Reasons to be Cheerful

Apr 08, 2019

The Sunday Business Post, 7 April 2019
It’s rare that a tax announcement offers reasons to be cheerful.

Not for the first time, it strikes me that being a Minister for Finance can be a fairly thankless task.  Take the experience of this week.  The Minister announces that he's not going to revalue houses for the purposes of Local Property Tax in 2019, so our LPT bills will be the same next year as they are this year. 

Surely this is good news.  On first principles, local property tax bills should go up because property valuations have gone up.  The current local property tax bills are based on the valuation of properties, arrived at during the absolute property nadir in 2013.  In 2019 those valuations are lower than they should be.  A 2019 revaluation could prompt local property tax bills to increase by 50% or even more depending on the area in which you live.  But who is thanking the Minister?

Not the Opposition, apparently, who accused the Minister of playing politics with the tax system during what could be an election year.  Nor were there any rounds of applause from property sector pressure groups.  They could legitimately have welcomed a pause in the upward march of property taxation which could, among other things, drive up rents. 

And perhaps, not even the Minister's own officials might thank him because he did not follow their advice.  The report of the interdepartmental group on LPT published this week actually recommended that a revaluation would take place this year, albeit with some compensating tweaks to try to ensure that a relatively limited number of taxpayers might react with outrage at the prospect of higher bills.  One of the concerns of the officials was the integrity of the manner of collection.  It’s not robust tax policy to enforce property taxes based on out of date information, hence the administrative need for a 2019 revaluation.

Furthermore, while the Office of the Revenue Commissioners isn't usually disposed towards welcoming anything, Revenue officials must have breathed a small sigh of relief that they had one less thing to cope with in a year which could include Brexit.  Revenue have enough on their plate with additional customs and trade controls without having to work through the logistics of revised rates and revised valuations.  It’s much easier for taxman and taxpayer alike to recycle last year's files and deal with the same charges in 2020 as in 2019.

The Minister had another option available instead accepting his civil servants’ report or deferring the LPT changes.  He could simply have abolished LPT entirely.  That would, I suspect, be quite a popular move and a fairly certain vote-getter. 

This is not as crazy as it might sound.  LPT contributes relatively little in terms of the country's overall tax take – less than half of one percent.  Last year's take from LPT was less than €500 million.  The value of the changes to the universal social charge and to the income tax rate bands made in the last budget was about €300m. In a buoyant economy, abolishing LPT rather than tweaking the income tax system would be affordable, certainly if carried out over two years.

From a tax administration perspective, the LPT system has provided Revenue with a wealth of information on the taxpaying public that it would not otherwise have had, and prompted the development of new ways to collect tax out of state payments.  That information and those methods would still be available even if the rate of LPT was nil.  LPT was part of the response to the troika bailout programme.  This month’s Exchequer returns underline that we are safely out of that. 

However, retaining LPT (even if deferring necessary reforms) reflects some kind of government commitment towards keeping the tax base as broad as possible.  The idea behind a broad tax base is that some tax, no matter how little, is collected from as many people and businesses as possible.  It’s not safe to concentrate all the burden of taxation on relatively few taxpayers because if those taxpayers get into trouble, so do the Exchequer receipts. 

The Minister’s own arguments in favour of a broader tax base in fact surfaced elsewhere recently, in a review published by his department on the Irish taxation system generally.  Nevertheless, the reality is that in the past few years we have narrowed rather than broadened the tax base by taking people out of the tax and USC system. 

There are good social policy reasons for not demanding taxes from the low waged, but equally there are good public policy reasons for not becoming overly reliant on relatively few people.  The 80-20 rule still persists in Ireland – about 80% of the taxes are collected from about 20% of the population.  LPT redresses this balance a little, because it demands some contribution from more people in our society.

Persisting with a property tax even though increases have been deferred is a significant signal of the importance of keeping a broad tax base.  It’s rare that a tax announcement offers reasons to be cheerful, but this is one of them.

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