Rethinking Taxation critical to Ireland's recovery

Image

According to the Parliamentary Budget Office's (PBO) Fiscal Monitor for October 2020 - Revenue Analysis Corporation Tax significantly underperformed in October 2020 relative to expectations (by 58 per cent when the retention by the Revenue Commissioners of €275 million in Corporation Tax to provide for payments under the Covid-19 Restrictions Support Scheme (or CRSS) is included). While the Government indicated that this decrease was anticipated, Social Justice Ireland would agree with the PBO's analysis that underperformance of this scale serves as a reminder that Corporation Tax is "a volatile and unpredicable source of revenue for the Exchequer".

In April this year, Social Justice Ireland published some options available to Government that would increase our overall tax take as a proportion of national income, broaden our tax base, and deliver a tax policy that would support our social and economic recovery and a new Social Contract. We argued that Government had an opportunity to reform and broaden our tax base and lay the foundations to increase our total tax take now to ensure we are well prepared to meet any future shocks.  

In September this year, we published a series of policy recommendations to Build a New Social Contract. Among them, making the taxation system fairer. A fairer system would involve increasing the overall tax take; broadening the tax base; and ensuring improved tax governance. Getting there would involve:

Increasing the overall tax take

Commit to increasing the total tax-take by between €2.5 to €3bn annually.  Social Justice Ireland believes that, over the next few years, policy should focus on increasing Ireland’s tax-take. Previous benchmarks, set relative to the overall proportion of national income collected in taxation, have become redundant following recent revisions to Ireland’s GDP and GNP levels as a result of the tax-minimising operations of a small number of large multinational firms.  Consequently, an alternative benchmark is required.  We propose a new tax-take target, set on a per-capita basis. This approach minimises some of the distortionary effects that have emerged in recent years. Our target is calculated using CSO population data, ESRI population projections, and CSO and Department of Finance data on recent and future nominal overall taxation levels. The target is as follows:  Ireland’s overall level of taxation should reach a level equivalent to €15,000 per capita in 2017 terms. This target should increase each year in line with growth in GNI*.  Increasing the overall taxation revenue to meet this new target would represent a small overall increase in taxation levels and one which is unlikely to have any significant negative impact on the economy[1].

Review the use of tax expenditures to promote investment in areas that support society.  We now have an opportunity to learn from past mistakes and take steps to broaden our tax base so that we are better prepared for the task of rebuilding our society and economy and in making the changes needed to build a stronger, more inclusive Ireland.  It is only through a strategic and determined effort to reform Ireland’s taxation system that this can be achieved.  The recent European Commission assessment on broadening the tax base[2] shows we have significant scope for improvement and that there are many policy instruments available to us. The OECD[3] points to tackling inefficient tax expenditures, and a focus on raising revenues from tax bases that will be the least detrimental to growth, including recurrent taxes on immovable property and general consumption taxes as areas for Governments to consider for base broadening.

Reform the High-Income Individuals’ Restriction to include all tax expenditures.  The suggestion that it is the better-off who principally gain from the provision of tax exemption schemes is reflected in a series of reports published by the Revenue Commissioners entitled Effective Tax Rates for High Earning Individuals and Analysis of High-Income Individuals’ Restriction[4]. These reports provided details of the Revenue’s assessment of top earners in Ireland and the rates of effective taxation they incur. While improvements have been made since the publication of these reports, it is important that Government continues to raise the minimum effective income tax rate for high-income individuals so that it is in line with that faced by PAYE earners on equivalent high-income levels. Following Budget 2020 a single individual on an income of €125,000 (gross) will pay an effective tax rate (income tax and USC) of 37.2 per cent (down from 39.3 per cent in 2014); a figure which suggests that the minimum threshold for high earners has potential to adjust upwards over the next few years. We also believe that Government should reform the High-Income Individuals’ Restriction so that all tax expenditures are included within it[5]. The restriction currently does not apply to all tax breaks, including pension contributions.

Increase carbon taxes in line with IPCC recommendations.  Budget 2010 announced the long-overdue introduction of a carbon tax. The tax has been structured along the lines of the proposal from the Commission on Taxation and is linked to the price of carbon credits which was set at an initial rate of €15 per tonne of CO₂ and subsequently increased in Budget 2012 to €20 per tonne. Budget 2013 extended the tax to cover solid fuels on a phased basis from May 2013, with the full tax applying from May 2014. Budget 2021 further increased the tax (to €33.50 per tonne) and signalled a pathway to bring the tax to €100 a tonne by 2030.  In welcoming this increase, Social Justice Ireland highlighted the importance of investing in a just transition using the additional resources from this carbon tax increase. Social Justice Ireland believes that as the tax increases the Government should be more specific in defining how it will assist these households. Furthermore, we are concerned that the effectiveness of the tax is being undermined as there is less focus on the original intention of encouraging behavioural change and greater emphasis on raising revenue.

Ensure fair taxation of corporates.  Despite a low headline rate (12.5 per cent), to date there has been limited data on the effective rate of corporate taxation in Ireland. A report from the Comptroller & Auditor General (C&AG), using the approach used by the Revenue Commissioners to calculate the effective tax rate – tax due as a proportion of taxable income – found an overall effective corporation tax rate of 9.8 per cent in 2016.  The C&AG report further points towards a concentration of corporation tax among a small group of multi-national firms and highlights that it is a small number of these firms who are aggressively minimising their tax liabilities[6].  Social Justice Ireland believes that the issue of corporate tax contributions is principally one of fairness. Profitable firms with substantial income should make a contribution to society rather than pursuing various schemes and methods to avoid making such contributions.

Introduce a minimum effective rate of corporation tax of 6 per cent on all corporate profits passing through Ireland.  Social Justice Ireland believes that an EU-wide agreement on a minimum effective rate of corporation tax should be negotiated and this could evolve from the ongoing discussions around a Common Consolidated Corporate Tax Base (CCCTB). We believe that the minimum rate should be set well below the 2018 EU-28 average headline rate of 21.9 per cent but above the existing low Irish level[7].  A headline rate of 17.5 per cent and a minimum effective rate of 10 per cent seem appropriate. This reform would simultaneously maintain Ireland’s low corporate tax position and provide additional revenues to the exchequer. Based on the C&AG report the impact of such a reform would be confined to a small number of firms yet it is likely to significantly raise overall corporate tax revenues. Rather than introducing this change overnight, agreement may need to be reached at EU level to phase it in over three to five years. Reflecting this, we proposed prior to Budget 2021 that the effective rate be adjusted to a minimum of 6 per cent – an opportunity regrettably missed.

Clarify and enforce the Vacant Site Levy legislation to ensure it achieves its original purpose.  Since 1 January 2017, Local Authorities have been required to keep a register of vacant sites; land in their local area that is suitable for residential development but has not yet been developed.  Sites on this register are subject to a Vacant Site Levy, at a rate of 3 per cent for 2018 and 7 per cent for 2019, if they had not been removed from the register in the interim.  Despite almost 400 sites being registered, only four Local Authorities reportedly received payment in the first year.  Other Local Authorities reported difficulties in collecting the levy on the basis of lack of resources or difficulty valuing the site.  Ireland has a very centralised Government, both in terms of decision-making and finances.  The Vacant Site Levy provides an opportunity for Local Authorities to generate revenue, while encouraging development of sites in their local areas in the midst of a housing shortage.  This is particularly timely in the context of a reduction in Local Authority revenue from the freezing of commercial rates due to the Covid-19 emergency.

Broaden the Tax Base

Introduce a Financial Transactions Tax.  As the international economic chaos of the past few years has shown, the world is now increasingly linked via millions of financial transactions. Similarly, global currency trading has increased sharply throughout recent decades. Transactions in these markets represent a mixture of legitimate, speculative and opportunistic financial transactions, and it is estimated that a very high proportion of all financial transactions traded are speculative and are completely free of taxation. This implies that large and growing amounts of these transactions make no real or worthwhile contribution to economies and societies beyond increasing risk and instability. Taken together, the daily value of international trading in the foreign exchange and interest rate derivatives markets is more than 25 times the annual GDP of Ireland, almost three times that of the UK, and between 40-50 per cent of annual GDP in the EU-28 and US. On an annualised basis, Irish based trading in foreign exchange markets is equivalent to 263 per cent of GDP while trading in interest rate derivatives is equivalent to 132 per cent of the annual value of GDP[8].

Social Justice Ireland regrets that to date Government has not committed to supporting recent European moves to introduce a Financial Transactions Tax (FTT) or Tobin Tax. The Tobin Tax, first proposed by the Nobel Prize winner James Tobin, is a progressive tax, designed to target only those profiting from speculation. It is levied at a very small rate on all transactions but given the scale of these transactions globally, it has the ability to raise significant funds.

Introduce an aviation fuel tax.  The time has come to look at the aviation sector and the policy levers that are available to ensure that it makes a real contribution to our climate targets.  No sector can have a free pass, and with all other sectors being required to make their fair contribution the aviation sector should be no different.  Jet kerosene is currently not subject to Mineral Oil Tax, yet air travel is a significant polluter. In a first step to address this anomaly, and as part of a comprehensive carbon policy to meet our national targets for 2030 out to 2050, Social Justice Ireland proposes the introduction of a Commercial Air Transport Tax. This is in line with the ‘Polluter Pays’ Principle and the Environment Liability Directive. 

Explore new initiatives to promote behavioural change through the tax system.  Many taxes, such as carbon tax and aviation fuel tax, are intended to promote behavioural change by acting as a disincentive to engage in certain behaviours that are harmful to the environment or society.  While their main intention is not to generate revenue, until such time as consumer patterns change they will provide some additional revenue to the Exchequer.  The Government must explore new initiatives to promote this behavioural change, ring-fencing any revenue raised to support a Just Transition.

Change the Local Property Tax to a Site Value Tax.  The Local Property Tax system allows property owners to benefit from infrastructural development and/or environmental factors unconnected to anything they may have done to their site.  The fact that rate bands for the purpose of calculating Local Property Tax have not been updated since 2013 is also concerning.  Replacing the Local Property Tax system with a Site Value Tax would introduce a more equitable tax system, while avoiding the political conundrum that goes with updating bands under the current system. 

A Site Value Tax is based on the value of the land, or the site, before anything has been done to it.  Site Value Taxes disincentivise land hoarding, as the same rate of tax applies to a piece of land irrespective of whether it has been developed[9].  This would lead to more efficient land use within the structure of social, environmental and economic goals embodied in planning and other legislation.

Reintroduce the Windfall Gains Tax at 80 per cent.  The vast profits made by property speculators on the rezoning of land by local authorities was a particularly undesirable feature of the recent economic boom of the early 2000s. Re-zonings are made by elected representatives, supposedly in the interest of society generally. It therefore seems appropriate that a sizeable proportion of the windfall gains they generate should be made available to local authorities and used to address the ongoing housing problems they face.  For some time, Social Justice Ireland has called for a substantial tax to be imposed on the profits earned from such decisions.  A windfall tax level of 80 per cent is appropriate and still leaves speculators and land owners with substantial profits from these rezoning decisions.  The revenue generated by this tax could then be ringfenced by Local Authorities to provide additional housing and upgrade existing housing stock.

Close tax loopholes for property investment vehicles.  While measures in Budget 2020 to “ensure that an appropriate level of tax is paid on property gains by REITs” were welcome, their introduction came six years after the preferential tax treatment of REITs was introduced in the Finance Act 2013.  All proposed tax structures associated with residential property should be reviewed by the Irish Government Economic and Evaluation Service (IGEES) prior to their introduction and subjected to annual review by the Department of Finance.

Reintroduce the Non-Principal Private Residence Tax at a rate of €500 per annum. While second homes are liable for the local property tax, as are all homes, Social Justice Ireland believes that second homes should be required to make a further annual contribution in respect of the additional benefits these investment properties receive. We believe that Government should re-introduce the Non-Principal Private Residence Tax and that it should be further increased and retained as a separate substantial second homes payment.  An annual charge of €500 would seem reasonable and would provide additional revenue to local government of approximately €170m per annum.

Taxation Governance

Provide an Annual Review of Tax Expenditures.  There have been multiple reports highlighting and detailing the need for new methods for evaluating and introducing tax reliefs (also known as tax expenditures). The proposals focused on prior evaluation of the costs and benefits of any proposed expenditure, the need to collect detailed information on each expenditure, the introduction of time limits for expenditures, the creation of an annual tax expenditures report as part of the Budget process, and the regular scrutiny of this area by an Oireachtas committee. Recently there has been some progress in this direction with a report for the Department of Finance, accompanying Budget 2015, proposing a new process for considering and evaluating tax breaks[10]. Documentation accompanying Budgets 2016-2021[11] also included an annual tax expenditure report. We welcome this development and believe it is important to further develop this work, to deepen the proposed analysis and to further improve the ability of the Oireachtas to regularly review all of the tax expenditures in the Irish taxation system.

Establish a Taxation Commission with a clear mandate to set out a pathway towards increasing the total tax-take and broadening the tax base.  There is merit in developing a tax package which places less emphasis on taxing people and organisations on what they earn by their own useful work and enterprise, or on the value they add, or on what they contribute to the common good. Rather, the tax that people and organisations should be required to pay should be based – as much as is feasible - on the value they subtract by their use of common resources. Whatever changes are made should also be guided by the need to build a fairer taxation system; one which adheres to our already-stated core policy objective.  While we welcome the commitment to establishing a Commission on Welfare and Taxation set out in the Programme for Government[12], a dedicated Taxation Commission with a mandate to develop a pathway to increase Ireland’s total tax-take and broaden the tax base should be established to ensure a more equitable system.

Simplify the tax system.  The Irish taxation system is unwieldy and difficult to navigate for the average person.  Individuals and corporations with the resources to exploit the loopholes inherent in the various pieces of legislation benefit disproportionately. We need a simpler and more transparent system that reduces the possibility for exploitation and facilitates just taxation.

Ireland must learn the lessons of the past if it we are to have a secure and stable recovery. Developing a fairer, and more sustainable, tax system must be a prioirity. 

[1] https://www.socialjustice.ie/sites/default/files/attach/publication/6291...

[2] https://ec.europa.eu/info/sites/info/files/2020-european_semester_countr...

[3] https://read.oecd-ilibrary.org/view/?ref=128_128575-o6raktc0aa&title=Tax...

[4] www.revenue.ie

[5] Healy et al (2020): Socio Economic Review 2020, Social Justice Matters: 2020 guide to a fairer Irish society, Chapter 4, Social Justice Ireland: Dublin

[6] Healy et al (2020): Socio Economic Review 2020, Social Justice Matters: 2020 guide to a fairer Irish society, Chapter 4, Social Justice Ireland: Dublin

[7] Healy et al (2020): Socio Economic Review 2020, Social Justice Matters: 2020 guide to a fairer Irish society, Chapter 4, Social Justice Ireland: Dublin

[8] Healy et al (2020): Socio Economic Review 2020, Social Justice Matters: 2020 guide to a fairer Irish society, Chapter 4, Social Justice Ireland: Dublin

[9] For more detail, see https://www.socialjustice.ie/content/policy-issues/time-site-value-tax-r...

[10] http://budget.gov.ie/Budgets/2015/Documents/Competing_Changing_World_Tax...

[11] www.budget.gov.ie

[12] Government of Ireland (2020): Programme for Government: Our Shared Future, Dublin: Government of Ireland.