Notes on the Front

Is anyone really surprised? Imagine: there are some wealthy people using loopholes to reduce their tax liability. Did you ever think it would come to this? The Revenue Commissioners’ recent report on those pesky top 400 income earners has once again turned our attention to equity in the tax system. And there’s little doubt that if you infuse a tax code with a plethora of reliefs, allowances and exemptions, those with the resources and the incentive will employ accountants to drive the proverbial coach-and-four.

So we can continue putting our progressive fingers in the tax dyke. Or we can try a new approach.

First, let’s recap the Revenue Commissioners’ report which refers to 2003.

• Six of the top 400 paid no income tax at all
• 66 (or 16% of this group) had an effective tax rate of less than 10%
• 95 (or nearly one in four) had an effective tax rate of less than 20%

According to the report:

The main reliefs claimed by the 150 individuals with an effective rate of less than 30% were property-based capital allowance incentives.

However, there were a number of other reliefs cited as contributing to reduced liability: loss relief and standard wear and tear allowances reflecting real trading losses and depreciation of business assets; relief for interest paid on borrowings for business investments in partnerships and companies; and relief for charitable donations. No doubt there were a plethora of other reliefs not cited by the Report, namely pensions.

In the past Labour proposed that high-earning taxpayers be subjected to a minimum tax of 20%. While the Tax Strategy Group was somewhat downbeat on this idea, the current Minister for Finance, Brian Cowen, has scaled back on the amount of relief those earning over €250,000 per year can claim. But, as Labour’s Joan Burton put it, ‘you close off one loophole only to find another opening up.’

Clearly, there are remedial measures that can be taken, circumscribing even further the relief that high-income earners can avail of. But this situation should give us a chance to step back and take a wider look at the tax code and what, more radical, measures can be taken to bring equity into the system.

One approach would be the ‘clean-slate’ method – a type of thought-experiment, if you will. Under this method you would abolish all reliefs, allowances and exemptions – even personal tax credits. Then you would start from scratch. Whatever reliefs, allowances and exemptions might be reintroduced would have to pass certain tests – notably, the balance of social / economic benefit test. In other words, if someone argues for X relief, they would have to show that it is socially equitable and economically efficient.

There is no doubt about the scale of ‘tax expenditure’ that occurs under our regime of reliefs.

In total, it costs the taxpayer over €12 billion to fund these reliefs – and I would stress these are only a selection of reliefs listed in the Revenue Commissioners Statistical Report. There are over 40 reliefs, allowances and exemptions which are ‘not currently quantifiable or are negligible or are not identifiable within total aggregates.’ Many of these are property-based schemes. Even so, the selection of reliefs that are quantifiable represents more than the total income tax receipts (though some of the business reliefs would be drawn through the corporate, not the income, tax system).

It’s not a matter of taking a scythe to tax expenditure. For instance, personal tax credits / allowances make up a sizeable proportion – to cut back on these would be to reduce taxpayers’ living standards. However, it is a question of analysing each relief to assess its equity and efficiency. For instance:

• 8 people benefited on average by €725,000 under the ‘Donation of Heritage Items’ relief – are we getting heritage value for money?
• BES tax relief amounts to on average €8,000 per investor – are we getting jobs and better companies for this?
• 89 people are getting, on average, a cash subsidy (that’s what tax expenditure is) of €25,000 for Seed Capital Investment – is this working?

Property-based capital allowance incentives? Good grief – nobody minds reliefs or incentives for productive, wealth-creating activity. But property based?

We might examine the ‘deadweight’ of some of these reliefs – especially business reliefs. In other words, in the absence of the relief would the investment have been made anyway? If it would, then the relief did not stimulate any new activity.

But there are broader issues that reach deep into the way we subsidise our lives. There is little question that many discretionary reliefs are highly regressive – notably private pensions, health insurance and mortgage interest. These represent a significant transfer of wealth to those already on high incomes. Such an analysis wouldn’t necessarily lead to them being abolished but rather reformed:

• Replace all housing / rent reliefs with a flat-rate Universal Housing Benefit, paid to first-time home purchasers and tenants (public or private) which would be taxable. This would start to create a level-playing pitch between all sectors, while using the tax system to benefit low and middle incomes.
• Health Insurance relief could be abolished with the introduction of universal health insurance – paid by all according to their means.
• Most private pension reliefs could go with the introduction of a state earnings-related pension financed through the social insurance system.

Even the system of personal tax credits / allowances could be studied to see if there is a more efficient and equitable way of achieving the same result. Through the integration of tax and welfare, might a partial Basic Income or a universal and refundable tax credit be better options?

Once one starts opening the Pandora’s Box of our tax relief system, we will not only discover serious anomalies but also new opportunities for more efficient and equitable redistribution of income. This could spread throughout all the taxation measures and enforcement procedures (I’m sure Mary Raftery wasn’t the only one quizzical about the Revenue’s assertion in the recent Comptroller and Auditor General’s report – that no one goes to New York over Christmas and purchases more than €175 of taxable goods to bring back here). We could start to ask fundamental questions of tax justice. For instance:

• Hundred of thousands in low-paid jobs face a marginal tax rate of 26%
• A property developer earning €250,000 by way of capital gains pays a marginal tax rate of 20%
• And those who receive nearly €500,000 by way of inheritance from a wealthy parent pays no tax at all

That’s the slate that needs to be cleaned – then debated, then reformed. But in the short-term, we will have to deal with those pesky top 400 earners. Imagine, requiring them to pay the same proportional share in tax as the rest of us. Now there’s a thought.