The Labour Party has urged that special reliefs and tax breaks within the tax system should be subject to regular vetting and monitoring by a Permanent Tax Commission. The call was made in a submission by the Labour Party to the Review of Tax Reliefs and Exemptions for Higher Earners.
The Labour Party Spokesperson on Finance, Deputy Joan Burton, said today that while she welcomed the opportunity to make a submission to the review, which was announced by the Minister for Finance at the end of last year and which was being undertaken by a group of consultants, she did not regard this process as an adequate substitute for a full Tax Commission.
“The Irish tax system has developed a plethora and range of tax breaks, loopholes and special exemptions and arrangements which favour particular classes of person, particularly those who are well off and those who opt for non-residency status. This is to the detriment of people in the PAYE Sector who, by and large, have little scope for limiting their tax liability beyond what is clearly advertised by the Revenue Commissioners in terms of general reliefs.
“Such a Permanent Tax Commission would provide a regular and routine opportunity for such tax breaks to be examined and costed, the beneficiaries identified, the additional economic activity generated and the question of for how long they should continue to be assessed on a regular basis.
“It is essential that those who get significant benefits through the tax system should be accountable and the information should be freely available. For the last seven years, the Minister for Finance has made a point of expanding on an ad hoc basis a wide range of tax breaks that appear not to have been costed. A parallel universe has been created of compliant tax payers, broadly speaking in the PAYE Sector, who are not in a position to avail of special tax incentives and tax breaks and, on the other hand, some very wealthy people who have a range of such breaks so that they legitimately end up with zero liability to tax.
“The figures disclosed last year of people with incomes in excess of €200,000 who pay no tax is a scandal in terms of equity for the ordinary taxpayer.
“The purpose of this consultancy should be to give the Irish people the detailed facts about tax breaks and who benefits, so as to enable a rational decision to be made about the continued existence of such breaks.”
LABOUR PARTY SUBMISSION TO REVIEW OF TAX RELIEFS AND EXEMPTIONS FOR HIGHER EARNERS
INTRODUCTION
1.The Labour Party welcomes the opportunity to make a submission to the Review of Tax Reliefs. The Labour Party has argued, however, that such a review is a poor substitute for the establishment of a Standing Commission on Taxation, which would examine tax reliefs in an open and transparent fashion on a regular basis. Labour has made the case for some time that the existing range of reliefs is distorting the Irish tax system, particularly by allowing high income earners to reduce their tax liability. This has the effect of undermining public confidence in the fairness and efficiency of the tax code, and of introducing a fundamental inequity, both to the tax code, and to Irish society.
2.Our submission is organised under the following headings:
a.Background
b.Assessment of Impact of Reliefs on the Tax System As a Whole
c.Assessment of Impact of Individual Reliefs
d.Concerns with Respect to Particular reliefs
Background
3. Every society requires a system of taxation. The Labour Party believes that the Irish tax system should be fair and equitable, avoid economic inefficiency, promote desirable economic and social activity while disincentivising undesirable outcomes such as environmental damage, impose the least possible administrative burden on taxpayers consistent with other goals, and be seen by all to be administered in a fair, impartial and efficient fashion. The principle of progressivity in taxation is one to which the Labour Party is committed. Sustaining low tax rates requires a broad tax base.
4.The Labour Party believes that tax reliefs and incentives are a legitimate, and potentially potent tool of public policy. They can also, however, be a blunt instrument, and are open to being abused, or being used in a manner which varies from that intended at the time of introduction. The Labour Party believes it to be important that such reliefs are periodically re-examined, both individually and collectively, in order to examine both the impact of reliefs on the tax system as a whole, and the impact of individual reliefs in relation to how well they are achieving their stated goals and objectives
5.In considering ‘tax reliefs’, it should be noted that general provisions such as standard capital allowances for plant and machinery, and pension reliefs for employers, employees and the self employed are in reality part of the structure of taxation. These are not therefore to be considered as ‘reliefs’ in the general sense which might be eliminated in any review. Similar considerations apply to personal tax credits. However, significant adjustments in areas such as pensions relief for high net-worth individuals in recent years are directly related to efficiency and equity issues. Adjustments which significantly increase the benefit of the relief in such cases are relevant to re-evaluation.
6.In considering the economic and social relevance of special tax breaks or incentives for investment in 2005, the following background is important:
-the taxation receipts/national income ratio is not high in Ireland by reference to international comparisons;
-tax rates have fallen significantly in recent years
-the Irish economy is at or near to full employment, with the consequence that special investment incentives need to be evaluated more critically than if there were widespread unemployed resources;
Impact of Reliefs on the Overall Tax System
Impact on Tax Base
7. Where tax reliefs are in place, it is appropriate that they are subject to frequent review both individually and collectively. TSG 03/27 states the following “Even where tax reliefs are beneficial, their desirability and feasibility must be considered in the context of the general tax system applying. For example, sustaining low direct tax rates requires a broad tax base”.
This argument repeats that advanced by the Commission on Taxation, which argued that there is a trade off between targeted reliefs for specific purposes, but which reduce the tax base, and according require higher tax rates for a given tax take. The tax strategy group qualified this argument, as follows:
“Tax reliefs and incentives, however desirable, narrow the tax base and therefore must be subject to on-going review. However, the availability of tax reliefs may lead to economic activity that otherwise would not have occurred. Thus, while eliminating a particular relief would lead to direct revenue gains, it could also indirectly lead to revenue losses stemming from reduced revenue from investments, employment VAT receipts etc and this could serve to partially to wholly offset the direct revenue gains from eliminating the particular relief. Equally, it has been argued that some tax reliefs are deadweight in that they simply pay companies or individuals for what they do or would do anyway”.
This latter point should be further qualified by the observation that, in current economic conditions, there are unlikely to be significant unemployed resources. Accordingly, a strong case must be made to justify the argument that tax breaks are generating economic activity, rather than simply diverting resources from other uses. Such a case is by no means impossible to make, but there must be a requirement for strong evidence to be adduced in its favour.
Impact on Progressivity and Legitimacy
8. Avoidance of tax by high earners is an issue of concern on grounds of both efficiency and equity. The evidence indicates that there are far too many methods available in the tax code for high earning individuals to avoid a reasonable share of tax legitimately. The Review should have regard to the extensive evidence pertaining to the low effective rates of tax being availed of by some high net-worth taxpayers. This situation is not sustainable, since it violates the principle of tax progressivity, while also undermining the perception of legitimacy in the tax system among the general public, which is itself an important principle of good taxation.
9.The Labour Party favours the introduction of a cap on tax reliefs which would ensure that the tax code contains within it a minimum effective tax rate for taxpayers with incomes in excess of €200,000
Transparancy and Accountability
10. Sound administrative practice requires that, once enacted, tax reliefs should be subjected to periodic re-examination, and cost-benefit analysis. The review should consider the existing arrangements with the system of tax collection for generating sufficient data on the cost and benefits of tax incentives. The review should also consider whether there is, at present, sufficient transparency of, and accountability for, the results of these measures, and this matter might be addressed.
Assessment of the Impact of Specific Reliefs
11. In assessing specific reliefs, the review should have regard to the economic context described above. The presumption should be that, in most cases, such reliefs will either be unnecessary for development, redundant, give rise to excessive deadweight, or potentially distorting, unless a strong case can be made to the contrary. There ought to be a strong burden of justification on those seeking to promote or maintain special investment tax reliefs.
“Sunset Areas”
12.The term ‘sunset areas’ relates to whether the developmental objectives or the regional or local impacts of certain reliefs have been achieved and the relevant commercial activity is sustainable in the “normal” tax system. In such cases, reliefs may be argued to be redundant and represent dead-weight. Examples here may include most property based reliefs, and exemptions for woodlands, stud-fees on stallions and greyhounds. An examination should consider whether the incentive is necessary to maintain activity, and whether transitional arrangements to the ‘normal’ tax system are appropriate.
Consistency with Government Policies
13.This is a broad area for analysis which would deal with whether the aims and objectives of other government policies in areas such as pensions, health care, education and social welfare are consistent with both the tax code generally and particularly with investment reliefs. It is important that ad hoc tax reliefs are not a substitute for policy coherence, and do not lead to inefficient or inequitable outcomes.
External Costs and Benefits
14.The relevance of taxation policy generally (including tax reliefs) should be considered in the context of mismatches between private and societal costs and benefits in the modern economy. Examples would be issues relating to commuting, transport, emissions control and waste management.
Innovation
15. The corporate tax regime is highly favourable to investment. A new scheme for research and development has been introduced. The issue here is what relief schemes, if any, are appropriate to fostering innovation in the context of long-term competitiveness and thereby maintaining a high employment economy.
ISSUES WITH RESPECT TO SPECIFIC RELIEFS
Private Hospitals and Nursing Homes
16. For some years now the Department of Finance has given generous tax breaks in respect of private hospital development, nursing homes and related ancillary medical and social services. Is there a correlation between such the tax breaks and the care and welfare policy of the Department of Health and other agencies?
The study should identify the numbers of nursing homes and private hospital proposals built or proposed as a consequence of these tax breaks and find out the estimated cost of tax foregone for each year from 1997 to date, and the estimate for the next 5 years. What is the geographical location of such facilities and their impact regionally? What is the sustainability of such services? Are they likely to last beyond the period of the tax break? Are there any covenants or restrictive clauses included in the usage of the tax breaks to ensure that the buildings or facilities continue to be available for use in the period after the expiry of the tax break?
The consultants should examine specifically the current phenomenon of nursing homes being built in remote locations with no independent access for residents to local facilities.
Pensions For High Income Earners
17. In respect of high-net worth individuals, the consultants should look at the equity of various tax breaks provided for pension purposes, specifically the availability of SSAPs, Small Self Administered Pension Funds, and ARFs.
The consultants should set out the take-up for these pension tax break options for a range of incomes from €50,000 upwards in bands of €10,000, indicating the numbers availing of the breaks and the cost to the Exchequer for each income category.
The consultants should identify the contributions made by employers in respect of the various classes of income earners, in particular in relation to those earning in excess of €200,000 per annum.
Exempted Income and Activities
18. In respect of these, it would be useful if the consultants could identify the range of incomes by the exempt activity and the numbers of people availing of each exemption, in each income range. Once again, we would suggest that data for incomes from €50,000 upwards in bands of €10,000 would be a useful indicator of who benefits from the exemption of certain activities and the cost to the Exchequer.