Simple or Fair?

Oct 22, 2018

Sunday Business Post, 21 October 2018
Almost anything can be studied.  One of the latest topics to attract the attention of researchers is why tax is so complicated. 

A team working mainly from the University of Paderborn in Germany has recently devoted quite a lot of time and effort into establishing what makes life so difficult for taxpayers.  Some of the factors are obvious – how complicated calculations are, or how incomprehensible the law is.  The researchers also considered issues which may be less obvious.  For instance, how much documentation does a company have to keep to stay on the right side of the tax authority?  How often do tax returns have to be made, and how detailed do those returns have to be?  Also they suggest there are two drivers of complexity which are firmly in the hands of the politicians.  These are unpredictability, and closely aligned to that, the extent to which tax rules change each year.

The big tax change in the Irish context is the annual Finance Bill.  The 2018 edition was published last Thursday.  It’s the piece of law which gives effect to the budget day announcements.  If budget day is all about income tax and USC changes, the Finance Bill is more about the drivers of complexity – the rules behind the calculations, the filing requirements and the legal obscurity.  Mercifully, this year's Finance Bill is unusually short. 

Measuring this year’s Finance Bill by reference to the University of Paderborn study, the system has become considerably more complicated for companies.  There are new rules to prevent companies from avoiding taxation simply by virtue of moving their operations out of this country.  There are also new rules to dissuade companies from setting up subsidiary operations in other territories solely for the purposes of avoiding tax.  Part of the tradeoff for a 12.5% corporation tax rate is a high compliance cost for companies.  Much of this compliance cost is driven by the need to conform with the international standards promoted by the OECD and the EU, rather than solely by the domestic concerns of the Revenue Commissioners.

                                                  

Were it not for all the compliance obligations, our system of taxing companies is fairly straightforward.  The tax systems in many other countries have high rates, accompanied by a whole slew of allowances and reliefs to help ensure no-one pays tax at those high rates.  The situation for Irish companies is radically different, in that there are really only three corporation tax reliefs.   One is for investment in research and development, one is to encourage the manufacture of products derived from know-how developed in Ireland (the so-called Patent Box), and a third to help small trading companies in their early start-up phase.  That's pretty much it. 

But what about the rest of us?  There is little in this year’s bill which is going to make life more complicated for the average income taxpayer.  Most of us receive our payslips in January with the income tax and USC changes already processed.  The payroll software companies will have done all the hard work, not only for employees but also for Revenue.  As long as you’re not self-employed, there is little enough complexity within the Irish tax system. 

A simple tax system may not be ideal in itself.  The justification for tax complexity is the attempt to be fair.  It’s fair that people on low incomes pay tax at lower rates.  Over the years however we have whittled out many of the reliefs and allowances for individuals.  These added complexity to the system, but perhaps made it a little bit fairer.  It used to be deemed fair to help people provide for their own financial security.  But tax relief for life assurance premiums has long since been abolished, mortgage interest relief where still available is a mere shadow of its former self, and pensions tax relief has been curtailed. 

A system which is doggedly indifferent to any aspect of the status of the taxpayer other than their gross income limits the capacity of government to create relief when it might be needed – for tenants, for parents, for home owners.

Of course it is possible to go overboard with relieving measures.  The British system is the paradigm of this, where it is estimated that in total there are over 1,000 types of tax relief available throughout the UK tax code.  By contrast our self-imposed constraint means that the Finance Bill is usually little more than a device to promote the continued enforcement of tax compliance. 

Insofar as this year’s bill introduces changes, it adds only to the obligations and little to the benefit of taxpayers.  The University of Paderborn study measures complexity rather than fairness.  That’s reasonable as in any event fairness is probably too subjective a concept to measure objectively.  But it is possible to measure the items in a piece of law which might promote fairness.  In Finance Bill 2018, there are precious few of these.

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