A Fashionable Tax

Jun 24, 2019

The Sunday Business Post, 23 June 2019, I awoke the other morning to hear Fianna Fáil’s environment spokesman Timmy Dooley, on RTE’s Morning Ireland, calling for tax increases.  Hearing any politician call for tax increases rarely constitutes a good start to the day.  The call was of course prompted by the discussion on the latest Government Climate Action Plan.

 

Just like everything else, taxes can come and go out of fashion.  Currently it’s quite acceptable for a politician to call for carbon taxes, because it is now generally accepted that climate change needs to be addressed.  Equally, however, the shortage of reasonably priced rented residential accommodation needs to be addressed, but it is deeply unfashionable to suggest any tax remedy which might go some way towards help sorting that problem out.

 

The age old problem with fashion is that it costs money to be fashionable.  It is easy for a politician to sit in a radio station calling for carbon taxes, on the back of election results which suggested that the electorate might be becoming more environmentally aware.  It is a different matter for a government to levy an additional tax and deal with the backlash.

 

From a political point of view, additional carbon taxes have one very attractive feature.  Like the greenhouse gases themselves, they are largely invisible to the electorate.  Taxpayers get up in arms about tax hikes affecting their pay packet, but tax increases which add to the cost of purchased goods or services get a strangely muted reception. 

 

In 2012, for example, the government added 2 percentage points to the standard rate of VAT, increasing it from 21% to 23%.  At the time the move elicited almost no public response.  That VAT increase is still with us.  Those extra two percentage points currently bring in some €1bn of extra VAT from taxpayers each year. 

 

Even better from a political perspective, carbon taxes would be applied to fuel-stuffs whose price is already as volatile as their composition.  The proposed fourfold increase of the carbon tax charged on home heating oil would increase the cost of 1,000 litres of kerosene to the householder by roughly €150.  Price fluctuations of that order, perhaps due to currency fluctuations or mere cussedness on the part of the oil producing countries, are already frequent occurrences.  Stage such an increase over a period of years, as Timmy Dooley suggested, and how many voters would really notice? 

 

Whether such an increase is equitable is a different matter.  VAT takes no account of ability to pay, and the parent who earns €100,000 per year gets the same reduced rate of VAT on children’s clothing as the parent who relies entirely on social welfare benefits.  Carbon tax is equally indifferent to a person’s ability to pay, unless relief can be channelled through the social welfare system.

 

Carbon tax is only one element of the environmental approach.  Because of the structure of the Irish economy and our emphasis on food production, the contribution of agriculture to greenhouse gas emissions is much higher relative to other EU countries.  There’s a lot of science behind the options to mitigate greenhouse gas emissions within the industry, such as changing animal feeding approaches and fertiliser use.  The less high tech approach is to use land for something else, notably forestry.

 

As it happens, income from forestry has enjoyed a significant tax break for many years.  Generally speaking income from commercial woodlands is tax exempt.  But forestry is a long term play, with some timber crops only        producing their yields after twenty years or more of tending and waiting.  It is possible to arrange a modest stream of income from the forestry investment during such a timeframe, but a better tax incentive would involve frontloading relief for the investment through refunding tax already paid from the farming business.  There’s little prospect of that though, given that the chapter in the Climate Action Plan doesn’t even mention the existing tax relief, let alone talking about improving it.

 

One front ended relief which does get mention is a proposal to introduce a government car scrappage scheme in 2020.  Previous scrappage schemes were designed to get older, less safe, cars off the road.  The idea now seems to be to get petrol and diesel cars off the road, scrapping them in favour of electric vehicles.  This is not an action item in the plan; it is an idea for consideration.  This, to my mind, is the problem with the overall plan.  It’s full of interesting analysis and policy ideas, but it’s hard to discern what the real action points will be.  Doing is not the same as considering.

 

Maybe that’s why so much of the focus has been on the carbon tax hike, which does seem to be a definite proposal even if we don’t know the final shape of its implementation.  Government might be well advised to finalise that.  And finalise it quickly, before the idea of a carbon tax goes out of fashion.

 

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