Tánaiste and Minister for Finance Simon Harris stated his intention to promote a culture of investing among Irish people by implementing saving and investing accounts. This is a far cry from the issues that are deterring individuals from deploying capital on the private markets.
In the final week of January, the College’s consulting society, the DUCG, organised a visit to the Daíl and panel discussions with Tánaiste and Minister for Finance Simon Harris, and three TDs: Naoise Ó Muiri, Alan Dillon, and Barry Ward. I had the pleasure of attending this event. Various topics were discussed, from Irish push for achieving a circular and sustainable economy, to the then-current tensions surrounding Greenland. But what grasped my attention the most were the words of Simon Harris, who said that the government is looking to promote a “culture of investing” among Irish citizens and will be going forward with so-called saving and investing accounts, to promote investing as opposed to just saving.
This commitment was repeated by Harris at the last Fine Gael’s parliamentary party meeting, which took place on February 11th. There, the Tánaiste reiterated that while most Irish people save, their savings are kept in low-interest savings accounts, rather than being invested into the public markets. The scale of the matter is non-negligible either, with Irish households having over €170 billion sitting in deposits, rather than being invested. This view is aligned with those expressed by Gabriel Makhlouf, the governor of the Central Bank of Ireland. In his open letter, sent to the Tánaiste onFebruary 10th, and the press release accompanying it, Makhlouf stressed the importance of retail participation in the financial markets for households to build resilience. If the Minister of Finance, the Government, and the Central Bank are in agreement about this, then what issue could there possibly be?
While the idea behind these announcements is almost unquestionably good, investing is perhaps the only way for one’s savings to beat inflation, the Government seems to be going about it the wrong way. Perhaps the reason why Irish people tend to avoid investing in the public market is the hostile tax structure for individual, retail investors? And the way to “promote investing culture” that Harris described does not bring down the capital gains tax, which in Ireland is set at 33 per cent. In a vacuum, this may not seem that high, but there is a shocking comparison between it with the EU average tax on capital gains of around 17.5 per cent, or with the Irish corporate tax rate of 12.5 per cent. The Saving and Investing accounts, as far as we know now, don’t seem to be tax-exempt or have any tax benefits like the American Roth IRAs. This seems like a very misguided top-down attempt at shifting the culture around investing.
Besides the uncommonly high tax on realised capital gains (when an asset is sold) Ireland also has the unique element of tax on unrealised capital gains. Ireland has a Deemed Disposal Tax on ETFs (Exchange Traded Funds), which are usually the lower risk public markets investment vehicle, since, unlike a single stock, they cover a broader range of companies. ETFs, especially index funds, that is funds which mirror the composition of major stock market indexes like the S&P 500, FTSE, NASDAQ 100, etc are the usual buy for long term holders. People who do not wish to research particular stocks are, according to Berkshire Hathaway’s Warren Buffet, best off simply investing in index funds and holding them, allowing the compounding to take effect. But for Irish taxpayers this is easier said than done, as every eight years they are subject to a 41 per cent tax on unrealised capital gains.Every eight years, those who opted to invest and hold least risky assets are punished for waiting for compounding to take effect, as they are taxed on money they haven’t actually made, profits that aren’t realised, funds they cannot use to pay for anything as they haven’t withdrawn them.
So the Irish taxpayer, who wishes to secure their future first may look at an interest-bearing savings account. But there, they are met with the 33 per cent Deposit Interest Retention Tax (DIRT), so a third of the interest accumulated is taken by the state, which usually pushes the yield below the rate of inflation. So looking to hedge from inflation the taxpayer may look to public markets – but there they are met with the taxes on realised and unrealised capital gains, while having to bear the risks of holding volatile assets. No wonder this seems like a bad deal. What is there left to do with one’s money? Either leave it in their savings account, to wither away due to inflation like the €170 billion, or invest in the real estate market. A house, or any other property, is less volatile than a stock or an ETF, it won’t “drop to zero” and the investor won’t be taxed every eight years, while the property appreciates in value, at rates comparable to some ETFs. This is one of the reasons behind Ireland’s housing and cost of living crises – investing in property is the only investment which is relatively safe and not taxed for holding and waiting.
In light of all of these obstacles that a potential retail investor from Ireland has to face, the government’s sudden push to promote investing culture seems like too little too late, and a misjudgement of what stops Irish people from investing. Ironically enough, by eliminating the barriers between Irish individual investors and actual compounding on the public markets, this government would also move Ireland closer to solving the housing and cost of living crisis. But it seems that instead of reducing taxes, this government would rather increase both their revenue and the profits of banks holding those Saving and Investing accounts.
