BusinessAnalysis

Cliff Taylor: Tax report conclusions present Paschal Donohoe with a tricky challenge

There is no prospect of higher taxes in the short term but the reality of the need to raise more revenue cannot be ducked forever

When Minister for Finance Paschal Donohoe set up the Commission on Tax and Welfare in the middle of last year he would no doubt have hoped that it would report in calmer times, after the worst of the Covid-19 crisis had passed.

Nobody could have guessed back then that when it did send in its conclusions a fresh crisis would have hit, necessitating another round of significant public supports for taxpayers and businesses. If context is everything, then the backdrop to the publication of the commission’s work could hardly be worse.

Donohoe may have planned a year ago that the report would kick-off a vital debate — how to pay for better public services, an ageing population and the green transition in the years ahead.

Instead it lands against a backdrop when any talk of raising more taxes will be resisted, given the pressure on household finances. The report was always framed with the medium to long term in mind, but reactions will reflect the here and now. Even the Minister himself presented them as “challenging”.

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And then Tánaiste Leo Varadkar said that while he supported some of the recommendations, some — such as increasing inheritance tax — could have featured in a Sinn Féin manifesto and would not be implemented when Fine Gael was in Government. Which raises the question of why you would appoint a commission to write a report if you are going to dismiss a large part of its recommendations on day one?

There is no prospect of higher taxes in the short term. But nor can the reality of the need to raise more revenue be ducked forever. The extraordinary buoyancy of corporation taxes and rock bottom interest rates has given the Irish exchequer a free pass over the past couple of years. But this will not continue.

The reasons why the exchequer will need more revenue are familiar and repeated in a host of warnings from the Irish Fiscal Advisory Council, the Department of Finance and a range of other bodies. Ireland is getting older and more and more cash is getting for public services and vital investment, including the transition to green energy.

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The great value of the commission’s work is in outlining a programme to fix this over a period of years, largely through more revenues from other tax sources such as inheritance tax and other capital taxes, VAT, property taxes, social insurance, green taxes and reducing a whole range of special allowances.

None of this is politically easy. But the thrust makes sense. Politicians — and lobby groups — who pick off parts of the plan need to be asked where they would raise the cash. If new revenues are needed and the public finances need to be made more sustainable, then the tax base must, indeed, be broadened.

In sharping its recommendations, the commission tries to ensure the plan is equitable, does not put too much burden on income tax — as this can hurt employment — and is fair. Specific welfare measures in areas like child supports for less well-off families are also included.

Like the report of the Pensions Commission, the authors warn that the recommendations need to be assessed as a whole. But also like the Pensions Commission, the reaction to the leaked proposals in recent weeks suggests that the political system will find this difficult — and have even lead some to suspect that the report was being undermined even before it was published.

Whether this is the case or not, households cannot be expected to take on higher taxes and charges right now. On the contrary, many need help. But heading towards the next general election, the report of the commission will need to be brought back into focus.

The economic slowdown now upon us — which will have an impact on taxes — may force this on policymakers anyway, depending on its impact on corporation tax in particular.

The commission has done a comprehensive and coherent job. Dealing with this through a planned approach is much more likely to lead to a better outcome than waiting for the day that the exchequer runs short of cash and having to respond to an emergency. The inevitable placing on this report on the shelf must only be temporary.