Proposed tax structure driven by basic principles

We need more broadly-based and sustainable taxes; there’s no point getting hung up comparing what is proposed and where we are…

We need more broadly-based and sustainable taxes; there’s no point getting hung up comparing what is proposed and where we are now – focus instead on what are the alternatives

IN 66 BC when Cicero described tax revenues as “the sinews of the state” it was understood that the primary function of tax systems was to fund government expenditure. Nowadays tax systems do much more – influencing behaviour, stimulating economic growth, creating a more equal society and shaping our response to urgent economic and societal challenges – at least one of the latter, climate change, was probably not a priority in Cicero’s time.

Ireland’s tax system, as well as collecting revenues efficiently, has proved to be a valuable policy tool in the redistribution of income and one of the key levers in building industry and employment to our country. It has evolved over time to reflect changing economic and social conditions. There is indeed much that is good in our present system but it needs to remain agile and responsive to emerging developments at home and abroad.

While Ireland’s circumstances have changed dramatically in the short time since we commenced our work, the commission kept its focus firmly on a structure for the medium to long-term. The tax structure we propose for that timeframe is one that is driven by basic principles such as equity, flexibility, simplicity and that the user or polluter pays. It is also very deliberately focused on encouraging the key objective of sustainable economic growth.

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Sustainable growth will create jobs and tax revenues – from jobs will come reward and security and from tax revenues will come the ability to provide services, look after the vulnerable and redistribute resources in our society. We put significant emphasis both on supporting economic growth and on equity because the reality is that they are interdependent. Equity is best achieved when the State has the revenues to provide services and redistribute resources and when these revenues are sustainable and as certain as possible. We will not have this without sustained economic growth.

Our recommendations are compatible with keeping Ireland a low tax economy. We do not advocate an overall increase in the levels of taxation. We do advocate a broader and less volatile base which allows for lower rates and a shifting of the tax burden away from those activities that do most to stimulate economic activity. One of our main concerns is the relatively narrow base of Ireland’s tax system which makes it very susceptible to changes in economic conditions. We are all painfully aware of the recent collapse in tax revenues. It must be a concern that falls in output much less extreme that those being currently experienced, could, if sustained, generate large budget deficits. Over time these could challenge our ability to provide essential services and, in the extreme, could challenge our fiscal autonomy. That is why we focused on revenue streams that are less likely to collapse during a downturn.

Recent international studies have ranked different types of taxes by reference to their impact on economic growth. Such ranking suggests that company and personal taxes are most harmful to growth and that annual taxes on immovable property have the least impact. This influences our view that we should, for example, shift the burden away from labour taxes and more towards recurring property charges. It is time that Ireland took seriously the matter of an annual property tax and, in that context, reconsidered our over-reliance on transaction taxes such as stamp duty.

Some of our proposals, and not least the property tax, are radical and involve taxing ourselves in ways we have avoided for decades – we also recommend water charges, a carbon tax, removing or curtailing many of the tax breaks currently available and reform of tax relief for retirement savings. In Ireland households have little incentive to conserve water and consumption per capita is about 30 per cent more than in countries that charge based on use. The wasters of water are in effect subsidised by those who use it responsibly. There is a constant need to expand the supply of treated water involving major and expensive engineering projects. Meeting the costs of this indefinitely from general taxation is not feasible and, in the absence of change, the outcome will be inadequacies in the quality and quantity of supply and no incentive to conserve.

Making a positive contribution to the climate change agenda and helping Ireland meet her legally-binding EU obligations requires a charge that will reward the reduction of harmful emissions and penalise the converse. Our carbon tax design will leave the response up to the emitter and reflect the polluter pays principle – in effect those who emit more will pay more – with provision to protect those who experience energy poverty.

The increasing scope and cost of tax expenditures or tax breaks has raised issues about their appropriate use. Tax expenditures can be inequitable, not very transparent and facilitate tax avoidance. They can on the other hand, if carefully designed and controlled, have an important role in achieving particular economic objectives. We have reviewed all current expenditures and propose guidelines for rigorous and transparent evaluation where they might be considered in future.

Our changing demography will provide a considerable challenge for policymakers to ensure that future pensioners will have adequate incomes to support themselves. A more equitable approach to the tax treatment of retirement savings is therefore needed to ensure that people with little or no retirement savings are encouraged to make such provision.

No doubt these and many more of our 240 plus recommendations will engender much debate in the coming weeks.

In that debate I hope that we will not get hung up about comparisons with the status quo – and instead ask ourselves about the alternatives. Where will stable revenues come from if not from some new areas of taxation and charges? Increasing labour taxes for example is not an option if we want to improve our competitive position and attract further investment.

And would it be too much to hope that we avoid the usual suggestions that these recommendations are okay except for the ones that affect our own particular interests? After all where such arguments are indulged, the inevitable consequence is to increase the tax burden commensurately on the rest of society. Above all I hope that we keep a focus on some overall objectives – greater stability in our tax revenues, more certain funding of public services and the capacity of our economy to grow and create jobs.

Frank Daly is chairman of the Commission on Taxation and a former chairman of the Revenue Commissioners