Can we talk about Capital Gains Tax for Budget 2020
One of the more memorable lines in all the movies that I’ve seen is one by Sylvester Stallone in the 2006 movie “Rocky Balboa” when he said that “life ain’t all sunshine and rainbows…It's about how hard you can get hit and keep moving forward; how much you can take and keep moving forward. That's how winning is done”.
I was reminded of those lines when I watched Minister Donohoe’s presentation at last week’s Budget Oversight Commission where he explained his Summer Economic Statement. He spoke about potentially moving to a deficit of up to 1½% of national income in a disorderly Halloween situation. That compares to the deficits of 10½-11% we experienced when the earth fell off its financial axis. We’ve been hit hard in the past and we kept moving forward. Further the Minister said that he believed that we would have the ability to correct the deficits ”quickly” in the post Halloween period. So we’ve demonstrated “financial Rocky Balboa” qualities and we have the scars to prove it.
The Minister also said that he would not have a second budget. Therefore Budget 2020, which at the moment will predate Halloween by almost three weeks, will need to be clear in its intention. To paraphrase Adam Smith in his “Wealth of Nations” treatise that when it comes to tax there’s none so great an evil as a small degree of uncertainty.
Capital Gains Tax (CGT) applies to disposals of assets generally. There are exceptions (with various T’s and C’s applying). The CGT rate on capital gains is currently set at 33% which is one of the highest rates in the OECD. At the recent launch of my book on the subject, I made the point that the CGT rate was previously 20% having come down from 40% before that. When the rate dropped to 20% the related tax yield increased exponentially. Granted that was in pre-crisis days so when the earth fell off its axis the rate went north and the Exchequer’s take went south because there were no gains to tax. Disposals of assets happened but many lost money on these deals.
I’ve previously written about the Minister’s speech at the Irish Tax Institute’s annual bash earlier this year where he said that he was not for reducing the rate of CGT. He explained the cost of reducing the rate “which assuming no behaviour change is estimated to be €36m for each 1% decrease”. He explained that it was not obvious that there was a need to incentivise the sale of all assets in a period of full employment and increasing asset prices. Ok I get that but cash matters.
To put that cost into perspective, according to the Annual Report of the Revenue Commissioners, the net CGT received by the Exchequer in the year to December 2018 was just shy of a billion euro. The total tax take for that year was €54 billion where importantly income tax outweighed corporation tax by a factor of two to one, we’ll come back to income tax in a second. So on the Minister’s numbers, getting to a 20% rate would cost just shy of €500m which would be a huge drop in CGT but that’s without any behavioural change.
Looking at late night TV commentary programmes lately I was struck by the amount of times I heard the John Maynard Keynes quote that “when the facts change I change my mind, what do you do?” If the CGT rate was brought down to 20% then, in my opinion (caveat - I’m not a psychologist or economist, just the tax ma’am, that’s me), it has to be likely that “hoarded” assets could hit the market with a view to crystallising the gains that have built up in the asset over time. Why? Jam today is better than jam tomorrow. If the rate were to be reduced by a couple of per cent then the yield impact would just not be the same, that’s pretty much a “yeah and so what” moment.
When tax reliefs are brought about they sometimes have a “sell by” date such that they are around for a limited period. So if we still have some jitters about such a move then why not put a sell by date on the rate decrease which could also focus the mind of any procrastinating asset owners.
An example of a legislative sell by date is the expiration of the “Help to Buy” scheme which I have previously written about in these pages. That has an expiration date of New Year’s Eve of this year which one hopes will be extended in the budget and the subsequent Finance act. Therefore, sell by dates are not unusual for critical legislative moves, so why not on CGT?
This rate cut would affect tax take but obviously this isn’t like a cut in income tax, which has also been mooted. Wages don’t increase because of an income tax rate drop and it’s acknowledged that we are a nation nearing full employment. An income tax rate cut will come at a cost but that’s a cost that should be borne where possible. My previous column in this paper suggested calling taxes what they really are so let’s call “Income Tax” the “Half of Income Tax” (HIT) so as to make it crystal clear that half your hard earned can go to the Exchequer. I’m not querying the tax, I’m just questioning the competiveness of when the HIT rate kicks in and I’m not alone.
Minister Donohoe was asked in the Dail recently about his plans to increase the HIT rate threshold thereby increasing the its starting point. He explained the Government’s position was that workers pay “too high a rate of income tax at too low an income level” and that “we cannot hope to remain competitive if someone on a relatively low income and who decides to work a few hours overtime has nearly half that extra money taken in tax”. Perfect sense given the HIT that person takes.
People may consider doing more overtime if the HIT rate drops but it’s unlikely that amounts paid to employees will increase dramatically as a result of an income tax rate cut. However, that same kind of thinking just doesn’t apply to disposals of assets. We know from the past that when the rate of CGT dropped the yield increased, so is it not time for another little bit of history repeating?
In partnership with Tom Maguire, Tax partner in Deloitte. Tom’s column on tax matters appear in the Sunday Business Post. The above column was first published on 14th July, 2019.