Skin in the game

Oct 16, 2017

Sunday Business Post, 15 October 2017
Ironically the hardest week in which to write about tax is the week of the Budget, because everything the Finance Minister said and did has already been parsed and analysed.  There is so much analysis that is just not possible for all of it to be correct.  And there is another, more fundamental, reason for some of the analysis at least to be wrong.

While as usual much of the detail in the budget emerged in advance, the difference this year was that the leaks only emerged much closer to the budget speech.  That was partly a by-product of perhaps a more disciplined government approach, a consequence of the reportedly late agreement of some key aspects and the commercial sensitivity towards the most important revenue raising measure in the Budget, which was the change to commercial stamp duty rates. 

Signposts

Whatever about leaks of particular items, the priorities in the run-up to the Budget had been well sign-posted.  The new arrangements for the minority government under the programme for partnership government and the confidence and supply agreement with Fianna Fáil were going to take precedence, no matter what anyone TD or pressure group wanted to see.  If those arrangements were to be followed there had to be cuts in the USC rates, however modest.  There also had to be changes to the scope of the 20% income tax band.  On the other hand there was not going to be an across the board indexation of personal allowances and reliefs.  Leaving personal allowances and reliefs alone was specifically identified in the Programme for Partnership Government as a revenue raising measure over the duration of the government’s term.

This rigid adherence to the pre-agreed rules goes a long way to explaining the muted response in political circles to many aspects of the Budget.  Political reaction tended to dwell on the beneficiaries of the budget, and how little they received.  There are very few elected representatives who argue the case for the individual taxpayers and businesses which keep the whole show on the road by consistently stumping up the money to pay for the Government programmes.  Yet again the self-employed, the sector which had suffered the most from the downturn, were short-changed by the meagre increase in the earned income credit.  This allowance for the self-employed continues to lag behind the PAYE allowance available to their employed counterparts in both the private and public sectors.  We really need to start taxing people by reference to what they earn, and not by reference to how they earn it.  From a tax policy perspective, this was the weakest detail in the Budget proposals, but I did not see a single politician complain.

Trends

Nevertheless there were two trends evident in last Tuesday’s announcement which were a departure from previous years.  This is the first budget for many years which did not narrow the tax base; in other words it did not ask fewer individuals and businesses to bear the overall burden of tax.  There are excellent social and political reasons for taking people out of the tax net entirely and I’m not suggesting that it is not right to do so.  However, the main reason our national debt is so large is because we opted to sustain relatively high spending patterns after the collapse of the tax base in 2008.  The tax base collapsed because of our overreliance on taxes from property which had made it too narrow.  Recent budgets have continued to narrow the tax base.  Taking people out of the USC charge, deferring local property tax revaluations and abandoning water charges and the broadcasting levy all resulted in fewer people paying the national bills through “general taxation”.  That pattern had to stop; Budget 2018 seems to me to have applied the brakes.

Secondly, this is also the first budget for many years where we changed our corporation tax rules to secure our own corporation tax yields rather than at the behest of international organisations like the OECD and EU.  Bending to OECD and EU requirements on tax has become a mugs game.  Nothing we do to change our tax policy will satisfy the “fairer” corporation tax agenda among larger countries.  Fairer in this context does not mean collecting more tax from multinationals overall, but it means getting a bigger share of tax at the expense of other countries.  The change announced on Tuesday to the way in which royalties on intellectual property – patents, know-how and the like – are taxed is in many respects a matter of timing of tax collection.  From an exchequer point of view, it should improve the predictability of corporation tax yields.

Points of view

Which brings me back to the problem of budget analysis.  Everyone has a point of view.  When it comes to tax, we all have skin in the game.  We focus on the detail of what matters to us personally, or to our business or to our constituency.  The worst people to ask about tax are taxpayers, which is why much of the analysis on specific topics in the Budget must be suspect.  Only looking at “what the Budget means to me” means that general trends miss coherent analysis.  This year, I think those trends are the preserving of the tax base while holding firm on corporation tax policy to suit our Exchequer and not some other nation or bloc.  Whatever might be said about the detail, both of these trends are positive.

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