Thought leadership articles

Originally posted on Business Post 3 December 2023.  Nobody wants to be seen to profit from the housing crisis, but everyone loses out if we insist on retaining the tax status quo. You cannot profit from the housing crisis. This seems to be the guiding principle behind the reported resistance by Fine Gael to introducing any form of tax relief which might help address the property supply problems. This aversion to property tax incentives is a consequence of the great recession a decade ago. It doesn’t seem to be the amount involved that presents the problem, as much as the very notion that a property incentive could be part of a solution to a current market failure. Big income tax reliefs for rented residential accommodation, renewal projects for cities and towns, holiday cottages and student accommodation contributed to the property boom and subsequent crash. Many houses and apartments derived their value not from their location or the accommodation they offered, but from the attractiveness of the tax relief on their purchase. As a 2006 review of property tax incentives by Indecon, the economic consultants, put it, in addition to increasing investment in projects, “the tax incentives had led to an increase in site prices, financial returns to promoters and property prices”. That Indecon report was one of a number of reviews into tax incentives commissioned by the government in 2005, amid alarm that Ireland had (yet again) overdone the whole property tax break thing. The reversal of the tax reliefs agenda started in 2006, but by that time it was too late to manage the popping of the property bubble in an orderly way. The chaos that ensued in the following few years has eclipsed another memory: that these property incentives contributed to improved housing supply. Analysis by the Economic and Social Research Institute found that persistent increases in supply and demand from the early 2000s resulted in housing supply averaging 84,000 units per annum between 2005 and 2007. Think of how an average supply of 84,000 units per annum now would help the current situation. Of course, it is too simplistic to attribute supply levels of this order solely to a favourable tax regime. In the previous decade when government got nervous about the housing market, the 1998 Bacon report identified that the key drivers of the housing market were economic growth, demography, cost of finance and the speed of the supply response. Now the problem driver is the lack of speed of the supply response, despite the recent interest rate rises. Unlike government interventions in the property market over the last 40 years, the tax system is not currently being used as a lever of government policy. While there have been adjustments to the stamp duty regime in favour of residential property development as compared to commercial development, and in recent weeks some tinkering with the refurbishment rules for landlords, there has been no broadly-based incentive introduced which might foster property supply. The Department of Finance’s own guidelines on tax incentives say that any new relief must be prompted by market failure, time-bound and re-evaluated on an ongoing basis to ensure that they continue to fulfil their intended purpose. How much more does the market need to fail by before tax reliefs are put back on the agenda? Previous tax reliefs have primarily been directed towards the buyer by granting future tax deductions from the purchase cost. Now the priority should be for measures that reduce development costs, ease cashflow concerns and make investment more appealing. During the pandemic we warehoused tax debt effectively to promote business survival. The same could be done for the construction sector by offering PAYE and Vat payment deferral associated with wages and materials costs incurred as units are built. Arrears would be collected when the housing development has been completed and sold. Another possibility would be to provide enhanced tax deductions for the cost of training workers in the construction industry. Boosting allowances for investment by builders in heavy plant, machinery and safety equipment could accelerate the supply of high-quality, affordable homes. Any such allowances should be time bound, and linked and targeted to the type of high density affordable housing most needed. The great advantage of tax incentives is that they can be delivered quickly. Yet we seem to be closing off any reasonable political discourse on approaches of this type purely on ideological grounds. Well publicised fire safety and structural safety construction defects in some existing developments don’t help the case for more incentives for developers. When interest groups put forward ideas for tax breaks, the most fervent advocates are usually those who will benefit most. Yet builders and developers are not the only ones who would benefit from reducing tax costs and barriers to residential property supply. Families need homes, and employers need their workers to have decent accommodation convenient to the workplace. It is politically difficult to get away from the notion that no one should profit from the housing crisis. But it is only the exchequer that profits if we insist on retaining the tax status quo. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 5 November 2022.  Conditions may be chaotic, but the outlook for the Irish exchequer is not necessarily bleak. We live in very strange times if a key determinant of economic success is whether or not the weather will be cold in Europe over the winter. Yet that is the unavoidable consequence of the illegal Russian invasion of Ukraine and the chaos it has created. Chaos is contagious, and dealing with it saps resources, but at least last week’s exchequer returns showed yet another bumper tax harvest in Ireland. It used to be the case that tax yields could be predicted fairly accurately by reference to GDP. If GDP increased, say by 5 per cent, then tax yields would also increase by about 5 per cent. This year at budget time, the GDP growth forecast was 10 per cent – but the tax yield growth forecast, at 19.2 per cent, is almost twice that. A few factors have put the sums askew in our favour. One is timing. A higher proportion of income tax and corporation tax gets collected in the last quarter of the year. Now that budget day routinely falls in October – and it was even earlier this year – predictions of the trend are more complicated. Another factor was the pandemic, which threw all forms of straightforward comparisons with previous years out the window. Thirdly, successive tax policies over the past ten years have narrowed the income tax base, meaning that fewer individuals pay the highest proportion of income tax. That makes calculating a reliable average tricky. As well as all this, we taxed our way out of the great recession mainly through higher Vat rates, but we have forgotten to reduce them. The standard Vat rate of 23 per cent in this country is among the highest in Europe, so a surge in price inflation also means a surge in Vat receipts. Corporation tax yields dominate the exchequer returns. Government never misses an opportunity to tell us how fragile that high yield might be, though there are good reasons for it. Many of the major companies established in Ireland are from the ICT or pharmaceutical sectors, which have shown extraordinary growth and profitability over the past several years. International corporate tax reforms since 2012 have restricted or eliminated opportunities for multinational corporates to locate profits in very low tax regimes, resulting in more tax being paid in this country. In some cases, capital allowances to encourage companies to establish here have expired, leaving more profits within the annual charge to corporation tax. So how might the current chaotic conditions really impact on government capacity to tax, and then spend? During the pandemic, those on higher wages were less likely to lose their jobs. However, this time there are clear signals that some jobs in the ICT sector are vulnerable. Twitter is letting staff go – as is Stripe, which has openly admitted it got it wrong on economic growth and cost management. There are also legitimate fears that some jobs in the lower-end services sectors and hospitality could go, as inflation, higher fuel bills and higher interest rates squeeze consumer spending. This month’s exchequer figures neither confirm nor challenge consumer spending trends, as Vat is paid every two months – and this wasn’t one of them. Despite this uncertainty, it does not automatically follow that the outlook for the Irish exchequer is bleak. International tax rules have not changed and are less likely to do so in an increasingly protectionist world. That is important for any small economy like Ireland’s that is dependent on foreign direct investment. Any disruption to our reliance for tax revenue on the corporate sector, high-income individuals or consumer spend will most likely be caused by poor domestic political decisions, rather than by outside influences. In a period of inflation, there tend to be greater opportunities for employment. It is counterintuitive, but there is an inverse relationship between inflation and the unemployment rate. Higher inflation leads to higher wages, leading to more attractive working conditions. This reality is borne out by a shortage of staff being felt across almost all sectors. It is not going to be easy to get through the current inflationary, fuel security and monetary crises, and it is right to highlight the risks that are not of our own making. But it is not right to identify these external risks without acknowledging that we would do most harm to ourselves with domestic policy mistakes. If we can improve our accommodation, health provision and migrant policy without recourse to increasing the national debt and without damaging confidence in the corporate and consumer sectors, we should be able to manage through the current chaos just fine. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 22 October 2022.  Last week’s budget correction in the Finance Bill means that trades, manufacturing and services are now treated equally in terms of tax and supports, but landlords and tenants need more. Budgets are tricky things, as the British have recently discovered. They are not merely about balancing the national books. They are about ensuring there is a business environment which can fund national spending aspirations while providing decent levels of employment, wages and spending power. They are also about convincing investors that your country is a safe place to put their money. This is a critical consideration for Ireland, given that about half of our national debt is owned abroad. While there is a high element of drama around budget day, the publication of the Finance Bill last Thursday was a far more mundane affair. If budget speeches are poetry (at a stretch), finance bills are most definitely prose. A finance bill provides the detail of the Budget Day adventures, but also corrects its mishaps. Given that Budget 2023 had involved spending so much money to deal with the cost of living crisis, mishaps such as the concrete levy were inevitable. Far more important than correcting the concrete levy was the change to the Temporary Business Energy Support Scheme (TBESS). The scheme, announced on Budget Day, was for tax-compliant businesses that experienced a significant increase in their natural gas and electricity costs. The mishap here was that the announcement confined this support to businesses taxed under “Case I”. This Case I moniker is jargon which not even tax students remark on, as there is no difference between trades and services when calculating profits. It’s a relic inherited from the 19th century, yet it was the term which the Minister for Finance used in his budget speech to exclude professional services businesses from the TBESS. In practice, it would have meant that the high street convenience shop would get some help in paying for the electricity used by the soft drinks cooler, but the doctors’ surgery next door would get no help to pay for the electricity used by the vaccine refrigerator. Official Ireland has long been suspicious of the services industry when it comes to business supports and tax incentives. Schemes such as the Employment and Investment Incentive Scheme (EIIS), whereby investors can get a tax deduction to buy into a business, are not available to services companies. Start-up services companies are not eligible for a corporation tax holiday, but trading and manufacturing companies are. Owner-managed trading and manufacturing companies are allowed to retain profits to reinvest, but profits retained by owner-managed services companies are subject to a corporation tax surcharge. More troubling, however, is the idea that services are in some way inferior to the more traditional trading and manufacturing activities. Such an idea does not make for good policy. The category of “professional, scientific & technical activities” accounts for over 10 per cent of all taxes collected, and 20 per cent of all self-employed income tax and universal social charge, according to recent figures from Revenue. That’s a big sector to overlook when it comes to providing state supports, yet that was the original premise of the budget statement. It has now been corrected in the Finance Bill. Perhaps the real surprise was that TBESS overlooked the services sector in the first place. An important policy aspect of the pandemic supports like the EWSS and the pandemic unemployment payment was that they were agnostic as to the nature and size of the business being helped, where it was located or its legal form. Companies, partnerships and the self-employed were all treated the same way. While ‘trickle-down’ economic policy is increasingly discredited by no less a person than the American president, a ‘rising tide’ economic policy which attempts to support all industries in equal measure seems to have something going for it. In this country it may help explain the remarkable fact that the nation does not have to borrow to provide the cost-of-living supports promised in the budget. If trades, manufacturing and services are now receiving equivalent policy treatment in the budget and Finance Bill mix, the missing piece is the private residential sector. There were modifications to the tax rules for landlords and tenants in the bill, but they don’t go far enough. A change to the way rental income is taxed to reflect all of the business circumstances of landlords and not just their rental business would help keep smaller investors in the market. A system of tax debt warehousing for builders – like the system in operation during the pandemic – to defer Vat and PAYE bills until houses are completed and sold would make a significant difference to the financing of property development at very little cost to the exchequer. Taken together, the budget and Finance Bill package demonstrates policy maturity and competence. Service business is being accommodated in tax and support policy which too often in the past was restricted to manufacturing, foreign direct investment and exporting activity. The next urgent step is to include the property sector. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 27 September 2022.  Paschal Donohoe and Michael McGrath have managed a careful balancing act, but the capacity issues that have caused problems in many sectors remain Like the last two budgets, this one was a response to a crisis. Instead of the pandemic, however, it sought to address a cost of living crisis created largely externally. Introducing significant fiscal initiatives can be tricky, as the UK government has learned in recent days. This Irish budget, however, has a good chance of keeping the national finances stable while improving the lot of most citizens. Paschal Donohoe, the Finance Minister, and Michael McGrath, the Public Expenditure Minister, avoided three potential pitfalls. First of all, the measures they announced should not disrupt the existing tax base. Finance ministers, like doctors, should above all else do no harm. The exchequer is funded primarily by corporate activity, consumer activity and the income tax paid by higher earners. None of the tax measures should disrupt any of these three key sources. In common with individuals, businesses are receiving assistance with spiralling energy costs. While we are often reminded that 50 per cent of the corporation tax yield comes from just 10 companies, it remains the case that 50 per cent of the corporation tax yield comes from the rest of the profitable companies operating in this country. Many of these smaller firms will be a direct beneficiary of the 40 per cent energy cost rebate scheme. The sizeable grants and social welfare payments will go towards sustaining people’s purchasing power and therefore help sustain Vat receipts. Higher energy costs also result in higher Vat yields. When petrol prices jumped from €1.40 per litre to around €1.90 per litre, for example, the government’s share rose by €0.11. The increase in the 20 per cent rate band will directly benefit approximately 1 million taxpayers who will see a greater portion of their income taxed at 20 per cent rather than 40 per cent. This is not so much a relieving measure as a preservation of the status quo, because incomes are also increasing in response to inflationary pressures. The change in the rate band should be seen as preserving and securing the high proportion of income tax paid by higher earners, rather than giving anybody a tax break. Secondly, the government has avoided borrowing for its tax and welfare measures. That’s a good call given that euro interest rates are on the increase, but it is also an important signal to potential investors in this country that the national finances are stable. Avoiding borrowing has only been possible thanks to an exceptional corporation tax yield, but as most of the tax bounce seems to have been diverted to one off measures, applying the budget surplus in this manner is a good use of available funds. Many finance ministers across the world would be envious of the Irish surplus available coming into this budget. Thirdly, while some of the additional welfare payments such as the increase in pensions and unemployed benefit will be permanent fixtures, the ratio of enhanced long-term welfare payments to once of reliefs seems to me to be about right. The gamble here is that the inflationary surge – and in particular the energy costs surge – will be short lived. There is of course no guarantee when, or even if, the pressures will abate and not all prices will ever revert to their pre-2022 levels. The mistake that may have been made in the budget is that much of the budgetary emphasis has been on an ability to purchase rather than on an ability to supply. A lack of capacity is a huge problem in our economy. It is encouraging to see an increase in the number of doctor only medical cards, for example, but it will increase the pressure on GPs. It should be a matter of national pride that our third level system is so accessible and after today even more affordable, but are we investing enough in our universities and colleges? It is also excellent to provide €500 in an annual tax credit for hard-pressed renters, but is the €6.2 billion of funding promised to the Department of Housing, Local Government and Heritage going to improve the supply of accommodation quickly enough? Overall, the government has done a good job. If capacity issues in the economy are addressed with the additional spending, it could even be an exceptional job. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 10 September 2022.  The findings of the current Commission on Taxation and Welfare come at a moment where inflation is rampant, and they could well prove to be a harbinger of impending economic mayhem.  What is the best early predictor of economic chaos? Is it a slump in GDP, or a surge in inflation or interest rates, or perhaps a dip in the purchasing managers index? In this country, it may be the establishment of a Commission on Taxation. While the findings of the current Commission on Taxation (and Welfare, to give it its full title) have been seeping out in the press in the past few days, its report will land at a time of inflation not seen since the 1980s, and of energy chaos not seen since the 1970s. Its predecessor commission, the second of that name, was announced in early 2008 when we still thought things were booming, but published in 2009 when it was clearly evident they were not. The original of the species, the first Commission on Taxation, was mooted in the late 1970s, but concluded in the grinding economic difficulties of the mid-1980s. All of these tax commissions were made up of knowledgeable and committed people. Their reports were careful and informed, and there is no reason to think that the report of the current commission will be any different. Only their timing is lousy. Taxation is based on technocratic principles, but ultimately it is a political process. The maxim of that long-ago and otherwise forgotten French minister for finance, that taxation is the art of plucking a goose with the minimum amount of hissing, remains true. This maxim tells us all we need to know in advance about the likely shape of the budget which is now just a fortnight away. Those of us in industry associations who lobby at the annual National Economic Dialogue and write anxious pre-budget submissions to government may have been troubling deaf heaven with our bootless cries. Instead, there are likely to be just two imperatives as Budget 2023 is framed. The first is to look after citizens and businesses whose livelihoods are being crippled by energy costs and inflation. Here, we should benefit from the lessons of the pandemic. The pandemic budgets of 2020 and 2021 were interventionist to an extent not seen in the previous decade. The 2007-08 crash left politicians and policymakers with a horror of manipulating the tax system to any purpose other than maximising tax collection. No serious attempts were made to help address homelessness, infrastructure deficits, or education and healthcare capacity shortfalls with tax incentives and reliefs. By contrast, interventionism was the watchword during the pandemic. The income tax system was thrown into reverse and used to subsidise wages, businesses were given what were in effect interest-free loans by deferring collection of Vat and PAYE, and Vat rates were temporarily reduced. This year’s economic rebound strongly suggests that temporary interventionist tax policies can work extremely well. Temporary reductions in Vat and excise can make inflated prices more manageable for people. Income tax reductions (unlikely to be as temporary because, after an exceptional inflationary period, not all prices go down) will make goods feel more affordable, particularly fuel. Sentiment is everything. An attractive and effective tax package should, from the political perspective, also quieten potentially noisy opposition benches. A percentage income tax or Vat reduction trumps a fancy tax policy or a principled position any time. The second imperative is to ensure that the exchequer continues to be able to provide help. The exchequer returns published on September 2 are unusually rosy. Perhaps more important, though, from the budgetary perspective, was the Department of Finance Annual Taxation Report published the previous day. This report confirms that the Irish exchequer is funded by higher income taxpayers, corporate activity and consumer spending. As long as those three sources are guarded, an appropriate exchequer response to a serious crisis such as the current situation is possible. There are no steps that any government can take to guarantee their preservation, but a prudent budget will ensure that at least these sources are not threatened. Amid all these considerations, it is unlikely that the concerns of any individual business sector or industry group will feature large in the budgetary arithmetic. Nor is it likely that there will be anything too new or innovative in how taxes are raised or collected. Instead, we may well see a series of targeted and reversible tax-relieving measures to supplement direct help provided under the social welfare code – an income tax relief is not much help if you’re not paying tax in the first place. The report of the Commission on Taxation and Welfare is due to be formally published shortly after budget day. Its conclusions will surely not be discarded, but new tax ideas are more likely to feature in future national budgets framed during less stormy economic times. And if, at some stage, a future finance minister announces the establishment of a fourth such commission, history suggests it will be time to prepare for the worst. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 06 August 2022.  The resolution of the agriculture emissions problem requires it to be seen for what it is: a problem of oversupply of a by-product. The vote of no confidence put down by Sinn Féin in the Dáil last month was a failure. Not only that, it seemed to galvanise the government parties while rallying some of the independents in the Dáil, whether they belonged to the government parties’ gene pool or not. Thus stabilised, government ministers should have gone on their summer holidays feeling reasonably secure, until the dispute over carbon emissions targets came to prominence. Climate change is not a little thing, but it should not trigger a crisis within government over carbon emissions targets in the farming sector. The concerns of farmers serve as a magnifying glass on political activity, and this particular magnifying glass can burn. The government’s position is not helped, either, by a discernible scepticism about climate concerns in the public mind fuelled by growing concerns over energy security. Fear of unbearably hot conditions over the next decade are being eclipsed by fear of unbearably cold homes over the next winter if Russian gas supplies to Europe are turned off. The EU’s relatively unambitious plan to cut gas consumption by 15 per cent has fallen foul of so many terms, conditions and exclusions that the net reduction might well be a lot less. It depends on every EU member state playing nice, and there are no guarantees of that. Few enough leaders across Europe have sufficient political capital to withdraw any existing services, or impose widespread restrictions on their electorates, and hope to survive the next election. This fact is at the root of the EU’s difficulties in agreeing restrictions on energy consumption, even if they can make the Russian sanctions regime more effective. Agreeing restrictions to make Ireland’s carbon sanctions regime more acceptable to the electorate is also at the heart of the current government problem, of which this is only the first instalment. If the government can survive this rattling over the next few months, it will be due in no small part to the disarray of the opposition on the issue. In all this, however, both government and opposition parties have missed the potential of commercial policies when it comes to achieving their objectives. There are many ways to view the problem of carbon emissions in the agriculture sector, but its resolution requires it to be seen for what it is: a problem of oversupply of a by-product. Agricultural oversupply can be resolved. In the past, butter mountains have been levelled and wine lakes have been drained when agriculture policies were modified to manage them. And before anyone starts whinging about subsidies to farmers, remember that for all its faults, the Common Agricultural Policy (CAP) is designed to ensure food security at reasonable prices for consumers. This is not just about incentives, but about euros and cents. If, despite protestations, the national herd gets forcibly reduced, say by 25 per cent, then the prices paid to eligible farmers need to increase by 33 per cent through direct government intervention. It won’t make the prospect of herd reduction attractive for the farming industry, because farmers are justifiably proud of their herds and of the quality of their produce. Equally, however, farmers are business people who, for the most part, recognise that restrictions for a broader purpose in their industry are sometimes necessary. One of the faults of the current CAP is that it is not clear enough about funding climate action. There won’t even be a method to measure its impact “until 2026 at the latest”, according to the EU’s own factsheets. So much for the notion that what gets measured gets done. More broadly, providing higher agriculture subsidies in Ireland to combat climate change may not be particularly effective. The world market for beef or dairy is unlikely to contract just because Ireland produces less. In this case, the ultimate consumer is the planet, not the person. We would be responding to the science, not to the demand. Perhaps the main obstacle to such a strategy is the lack of imminence of the problem. Climate activists the world over have seen their objectives topple down the policy agendas as governments grapple with Russia’s invasion of Ukraine and its consequences. It is hard to marshal political support for any problem not crystallising before the next election, or even before the summer holidays. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

 Originally posted on Business Post, 2 August 2020.Increases in VAT usually pass the acid test of tax policy – the extraction of the most amount of money with the least amount of complaint.  Compared to an income tax increase, the general population rarely gripes about increases in VAT rates.  Hiking the standard rate of VAT of 21% to 23% in 2012 generated hardly any noise compared to the introduction of USC and the reduction of allowances and credits the previous year.  So will people really notice the VAT decrease of 23% to 21% in the July Jobs Stimulus? VAT is a truly European tax in that the rules are devised in Brussels and then implemented in EU member countries.  It is Brussels that decides that the maximum rate of VAT cannot exceed 25%. .  European rules tell us that a box of teabags is charged 0% VAT, but a cup of tea in a café is charged 13.5% VAT while a tin of iced tea in the supermarket is charged 23% VAT.  There’s little enough any Irish government can do to tinker with the VAT system, except make marginal rate adjustments. VAT is a major contributor to the Irish Exchequer.  In 2019, over €15 billion was collected in net VAT receipts which is more than one quarter of the total tax receipts for that year, yet it is a notoriously blunt instrument of public policy.  No VAT is charged on the clothes of the children whose parents are on social welfare, but no VAT is charged either on the clothes of the children of high earners.  Maybe that’s why governments avoid using it for public policy purposes unless you include the now defunct 9% rate of VAT for the hospitality sector.    So it was all the more surprising that the July stimulus knocked two percentage points off the main VAT rate.  The cost of this measure is €440 million, which is a little less than 10% of the total value of the package.  This estimate for the cost of this six month VAT reduction period is in line with Revenue estimates for good years.  In a moribund economy the Department of Finance seems to expect a spending spree.  Remember too that the 23% rate only applies to about half of the items or services we buy.  The rest are charged at lower rates or are exempt. Outside of the retail sphere, the education sector and the banking sector pay sizeable amounts because their activities are largely VAT exempt.  These sectors cannot recover the VAT they pay on purchases because they don’t charge VAT on their sales.  In the main VAT is therefore a consumption tax ultimately falling on the consumer.  So will the VAT reduction boost sales of clothing, alcohol, electrical and other household goods and luxury foodstuffs which fall into the 23% VAT category?  It might not, even if businesses pass on the VAT rate reduction to their customers.  Despite suggestions otherwise from some political quarters, Minister for Finance Paschal Donohoe was quite clear that the 2% reduction should be passed on to consumers.  That's not going to make a huge difference for many items because the value of a 2% VAT reduction approximates to about €1.60 for every €100 spent.  It only becomes a different story if you go out to buy a big-ticket item like a car, where the VAT saving could perhaps insure it for a year. There is no law obliging traders to reduce their prices because there has been a reduction in the VAT rate.  As long as they charge the correct amount of VAT at the correct time, they can take whatever margin they wish.  Past history however suggests that small VAT reductions like the current 2% reduction tend not to get passed on to consumers.  Part of the rationale when the 9% rate of VAT on hospitality was introduced was that a full 4.5% reduction to the normal 13.5% rate would be visible and palpable and therefore consumers would expect to see the difference.So even if it is passed on, a 2% VAT reduction may be inadequate to drive additional volumes of consumer spending.  In terms of business benefit it might have been better to apply the projected €440 million cost towards reducing the vast amounts of VAT debt currently being warehoused against the day when businesses can finally pay their tax liabilities.  Given that the EU state aid restraints are temporarily lifted, that €440 million could have been targeted, for example, specifically to forgive some of the historical VAT due from the SME sector.  The July Jobs stimulus was good.  Ministers and their officials alike did well to deliver what in effect is a full scale national budget in the space of few weeks.  The purpose and rationale of many of the measures like the extension of the wage subsidy, the extension of the pandemic unemployment payments, and the extinguishing of commercial rates is readily apparent.  The object of this VAT reduction is not as clear. I've never seen a tax reduction I didn't like.  However, many consumers may not notice this tax reduction and many businesses could benefit more from this element of the jobs stimulus if the cost of the VAT reduction was diverted to reducing their current and not their future tax debts.  Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

 Originally posted in The Business Post, 28 June 2020The US had also very publicly pulled its support for the World Health Organisation and in more recent days it has sowed confusion as one of its representatives, Robert Lighthizer, said it was pulling out of OECD talks on a new global tax framework.More on that in a minute, but for now a question – is the momentum for international corporation tax reform as sponsored by the OECD on the wane?The organisation‘s work on the international corporation tax rules has a resonance with current public sentiment against the legacy of empires. The current cross-border corporation tax rules were formulated by the British Empire. The tax from great wealth being produced by corporations in the colonies was not ascribed to the colonies. Any company making its money anywhere in the British Empire had to pay its taxes in London and that was the end of the matter.International tax law has largely stuck with principles that result in tax being paid where the company is incorporated, managed and controlled. This might have been defensible in an era when it was made from digging stuff out of the ground and manufacturing products, but it is increasingly inappropriate in a world where goods are internationally traded and cross-border services are provided, the latter often without need for any physical movement of either people or goods. This is why the international debate has focused so much on how the digital economy should be taxed.The OECD's approach to overturning the colonial method of taxation involves two objectives, or “pillars” in the jargon. The first pillar focuses on the digital economy. Subject to terms and conditions, the idea is that the profits of some companies should in part be taxed where their products and services are sold. The businesses that would be caught include those which provide content streaming and online advertising, or remote sales of goods and services to consumers. The second pillar is that there should be an effective minimum rate of corporation tax payable by all companies irrespective of where they are located.With more than 130 countries involved in the OECD negotiating process, these objectives have garnered some momentum. If the process becomes fragmented, it could push countries to create their own new tax rules outside of an international consensus approach. The EU institutions are also susceptible to promoting rule change, overlooking the inconvenient reality that the EU does not have the power to establish a corporation tax regime for its member countries.It appears that the US position on the OECD discussions is considerably more nuanced than has been widely reported. Writing to the finance ministers of France, Spain, Britain and Italy just two weeks ago, Steven Mnuchin, the US Treasury Secretary, clarified that the pillar one ideas should, in the view of the US, only apply as a default taxing position when all else fails. He also pointed out that the world may perhaps have better things to be doing than agonising over international tax rules when it should really be focusing on economic issues resulting from Covid-19.He wanted pillar one discussions “to pause” with a view towards resuming later in the year. His assessment of where matters stand in relation to pillar two, the global minimum tax, was that discussions have progressed more rapidly and could be concluded by the end of the year.This assessment is reasonable given that the US has particular cause for concern over pillar one. Due to the American dominance of the digital industry, a significant amount of tax revenue could be displaced away from the US and into other countries. Therefore, as regards digital taxation, it is in the short-term interests of some economies to go it alone. If they do, the US has an answer for that as well.America has a process known as a section 301 investigation, somewhat similar to the EU's competition investigations. Some weeks ago the US opened section 301 investigations on the digital tax proposals of a number of authorities, including Italy, Spain, the EU itself and Britain. It appears that these so-called anti-trust investigations enjoy bipartisan support in the US and are likely to persist irrespective of who is in the White House in 2021. If a response is deemed necessary, the US has plenty of tax and trading remedies at hand to counter any country’s attempts to unilaterally levy tax from American owned companies.Despite the recent suggestions to the contrary, the OECD is still in the tax policy arena. Their processes may have slowed as a result of the recent US intervention, but they have not stopped. The current programme for government states that Ireland should continue to support OECD efforts to arrive at international consensus on taxing methods. Mnuchin‘s letter in combination with the new section 301 investigations suggests that the US is taking the same approach.Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

 Originally posted on The Business Post, 21 June, 2020The 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

 Originally posted on the Business Post, 31 May 2020 The Japanese government is delivering generous one off relief payments to residents of Japan as part of a package of measures to lift its economy following the coronavirus pandemic.  Japan, among the developed nations, has had one of the less stringent lockdowns with many businesses operating more or less as normal, except for the hospitality and tourism industries.  This per capita, no questions asked, lump sum is attractive but it is something of an outlier in the context of international economic responses.  One of the more striking aspects of government bailouts across the world has been their similarity of approach– cuts-and-pastes of policies between one jurisdiction and the next.  Now, as countries emerge from the restrictions, patterns of effectiveness of different types of government support for business are emerging.Like Ireland, many countries used their Revenue Authority as a primary channel for economic relief.  Tax systems have the dual benefit of holding records on the entire business community (at least in theory) along with automated processes.  Few developed economies do not at this stage have highly automated systems for payroll tax collection and sales tax collection and this infrastructure has been widely used to pay funds to support employment.  New Zealand is of course a paradigm of how to deal with the pandemic, and has gone one step further.  The New Zealand Inland Revenue also delivers cheap loans to struggling businesses and the amount of the loans is predicated on the number of employees in the business.Wage subsidy schemes like the Irish scheme have been introduced in the likes of Canada, Australia, Hong Kong and New Zealand.  Not all employment support schemes have been an unqualified success.  Some countries are finding that emergency coronavirus benefits for workers who have been made unemployed trump the benefits of staying in employment.  Complexity and claimant publicity in Canada have turned out to be significant disincentives for take up, similarly to the rumblings in this country when the scheme was first announced here.  Reaction to the UK’s Job Retention Scheme to date seems to have been largely positive, but their scheme is only a few weeks old.Countries are also exploring ways of getting more cash into troubled business.  Germany is looking to revise some of its tax rules so that losses in this pandemic year can be set against more profits already taxed in earlier years, resulting in refunds.  New Zealand is considering allowing estimates of likely losses in 2021 to be used to trigger tax refunds now.  In another echo of the Irish experience, Germany is scoping a new low rate of VAT for its restaurant sector.It seems that in many countries, direct welfare benefits paid to individuals have not just undermined attempts to subsidise businesses to secure employment, but created issues of their own.  There has already been some debate in this country as to how recipients of the pandemic unemployment payment will account for the tax due on those payments at the end of the year.  In Germany it is unclear if individuals receiving comparable benefits to our Pandemic Unemployment Payment will be obliged to file tax returns; normal German tax administration procedures suggest that they will.  On the other hand the peculiarities of the Australian system are such that many individuals will look to file tax returns early to secure refunds of income tax overpaid.  Revenue authorities in different parts of the world are thus facing the prospect of a flood of taxpayer activity either because of refunds due or obligations to be met.  That's something that could well happen here too, unless Revenue devise and publish processes to simplify compliance for all those workers facing tax liabilities arising either from the pandemic unemployment payment, or from wage subsidies which were not subject to PAYE.Future problems are accruing.  It's not just Ireland that is proposing to “warehouse” tax debt, but in every country where there has been tax debt deferral, these liabilities will ultimately have to be paid.  Countries are tending to replace the pandemic business liquidity crisis with a business debt crisis.  As long as that continues, there is little prospect of rapid business recovery.  Businesses which are currently being kept on artificial life support through subsidies, loans and tax deferrals will hit a wall when these dry up.  In Australia, the talk is already of an “insolvency cliff”, as troubled small businesses have up to now been shielded by a nationwide ban on liquidations.This week the Irish Fiscal Advisory Council was calling for an “adjustment” to the national finances but in fact are championing Austerity 2.0.  Yet if we do too much to hinder a return to previous levels of consumption, many businesses will be consigned to a limbo of business stagnation.  When the crisis hit, few jurisdictions had the time and space to look at models implemented in other countries before they introduced their own systems for pandemic relief.  Now it is different.  While we can’t afford to follow the Japanese example, we can benefit from experiences in other countries, and learn from the ones that are getting it right.Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

 Originally posted on the Business Post, 24 May 2020 The late US President, Ronald Reagan, had a simple maxim about government's view of the economy.  If it moves, tax it.  If it keeps moving, regulate it.  If it stops moving, subsidise it.  Coronavirus has thrown this maxim into action.   Everything has stopped moving in the economy and must now be subsidised. No less a body than the European Commission formally recommended this week that Ireland “take all necessary measures to effectively address the pandemic, sustain the economy and support the ensuing recovery”.  Borrowing is of course one way of funding these subsidies.  In its capacity as the watchdog of fiscal rectitude among EU countries, the Commission has invoked its General Escape Clause.  That means that there won't be any sanctions for countries borrowing what they have to borrow, and doing what they have to do, to secure their nations’ health and livelihoods.  The European institutions have even made long-term finance available at virtually invisible lending rates for these very purposes.While all this is helpful, it doesn't take away from the need to ensure sustainable tax revenues to deal with increased bills for our healthcare system, social welfare and other essential services which are likely now to extend well beyond 2020.  These bills cannot be met indefinitely by borrowing.  Gloomy unemployment forecasts of up to 22% in the second quarter of this year, as suggested by the Department of Finance this week, don’t augur well for sustainable tax revenues.We find ourselves in something of a phoney war, a period of stabilized abnormality.  Everyone is looking forward to the resumption of something approaching normality as the country embarks on its phased reopening of businesses and amenities.  The real measure of the Covid-19 pandemic will be not so much on what does reopen, but what does not.  While it is the high-profile household names – Debenhams, FlyBE - which receive all the attention when they hit the wall, most industry will find it just as difficult to return to pre-covid trading levels.  Smaller service industries in particular are now finding that once they have worked through any business that was on hand, there is nothing new in the pipeline.To compound matters, the British government's proposals on implementing the Northern Ireland Brexit protocol published this week, while receiving cautious welcome as being something rather than nothing, will not be workable.  The proposals emphasise not imposing additional customs declarations on GB and NI business as trade in goods flows between Britain and Northern Ireland.  This is politically understandable, but customs is a tax.  Taxes are very hard to enforce without declarations.  Further, the proposals are silent on how to manage the exports from Northern Ireland to Britain which are channelled for instance through Dublin Port.We have a battered economy that is dealing with massive unemployment, compromised business models and the challenges of Brexit rearing up again.  Irish industry is not even paying the taxes which are currently due let alone being able to deliver additional ones.  Downturns tend to promote clamour for tax reform because the fairest tax is always the one which you don't pay yourself.  Tax reforms like changing the corporate tax regime or introducing a wealth tax seem all the more attractive when cash is tight.  The current signals are that tax-raising measures are not high on anyone's priority list, but that will change.  Given the high number of business closures and job layoffs, there will be fewer income earners and hence fewer taxpayers for the next several years.For years Ireland has used tax as a primary lever of economic policy.  Long before we surrendered our interest rate and exchange rate mechanisms when we joined the euro group of countries, tax was used to drive investment and the employment which follows it.  Our system is characterised by a high rate income tax regime, a high rate VAT regime, a moderate rate capital tax regime, and a low rate corporate tax regime.  We aspire to social equity by having income tax rate thresholds and allowances skewed towards lower earners, generous tax relief for pension provision and a wide range of essential goods and services charged with VAT at lower rates.  It is impossible with any certainty to determine what tax changes might be sustainable when we really don't know what our economy is going to look like in three months’ time, let alone three years.  Overall though, when compared with most other developed economies the Irish tax burden is not particularly high.  We can rely on debt to meet the upfront emergency costs in 2020 and hope that these do not recur, but we cannot rely on it indefinitely while waiting for the numbers of successful businesses recover, and unemployment to fall.Changes will have to be made, but now is not the time to make them.  It is still the time for subsidies, not for taxes, just as Reagan’s maxim demands.Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland