SECTION TWO OF 1969
Benjamin Franklin remarked that taxes and death were the only two certainties. A century earlier French Finance Minister Colbert defined the art of taxation as “so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing”. And we all know what befell the woman who said only little people paid taxes.
Whatever else can be said about tax there’s almost universal agreement that current systems are basically unfair. Every country employs a system of levies, reliefs and exemptions that have evolved out of a mix ranging from political beliefs, expert advice to foster desirable social and economic developments, a vague commitment to equitable treatment ( at least among OECD states), down to special pleading and cronyism, the latter two normally carefully disguised. Once legislated for (in or out!), particular provisions regarding tax tend to be regarded as holy writ, with any change assuming a zero sum status. Those who benefit hunker down; those who don’t howl for change.
We in Ireland have had several fairly unique tax exemptions. Back in the era of real hardship – synonymous with the pre-Lemass/Whitaker era before 1960, when the country was literally bleeding to death – farmers, the chief bred-in-the-bone source of the country’s modest wealth, were by and large free from tax. It was meagre income/ meagre capital allowances, rather than any special treatment. Nevertheless, after EU membership, when farmers at last had some income thanks to Europe’s CAP, the perceived favourable tax treatment of farmers generated some resentment and criticism from urban taxpayers.
When at last the country began to develop a significant manufacturing base, via for the most part FDI, exported manufactured goods earned a tax exemption. This survived and morphed into a generalised zero taxation rate for manufactures, making Ireland a desirable place for foreign investment. There is little doubt that this favourable tax regime, ably promoted by Ireland’s Industrial Development Authority, helped the successful development of the Irish economy from the mid – seventies on.
This very success eventually prompted attacks from the European Commission and several member states, seeking to end the exemption on the grounds that it gave Ireland an unfair advantage in attracting foreign investment. Perhaps, but then Ireland already has significant strikes against, in the form of geographical peripherality and the extra costs of bringing goods to market.
The battle with the Commission is ongoing and has seen grudging acceptance – on both sides – of a modified tax rate of 12.5% on manufactures. When Ireland went broke several years ago there were fears that Europe would keep the plug pulled unless the favourable rate was abandoned but this threat did not materialise. The pressure, however, continues, with the strongest argument for abolition the fact that many large multinationals use their Irish branch to launder profits to avail of the preferential tax rate. The counter argument is that the multinationals will simply find somewhere else equally or more accommodating.
One unique and enduring Irish taxation measure HAS captured the imagination and attracted much international interest. In introducing the Irish budget in 1969 the then Irish Finance Minister, Charlie Haughey drew “particular attention to Section 2 which deals with the exemption from income tax of earnings of writers, composers, sculptors and painters”. Whatever else he will be remembered for, Haughey will be forever associated with this measure. As anyone with experience in government will testify, most legislation, particularly involving changes in taxation, emerges after a gestation period of debate and consideration, sometimes public, sometimes internal. Section Two of 1969, however, appears to have come out of left field and indeed it’s difficult to conceive of another Irish politician coming up with the idea.
How to treat income generated from artistic endeavour has long been a problem everywhere. Aside from the handful of mega successes who earn millions, most of the artistic community in any society live and earn modestly. Financial success, where it comes, is often concentrated in one or two years with fallow periods before and after. Prior to 1969 the artistic community in Ireland had been lobbying for a change in the system to allow royalties or revenue to be spread across several years; this at a time of low incomes, low tax thresholds and very high rates of marginal tax ( dubbed surtax). Not surprisingly the bureaucrats found enough practical objections (chiefly involving relativities) to do nothing. Haughey’s measure cut that particular Gordian Knot.
The scheme was broadly, though not universally, welcomed. One crusty revenue official remarked to me, with sage perspicacity, that Haughey was seeking to create another group of people who would pay no tax! This at a time when Ireland’s retarded economic development was finally speeding up, with fortunes being made particularly in building and property development, where tax breaks and loopholes abounded. Yet such riches did not touch much on the artistic community at the time nor for long afterwards, despite Haughey’s initiative.
The terms of the scheme were quite clear: earnings from an original book, play or other writing, a musical composition, painting or sculpture, deemed by the Revenue Commissioners to have artistic merit, were exempted from tax. So first there had to be earnings! The expressed aims were to foster and encourage the arts generally and artists to remain in Ireland ( 1969 was the year the Nobel Prize for Literature went to one famous Irish exile – Samuel Beckett). Irish residence (including for tax purposes) was, and is required. Claims could not be made retrospectively, thus ensuring that there was a stream rather than a flood of writers and artists into the country, as some critics had feared.
The scheme ground on without amendment for a generation, despite several efforts by Revenue to have it reined in. Most of those covered benefitted modestly. To counter “administrative creep,” guidelines were introduced in 1995 and revised in 2013. By then there had been change. For as Ireland boomed, and incomes rose, so too did the incomes of artists and writers. When the Freedom of Information Act was deemed to cover those benefitting, the information revealed caused some surprise, particularly the revelation that a small handful of individuals, including some rock stars (on royalties from musical compositions) were saving millions in tax.
In 2007, thirteen of the 2,427 availing of the scheme were earning in excess of €500,000.The exemption was capped in 2006 at a generous €250,000 (roughly $300,000) and further reduced to stand now at €50,000, as well as being enmeshed in the high earners’ tax restrictions. The latest figures available, for 2012, show that roughly 64% of those benefitting had incomes below the exemption, with many having less than half that amount.
Section 2, now Section 195 of a 1997 act, is again under attack, on the usual grounds of equity, with Revenue again leading the charge. In a perfect world the case for abolition would be unchallengeable. But, given the gaps, loopholes, deficiencies and blatant unfairness, which characterise the way in which income (including welfare payments) and wealth are treated in Irish legislation, why single out this? In the broad scheme of things the measure costs little. To end it would be a victory for the bean counters, no one else.