity than otherwise would have taken place and therefore a net loss to society and incidentally, you would probably see a lower tax take so my view is that anyone who would persist with such a policy who should know full well the likely effects doesn't really give that much of a stuff about the overall good of society whatever he professes.
All this is not to reduce the twit-itude of VB of course!
That's one thing upon which we can agree!
Posted by: Frank McGahon | March 24, 2006 at 11:29 AM
Well, I think I can live with your last explanation! You have to be right that changes in tax coverage will lead to changes in behaviour. You're also right that the CG tax regime in Ireland is likely to have a positive effect or, at worst, not to harm, the boom in Ireland.
I suppose my last query came from your seeming to state that there was a correlation between CG rates and national income in general (as in, not just specific to Ireland and to changes in tax regimes). That would be much more difficult to establish. But I can't argue with what you just said.
Posted by: Ciarán | March 24, 2006 at 11:54 AM
further to Gore Vidal's quote, VB's also probably been listening to Morrissey's "We hate it when our friends become successful".
"You see, it should've been me
It could've been me
Everybody knows
Everybody says so"
Posted by: Conor Griffin | March 24, 2006 at 08:04 PM