The Tax Take Budget 2019 Special

Oct 08, 2018
Sunday Business Post, 7 October 2018

Reading the Script

A national budget’s primary objective is to ensure that the money which the government proposes to spend on public services and governance can be met by the taxes raised and other sources of funds. 

Masking this humdrum reality is that the budget is one of the few government exercises which affects each and every single person in the country.  As a consequence of next Tuesday's Budget statement, some of us will be a little better off and some of us a little worse off in 2019.  That’s why we tend to evaluate the success or otherwise of the Budget in terms of how it directly affects us – it’s a profoundly political exercise.  Nevertheless, the key measure of success is whether the budget meets its primary objective and this economic measure is almost always at odds with the politics.

The Minister will stand up at 1:00pm on Tuesday to set out his 2019 plans, bolstered by the knowledge that his plans made last year will more or less meet the tax-and-spend objectives for 2018.  The exchequer returns for October suggest that the economy is reasonably healthy if not particularly robust.  The main tax raising measure in last year's Budget, the introduction of a 6% rate of stamp duty on commercial property transactions, doesn't appear to be bringing in all it was intended to collect.  Aside from that, tax revenue is more or less at expected levels. 

The 2018 Budget followed scripts set out in the Programme for Partnership Government and the confidence and supply arrangement between Fine Gael and Fianna Fail.  What are those scripts telling us about what may happen on Tuesday?

Confidence and supply

The confidence and supply agreement specifies that there are to be reductions in the universal social charge with an emphasis on low and middle income earners.  This has been an ongoing process in recent budgets.  There is also reference to retaining mortgage interest relief beyond 2017, and tax relief for people with loans taken out between 2004 and 2012 is being continued to 2020 on a tapering basis.  As interest rates are still unusually stable it's unlikely mortgage interest relief will be further extended beyond 2020. 

A commitment to introduce an earned income credit mainly targeted at the self-employed which would equate to the PAYE allowance has only been partly fulfilled.  The earned income tax credit currently stands at €1,150.  Parity with the PAYE allowance requires it to be increased to €1,650.  We persist in taxing people not on what they earn, but on how they earn it. 

The PRSI treatment of the self-employed is to be revised and “a supportive tax regime for entrepreneurs and the self-employed” is to be promoted.   The merger of PRSI and USC has been on the agenda for some time, though it is unclear how changes in the collection system will be married to changes in entitlements – after all PRSI is a form of insurance and unlike USC not merely a tax.  PRSI reform in recent times has involved small tapering of the rate at the entry point to the system, and modest additional benefits being provided to the self-employed.  We know that employers PRSI, currently at 10.85% will be increased to 10.95% for 2019.

There is also reference to Ireland's 12.5% corporation tax rate and “constructive engagement” with measures to work towards international tax reform.   A corporation tax “roadmap” was published last month setting out a timetable for implementing various cross-border company tax initiatives proposed by the OECD and the EU.  We can be fairly certain that there will be progress on these, particularly on the new so-called CFC rules which ensure that companies established abroad will have to prove their bona fides or be taxed as if their activity and profits had never been moved offshore.

The Programme for Partnership Government

As you might expect, many of the items in the Confidence and Supply agreement are articulated in the Programme for Partnership Government.  After all the two arrangements have to coexist. 

On broader tax issues, the programme refers to capital acquisitions tax with an emphasis on reducing the tax burden on gifts and inheritances from parents to their children.  At the moment the first €310,000 of such gifts is exempt, and the programme envisages raising that threshold to €500,000. 

A commitment to reducing childcare costs and caring costs generally was addressed in a small way last year when the home carer tax credit was increased from €1,100 to €1,200.  More ominously however, there is mention of the removal of the PAYE tax credit for higher earners and that potential policy shift received attention in the interdepartmental Tax Strategy Group papers published earlier in the year.  These papers tend to highlight what is actively under consideration, and ideas to target higher earners have been given additional political oxygen by the Comptroller and Auditor General’s report for 2017 which drew attention to low effective rates of tax on wealthy individuals. 

The other big revenue raising idea in the programme is not to index tax credits by reference to inflation.  This ensures that the government takes a proportionately higher bite out of peoples’ after-tax income each year, and the idea has been rigorously followed in previous budgets.  It's a big part of the reason why the feel-good factor which should be associated with better economic times is not filtering through.  Even though the economy is recovering, the failure to index the various tax allowances means that we pay proportionately more tax as a consequence.  That's not a trivial issue.  The Parliamentary Budget Office report published on 1 October cites the benefit to the Exchequer as being more than €600 million per annum.  That means that a typical employee is paying some €300 or more in tax each year than would otherwise be expected.

The Programme for Partnership Government also addresses business issues, but with a faint air of missing the point.  Remember the programme was devised before Brexit.  The vague aspirations it contains to provide a supportive tax regime for entrepreneurs and the self-employed requires a sharper focus in these post Brexit referendum times.  In particular it talks about the retention of the 9% VAT rate on tourism-related services but with the important caveat that prices remain competitive.  That proviso would give the Minister the political leeway to increase the 9% VAT rate possibly back to 13.5%, or by a few percentage points less, say, to 11%.

Plans to use the taxation system to encourage greater land mobility to boost farming incomes is an area where there has been considerable progress over the last several years.  Existing tax breaks for family farm transfers have been retained or extended.

Putting it all together

These scripts provide plenty of hints about the shape of Budget 2019.  There are even further clues in the various public consultations and ministerial speeches in recent months, and the review of the corporation tax regime carried out by the Public Accounts Committee will not be ignored.  I think the likelihood is that there will be modest adjustments to USC rates and entry points, and an increase to the threshold of €34,550 where single taxpayers leave the 20% tax rate band and start being taxed at 40%.  There isn’t enough money in the kitty even for these modest adjustments, so there will be revenue raising measures.  Look out for hikes to the price of petrol, diesel and fuel generally under the badge of a carbon tax.  A change to the 9% VAT rate cannot be ruled out.  An announcement regarding Local Property Tax reform may be deferred; the revaluation of properties with the corresponding tax consequences is after all next year’s problem.

There could be new anti-avoidance measures announced for income and corporate taxpayers alike, with a particular focus on high earning individuals.  We need to see some safeguarding measures against the consequences of Brexit.  Remember 29 March 2019, the official Brexit date, falls during the Budget year, but given the state of flux in the negotiations, these might be muted.

This will be a Budget which will leave most people slightly better off.  It will not lose sight of first purpose however, which is to meet the economic requirements.  Tuesday will be interesting, but not an opportunity for a party.

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