Thought Leadership News

 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