Friday, October 03, 2008
AMID all the fuss about the potential cost to the State in rescuing banks, it is easy to forget what else is going on with everyone’s money.
The new national pay agreement for example — which remains to be ratified — wants public sector workers to wait 11 months before they get their next pay rise. Private sector employees have a three-month wait at very least facing them — with many expecting to wait far longer if they keep their jobs.
Income tax increases are inevitable in the budget on Tuesday week. If the rates aren’t increased, then credits will be left untouched which will mean an increase in real terms. Other taxes will be increased. Nobody will escape unscathed. Or will some people? What about the rich and how will it affect them? What sacrifices are they going to have to make during the economic crisis that engulfs us?
The issue has been thrown into stark relief by the Government’s decision to issue guarantees to save the banks. While this appears to have been absolutely necessary to stop the collapse of at least one bank — and to ensure that access to money for businesses and ordinary people continued — it did rescue many bank shareholders from the complete loss of the value of their shares. It also kept some of the people responsible for the dreadful lending practices of the banks in their very highly paid jobs.
One of the chief beneficiaries of this decision was Anglo-Irish Bank boss David Drumm. In the last financial year, Anglo-Irish Bank paid him a total of €5.9m in salary, bonuses and pension contributions. That’s the average annual industrial wage about every two days.
He wasn’t alone in picking up such largesse, based largely on profits inflated by the reckless property lending that led to this week’s near collapse.
Michael Fingleton runs a building society like a personal fiefdom and picked up €2.3m last year. Brian Goggin, at Bank of Ireland, took a €1m pay cut but still picked up a package worth €3m.
AIB boss Eugene Sheehy got ‘only’ €2.1m, but he invested heavily in AIB shares when they traded at €18 which means he is seriously out of pocket now.
Not surprisingly there has been something of a backlash against all of this, especially now that the State has had to engage in a potentially ruinous defence of the reckless banks, and a debate may now start about income inequities in this society. The problem, however, may be in defining what constitutes rich.
A ministerial salary for example — even if more than €200,000 — makes a person very comfortable but by no means rich. A quick peek at the annual Sunday Times rich list would suggest a massive cast of billionaires and multi-millionaires who have wealth beyond the dreams of most readers.
Not on the list are thousands of people who have been earning high six-figure, and sometimes seven-figure, salaries. Yet many of these people pay less tax proportionately than those on modest or low incomes. A range of ‘incentives’ to invest in various schemes — some of which are to blame for the inflating the property bubble that has burst — and various allowances and credits has allowed these people to pay as little as 1% of their annual income tax.
Others have been paying only between 20% and 30% of their income, as well as 20% tax on profits from the sale of assets (known as capital gains tax). The system has allowed them to increase their wealth at a faster rate then the lower paid. At the same time the experience has been that the better-paid tend to get double-digit pay increases whereas the worker drones get single-digit increases, if any at all.
But the opportunity to raise extra taxes from many of those people may not be as large as some would like to believe.
There seems no way, for example, to levy tax on so-called tax exiles. As long as they limit the number of days they spend in the country the income they earn outside it is not liable to tax in Ireland — and if they hold ownership of assets in Ireland from abroad there may be tax benefits to them, too.
Unless the Government moves to limit further the number of days they spend in Ireland — 260 days over two years — then no further taxes can be raised. The fear, although it is unlikely to happen, is that they would remove their capital from Ireland. In the current circumstances no such chance is likely to be taken.
In any case some of them may not be as rich as they were once because the value of many of their assets is likely to have fallen dramatically over the last year.
Only those who kept all of their money in cash, or who bought gold, are likely to be nearly as rich as estimated previously. The author of the Sunday Times rich list is going to have a hell of a job early next year in making new calculations.
For example, Seán Quinn, dubbed Ireland’s richest man earlier this year with an estimated wealth of €4bn, may be worth just a fraction of that now, especially due to the prices at which he acquired a 15% shareholding in Anglo-Irish Bank. His other interests in cement, hotels, insurance, manufacturing and much more cannot have escaped serious downward revaluations. The Government’s greater interest may lie more in protecting Quinn’s interests because of the enormous numbers he employs — rather than trying to extract extra tax from him. Most worryingly, 38% of those on the most recent list were heavily involved in property/construction — which means they are worth nothing like they used to be. The assets they own are valued at far less but, more importantly, the loans they took to buy these assets may now be larger than the assets they would struggle to sell now if they tried.
Just as some ordinary homeowners now face negative equity, these wealthy people have found suddenly they are no longer nearly as rich as they once thought.
I came across a survey earlier this year conducted by a firm of economic consultants that estimated there are at least 450 individuals in this country with more than €10m in investment assets (excluding the value of their family homes).
IT WAS reckoned that not far short of 200 of them achieved that wealth through property development and construction. It reckoned that many of them had maintained most of their wealth in Irish shares and property and were badly exposed to a major downturn in our economy. That has now come to pass.
Given that many had heavy borrowings it is possible some of them have had the bulk of their wealth extinguished. The same survey estimated there are about 36,500 of what were termed "high net worth individuals" with an excess of assets over borrowings of more than €1m (again excluding the family home). This number also may be down substantially.
I suspect many people will say "pity about them!" Undoubtedly some were greedy, especially in the construction sector. Others did their damnedest to minimise tax, and were actively encouraged by the Government to do so, even though this is an opportunity denied to the majority of people.
Others leave the country for tax purposes but are treated as heroes when they visit. Unfortunately, the reduced wealth of many of them means that the opportunity to tax them more heavily, if there was the will, no longer exists. The time to enforce fairness and equity through the tax system may have passed, too.
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