Thought Leadership News

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