In a famous episode of the Simpsons, the good citizens of Springfield lose the plot and begin to frantically dig in search of rumoured buried treasure. At the end of the episode, Homer, Otto and Chief Wiggum find themselves in a huge hole that they cannot get out of and without any treasure in sight. Homer is asked how they will get out and he roars that the will “dig his way out”, only to then be admonished by the redoubtable Chief Wiggum to “dig up, stupid”. They carry on as before and the episode ends with them digging away fruitlessly at their hole.
I am reminded of this when considering suggestions that the best way to fund the cost of the COVID19 crisis is to increase tax rates. To my mind there are a number of problems with this which I have considered in more detail below:
- What tax rates could be increased?
- New taxes – Wealth Tax?
- Do tax rate increases work?
In summary I would say that stimulus and encouragement of the economy is a far better policy than increasing tax rates. By encouraging people to work, earn and transact, the economy can hopefully begin to move again, rather than simply repeating the mistakes of the past and increasing tax rates across the boards. I believe this will ultimately be the key in generating more tax receipts for the State and helping us climb out of this economic crisis as opposed to digging a deeper hole.
What tax rates could be increased?
Corporation Tax, Income Tax and VAT combined make up approximately 84% of the total annual tax take (from the most recently published tax year of 2018, as published by Revenue Commissioners).
The 12.5% corporation tax rate is our sacred cow and is unlikely to be touched. Recent government pronouncements would suggest that there will be no personal income tax increases either. It would likely be seen as anti-business to increase the VAT rates which is the last thing a new Government would wish to be viewed as at this time. If anything, VAT decreases (particularly for the hospitality industry) may be the order of the day.
Stamp duty on commercial property transactions was recently increased to 7.5%. It is possible that these rates could be increased further or that residential property rates could be increased. However, certainly the latter might prove problematic if the housing crisis is to be addressed (a core tenet of most major parties’ agenda).
That only leaves capital taxes such as capital gains tax (“CGT”) or capital acquisitions tax (“CAT”) on gifts / inheritances. We already have one of the highest CGT rates in the OECD and further increases would surely run the risk of acting as a disincentive to people buying and selling assets. Similarly, the scope of our CAT regime is quite far-reaching already and the effective rates are significantly more costly than in many other countries. Apart from anything else the yields from these taxes are currently quite low – CGT amounts to 1.82% of the total tax take while CAT amounts to less than 1% (again based on the 2018 Revenue figures) so the benefit of targeting capital tax rates may be negligible in reality.
New taxes – Wealth Tax?
It may be that entirely new taxes (such as a Wealth Tax) may be introduced to help plug the gaping hole in the national finances. Sinn Fein made this a key part of their financial manifesto and sought to collect, on an annual basis, 1% of wealth held by persons in excess of €1M. They forecast that this would result in a yield of €800m in a full year or about 1.46% of the total yield (based on the 2018 totals). Ireland previously had a Wealth Tax in place in 1975 but it was narrowly applied and short-lived and was repealed in 1978. Therefore, the introduction of a Wealth Tax would represent a marked departure from both our historic and our current political approach.
The imposition of a Wealth Tax is in fact relatively rare. In 1990 twelve countries in Europe had a Wealth Tax but many have since repealed these taxes as they tended to raise low revenue and were increasingly difficult to administer. Only four countries in Europe (and only two in the EU) now have what could be regarded as a “pure” Wealth Tax (Spain, Switzerland, Norway and Belgium). Other countries such as Netherlands and Italy have versions of a Wealth Tax though they are not chargeable on all assets and there are various exceptions and exemptions. France used to be one of the main countries with a Wealth Tax though this was abolished in 2017 to be replaced with a tax on the value of French real property.
There are ideological arguments for and against a Wealth Tax. The main argument for such a tax is that those with the most wealth can afford to pay more. However, the fact is the wealthy DO pay more as it is. A joint report by the OECD and Revenue Commissioners in April 2018 (Income Dynamics & Mobility in Ireland: Evidence from Tax Records Microdata) states that the top 10% of earners account for 36% of the total income earned in Ireland. However, that same 10% of top earners in fact account for 61% of the total income tax paid (and 59% of the total Universal Social Charge paid).
At the other end of the scale some 37% of workers paid no income tax in 2018 based on their level of income.
For those who would argue against a Wealth Tax, they would state it is unjust that accumulated wealth (created from already taxed monies) is to be subject to a Wealth Tax, and then ultimately taxed again on inheritance. Furthermore, some or all of the assets (including the family home) may not in fact be producing income so there may be a real practical difficulty in actually paying the tax.
An entirely different problem would be the assessment of any such tax which would presumably be on a self-assessed basis in line with all other personal taxes. Revenue Commissioners have seen first-hand the difficulties in valuing assets for the purpose of their Local Property Tax. Indeed, having a reliable and equitable system of valuation has proven so difficult, that the values used have remained unchanged since those originally imposed in 2013. Shifting the burden of asset valuation to the taxpayer on an annual basis would potentially cause huge additional administrative cost and risk to the taxpayer. From a tax practitioner perspective this would also create a significant element of risk and difficulties in processing returns.
Before introducing such a tax, the possible benefits should be carefully considered against the very real problems that would arise.
Do tax rate increases work?
A more fundamental question is whether in fact increasing tax rates succeed in generating more revenue for the State. Historical tax figures would suggest that the opposite is in fact the case.
Up until October 2008, both the CGT and CAT rates were at 20%. As a result of the austerity introduced in the wake of the recession, the rate for each tax was increased in increments to 33% by December 2012 and have remained unchanged since.
The 20% rate was originally introduced by then Minister for Finance Charlie McCreevy in December 1997, a huge reduction from the previous rate of 40%. In 1997, CGT amounted to 0.94% of the total annual tax take. By the year 2000, this had risen to 2.84% and by 2006 risen further to 6.96% of the total tax take. While spiralling property prices clearly had an impact on the sales values of property, the (relatively) low rate of CGT was deemed to be an acceptable cost by vendors. In other words, it was worth paying the tax to crystallise the gain which of course meant significantly more funds were moving around the economy.
By the time the full rate increases were in place by 2013, CGT collected represented less than 1% of the total tax take and has only risen to 1.82% by 2018. While there are of course other factors influencing this, the rate of tax payable on a gain certainly does appear to be preventing people from selling assets in their lifetime.
The rate of CAT was also at 20% up to 2008 and was subsequently increased in line with the rate of CGT. In 2007, the total amount of gift tax arising from lifetime gifts amounted to over 18% of all CAT collected. This obviously suggests that assets were being transferred by choice to the next generation and the level of tax was felt to be “acceptable”. This meant that assets were not being “hoarded” and were being passed to the next generation and substantially re-invested into the overall economy.
By 2013, when the CAT rate had been increased to 33% , gift tax accounted for only 7% of total CAT collected and even by 2018, this had only increased to 10%. This is despite the huge decreases in the tax-free thresholds in the intervening years as well as the tax rate increases already mentioned. Clearly the tax rate is acting as a disincentive and assets are being retained for longer or until death which is far from ideal from many perspectives.