OPINION:THE COMMISSION on Taxation was asked by the Government to recommend a tax policy framework for at least the next decade, a request that was made in early 2008, before the world was plunged into global recession and the extent of the economic difficulties facing Ireland became evident, writes OLIVIA LYNCH
While there may be a strong divergence of opinion about the various recommendations of the commission, one thing is certain – it has stayed true to its mandate and produced a report which is focused on the medium to long term. Should the Government implement the commission’s recommendations, what kind of tax framework will we have in 2020?
Crucially, we will have a low tax rate regime. The report consistently advocates a policy of low tax rates, to be achieved by a further broadening of the tax base. We will also have a more stable tax base, moving away from transaction taxes such as stamp duty towards more stable taxes such as a recurring annual tax on residential property. Thirdly, we will have greater accountability and more direct funding at local authority level with water charges and the property tax. Beyond that, we will have a tax system that has a greater influence on people’s behaviours with a particular focus on the environment. Measures recommended include the phasing out of vehicle registration tax to be replaced by a motor usage charge and the introduction of a carbon tax.
The most pressing question in the minds of ordinary taxpayers is “Will the Commission on Taxation’s recommendations increase my tax bill”? The report provides no comprehensive answers to this question and, unlike the budget, there are no charts or tables to show the impact of its proposals across a broad range of taxpayer incomes.
However, the commission makes one vital recommendation which underpins its entire report. It clearly states that implementation of its recommendations should be done as a package and in a manner that does not increase the overall tax burden on the State, something that the institute believes is of paramount importance at this juncture.
Clearly, the commission is making recommendations that will lead to additional tax liabilities on a stand-alone basis. The three new taxes recommended by the commission – the property tax, water charges and the carbon tax – will hit the pockets of most individuals and families. But the commission strongly recommends that individuals and families should be compensated through a reduction in income taxes.
What will the commission’s recommendations do for job retention and creation? A key base-broadening measure is to encourage economic activity and employment creation, thereby increasing the tax yield. Will the recommendations assist or hinder Ireland in competing for foreign direct investment?
Perhaps the key positive element in the report is the strong recognition of the impact on job creation and inward investment arising from the tax wedge (the gap between the employee’s take home pay and the total cost of their employment) on labour.
The commission recognises that we must maintain a low tax wedge if we are to attract mobile investment. The report notes that our tax wedge has increased by 36 per cent as a result of the emergency budgets. It also highlights in clear terms the negative impact of high marginal personal tax rates on entrepreneurship, which is needed to restore economic strength, and on attracting key mobile skills and talent to Ireland. The report rightly states that the tax code needs to be internationally competitive. In establishing the commission, the Government asserted the key strategic importance of our 12½ per cent corporate tax rate. The commission has endorsed this position and stated that a low corporate tax rate is vital for future economic growth. A number of recommendations are made to enhance our attractiveness for inward investment. These include the proposal to zero-rate stamp duty on all share transactions, a widening of the scope of the research and development tax credit and the simplification of the taxation of inbound and outbound payments. There are also important recommendations of assistance to the small and medium sized sector, including an extension of the tax exemption for start-up companies and recommended improvements to the administration of the business expansion scheme.
However, some of the recommendations need to be treated with care. The commission has recommended fundamental changes to the basis on which individuals are liable to tax and withdrawal of tax relief for some employee share ownership schemes. Care needs to be taken to ensure that implementation of these measures does not prejudice our ability to attract necessary overseas talent and skills.
The commission also makes radical recommendations regarding relief for retirement. Importantly, it stresses that these recommendations should be considered at a time when our economy has recovered and should not be implemented in the short term. This is important because the institute believes any reduction in relief for retirement provision would be a retrograde step. We also believe that any changes must consider the fact that tax relief for pension provision is generally tax deferred as opposed to tax forgone. Finally, implementation of the commission’s recommendations must take account of the cumulative effect on the overall tax bill for individuals and families and should honour the recommendation that the overall tax burden will not be increased.
The report rightly states that our tax system should adhere to the principles of simplicity and certainty. It points out that taxpayers are entitled to know the tax implications of any transactions they may be considering. It also points out that the administrative burden on taxpayers needs to be appropriate and justifiable by reference to tax yield. In light of these principles perhaps it is time to reconsider taxes such as the car park levy, second home levy and air travel tax. Perhaps the most important caveat contained in the report is that while its recommendations are to be considered as a complete package that should not be implemented in a piecemeal fashion, the package must be implemented on a phased basis over a number of years.
The commission also recommends a number of new safeguards and protections for taxpayers in dealing with their tax liabilities and interaction with Revenue.
This is a crucial point. Our taxpayer base and our business community can only bear so much change, having already endured a year of enormous change and challenge.
Government now needs to carefully consider the commission’s report and in implementing any or all of its recommendations, should do so on a phased basis over time, allowing for a clear explanation to taxpayers and sufficient lead-in time for business and Revenue administration. Through this period of implementation we must ensure we consistently measure the impact of our new tax regime on the creation of jobs and the recovery of our economy.
Olivia Lynch is the incoming president of the Irish Taxation Institute