New PRSI and tax regime will change Ireland

Aug 06, 2020

 

Originally posted on The Business Post, 21 June, 2020

The accusation that the proposed coalition of Fianna Fáil, Fine Gael and the Green Party represents no change hardly stands up to scrutiny. Indeed, I can't see how any coalition involving Fianna Fáil and Fine Gael constitutes anything other than significant change.

The groundwork for this political structure was laid by the confidence and supply agreement which kept the last government afloat and which, thanks to Brexit, survived much longer than anyone might have anticipated.

The programme for government published last week is not the direct descendant of the confidence and supply agreement. It is more like a younger sibling scarred from the experience of the Covid-19 pandemic. The programme does not propose that we repeat past mistakes and try to tax our way out of this recession.

Confidence and supply depended on income tax to fund the system. This new programme for government will depend on PRSI and environmental taxes to keep the show on the road. The difference between income tax and PRSI is not mere semantics. If the revenue-raising policies as set out in this programme for government are followed as closely as was the case with the previous tax policies in the confidence and supply agreement, the Irish fiscal landscape will look considerably different in five years’ time.

Despite the read-my-lips-no-new-taxes protestations, the new programme for government seems to take what could be quite a different approach to pay-related social insurance. PRSI is not tax. Rather, it is a levy which entitles those who pay it to certain state benefits which come out of the country’s social insurance fund. The charges and entitlements for employees compared to the self-employed are quite different. The emphasis on applying taxes and levies by reference to how income is earned rather than by reference to how much income is earned is one of the greatest inequities in the Irish tax system.

To its credit, the last government went some way towards improving the PRSI benefits available to the self-employed, without hiking the 4 per cent rate that they were being charged. These improvements were relatively modest. However, the introduction last March of pandemic unemployment payments at the same rates for the self-employed as for employees was a game changer. If only because of their sheer cost, these benefits can only be temporary. It seems that there is a subtext in the programme for government that in future, equalised benefits will be funded from increased PRSI contributions.

Increased PRSI contributions will also be required to resolve the pensions conundrum as contributory social welfare pensions are funded from PRSI. In a normal year, contributory social welfare pension payments make up nearly three-quarters of all the cash paid out by the social insurance fund. The state pension is currently payable from age 66, and if the current retirement age is to stick, increased PRSI becomes the most obvious source of funding.

There have been signals that people might be willing to pay additional PRSI if they could secure additional PRSI benefits. In 2017, the Department of Social Protection carried out a survey of mostly self-employed people paying PRSI. Respondents rated cover for long-term illness, short-term illness and unemployment as the most important extra benefits to them.

Almost four out of five said they would be willing to pay a higher headline rate of PRSI in return for extra benefit coverage. With the proposal in the programme for government to establish not just a “commission on taxation” but a “commission on welfare and taxation”, those wishes may be fulfilled by the coalition if it ends up in power. .

The SME sector has undoubtedly been the hardest hit by the coronavirus lockdown. Here the measures in the programme for government are weaker. Many businesses haven’t the appetite to draw down loans, however inexpensive the rate of finance, to re-establish their business even where they might have the wherewithal to repay them. There is no point in replacing a cashflow crisis in Irish business with an indebtedness crisis, yet that is the thrust of the proposals for the rescue funds in the programme for government.

Corporation tax receipts from multinationals and larger indigenous industry have bucked the trend for several years and corporation tax receipts have continued to increase in this country, at least so far, despite the pandemic. The proposals on corporation tax retain the thinking of confidence and supply, with the emphasis on retaining the 12.5 per cent rate.

A commitment to adherence to tax sovereignty and endorsement of the OECD’s primacy in formulating international tax reform is a clear signal. The next government will be unenthusiastic about EU attempts to impose new digital taxes or rule harmonisation. Coincidentally, the work of the OECD on these issues received quite a rattle last week when the US signalled a withdrawal from current discussions on digital taxation.

Service industry, large or small, is the great driver of employment in this country. Services are largely responsible for the trade surpluses we enjoy with many of our trading partners. The programme for government speaks a lot about jobs recovery and that is the correct approach. If the recovery is to be jobs led, it must be services led.

The policies in the current programme are sufficiently vague to allow for a focus on services. If this is missing as the new government takes up its work, the accusations that there has been no real change may prove to have been well founded.

Dr Brian Keegan is director of public policy at Chartered Accountants Ireland