Priorities for Taxation Reform in Budget 2023

The experience of the last decade has highlighted the centrality of taxation in budget deliberations and to policy development. Taxation plays a key role in shaping Irish society through funding public services, supporting economic activity, and redistributing resources to enhance the fairness of society. Consequently, it is crucial that clarity exist with regard to both the objectives and instruments aimed at achieving these goals.

 

‘Just Taxation’ is a key component of Social Justice Ireland’s guiding vision and policy framework. During the past year we submitted a detailed document to the Commission on Taxation and Welfare outlining how the taxation system should be changed to better achieve this objective. We look forward to the publication of the Commission’s report and engaging with its proposals.

 

Here we present a series of reforms necessary to establish a just taxation system. The accompanying chapter in our annual socio-economic review Social Justice Matters 2022 details our belief that Government’s key policy priorities in this area should be to:

• increase the overall tax-take;
• adopt policies to broaden the tax base; and
• develop a fairer taxation system.

Overall, our views are driven by principles of fairness, sustainability, and the need for structural reform.

Increasing the overall tax-take

Social Justice Ireland believes that, over the next few years, policy should focus on increasing Ireland’s tax-take. We believe that an increase in Ireland’s overall level of taxation is unavoidable in the years to come; even to maintain pre-Covid levels of public services and supports, more revenue will need to be collected. The pandemic has also highlighted public service deficits in many area which will necessitate new investment and spending in the years ahead. Consequently, an increase in the tax take is a question of how, rather than if, and we believe it should be of a scale appropriate to maintain current public service provisions while providing the resources to build a better society.

In other publications we have outlined the details of our proposal for a national tax take target set on a per-capita basis; an approach which 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. It also incorporates an adjustment for current windfall corporation tax revenues. 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 tax take to this level would require a number of changes to the tax base and the current structure of the Irish taxation system. While increasing the overall taxation revenue to meet this new target would represent a small overall increase in taxation levels (about €2,100 per person), it is one that is unlikely to have any significant negative impact on the economy.

Reforming and broadening the tax base

Social Justice Ireland believes that 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. There are a number of approaches available to Government and our recent edition of Social Justice Matters (see ch 4) provides details of these proposals which highlight areas we consider a priority including:

• Reforming Tax Expenditure
• A Minimum Effective Tax Rates for Higher Earners
• Reform of Corporation Taxes
• Introduction of  a Site Value Tax
• Taxing Second Homes
• Taxing Empty Houses and Underdeveloped Land
• Taxing Windfall Gains
• Supporting a Financial Transactions Tax

A Minimum Effective Rate of Corporation Tax

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 pursue various schemes and methods to avoid such contributions. Ireland’s headline corporation tax rate of 12.5 per cent has been the subject of increasing controversy in recent years. This is not so much because it is low, but because the effective rate that some large firms pay is considerably lower.

For many years we have called for the adoption of a Minimum Effective Rate of Corporation Tax and welcome the growing international acknowledgement of this as the only practical and fair route to address this issue. We have proposed an effective rate of at least 10% and believe Budget 2023 should commence the adjustment to this rate by adopting a rate of 6 per cent for 2023/24. Such a rate would raise over €1 billion each year.

Developing a fairer taxation system

The need for fairness in the tax system was clearly recognised in the first report of the Commission on Taxation. It stated:

“…in our recommendations the spirit of equity is the first and most important consideration. Departures from equity must be clearly justified by reference to the needs of economic development or to avoid imposing unreasonable compliance costs on individuals or high administrative costs on the Revenue Commissioners.” (1982:29)

The need for fairness is just as obvious today and Social Justice Ireland believes that this should be a central objective of any forthcoming reform of the taxation system. Our recent edition of Social Justice Matters (see ch 4) highlights these areas of priority (see also p5):

• Standard Rating Discretionary Tax Expenditures
• Favouring Fair Changes to Income Taxes
• Introducing Refundable Tax Credits
• Reforming Individualisation
• Making the Tax System Simpler

Budget Choices 2023 is available to download now.