Why we’re not feeling the tax benefits of the recovery

Jul 31, 2017

Sunday Business Post, 30 July 2017
How much can we reasonably expect to gain from next year’s budget? We won’t really know the answer to that until the middle of October. But figures published this week by the Revenue Commissioners contain strong hints as to what might be possible. And that is very little.

“Ready Reckoner” is an innocuous enough title for a document that shows the tax landscape as Revenue see it. It’s a unique profile of the Irish citizen analysed not by where they live, nor by their status nor by their attainments or qualifications. This profile is all about the capacity of people to pay tax, and what the exchequer implications might be if they were asked to pay a little bit less or a little bit more.

How many taxpayers?

The single biggest achievement of the economic recovery has been the reduction in the number of unemployed people. While we still have some distance to go, the number of income earners in this country now tops 2.6 million. “Income earners” has a particular meaning of its own – for instance a married couple with two people earning are categorised as a single income earner. This particular report is blind to the usual niceties. 

A significant number of income earners pay no taxes mainly because they are not earning enough to be caught in the tax net.  770,000 of us fall into this category. That still leaves almost 2 million taxpayers amongst whom the largesse of Budget 2018 must be spread. We know from the Summer Economic Statement that fiscal space for tax cuts is in short supply. If the money available for tax relief was to be spread evenly across the taxpaying population, we would all be better off to the tune of about two euros a week. That’s hardly a lifestyle changing benefit. 

The recurring problem for any Minister for Finance is that any tax relief made generally available costs a fortune to implement. To make any meaningful change to the fundamentals of the tax system – say for example a 1% percentage point reduction in the 20% rate to 19% – €500 million must be set aside. That kind of sum is simply not available without raising taxes elsewhere and the ready reckoner contains plenty of ideas to do that. 

Shaking the tree

Take VAT for example. We seem to have a remarkable tolerance for VAT increases in comparison with income tax or local property tax increases. The 21% rate of VAT went to 23% in 2012 with barely a murmur. Over half of the goods and services bought by consumers attract VAT at the 23% rate. A one percentage point increase in the VAT rate to 24% would bring in €411 million. At that level you’re touching the edge of what the EU will allow, as the EU directives don’t permit the rate to go beyond 25%. 

Excise duty would be another happy hunting ground for the Minister for Finance. By adding 10 cent to the price of a litre of diesel, the exchequer would benefit to the tune of €250 million. An extra 10 cent on a litre of petrol drags another €100 million euros into the government coffers. VAT and excise increases are especially attractive to government because they bring in additional money with almost immediate effect and are almost impossible for taxpayers to circumvent or avoid, legally at any rate. 

Income tax, VAT and excise measures are undoubtedly the big-ticket items when it comes to tax collection.  For income tax in particular, the Ready Reckoner highlights another aspect of tax collection, frequently overlooked. If tax allowances and bands do not increase with inflation, the net result is a greater share of taxes flowing into the exchequer.  Even though inflation is historically low, by not indexing up items like the personal tax credit which currently stands at €1,650, the government stands to gain an extra €300 million. While this is a tax technique that goes largely unnoticed, it contributes to the individual’s sense of being within the squeezed middle and not feeling the benefits of economic recovery.

Value for Money

What the Revenue’s ready reckoner does not and cannot address is the extent to which the taxes identified represent good value for the taxpayer. We tend to look at taxes and tax collection in isolation without reference to the levels of government service and benefits provided. That makes it impossible for example to meaningfully compare different tax systems. It’s all very well to point to higher standards of public service in other countries – the Scandinavian countries are frequently cited – but at what cost to the taxpayer? 

Where there are limited resources for tax cuts the focus must be on the equitable treatment of taxpayers. We are already good at progressivity – ensuring that people on lower wages pay proportionately less than those on higher incomes. We are not so good at ensuring that people in similar situations are taxed similarly. There are big discrepancies caused mostly by the jump from the 20% income tax rate to the 40% tax rate between people earning just below the average wage of around €37,000 per annum and people earning just above it. And the self-employed person on identical earnings to the salaried counterpart will pay €700 more in income tax. 

Making some progress in the next Budget towards rectifying those anomalies is possible, even with limited resources.

Brian Keegan is Director of Public Policy and Taxation with Chartered Accountants Ireland.