It is important that tax reliefs — particularly the costliest ones — are scrutinised and that there is proper parliamentary debate to ensure they remain cost-effective and fit for purpose, writes Eamon Murphy.
Given where the discussion is on the need for tax reform internationally, it is critical that Ireland review its approach to tax reliefs.
Tax reliefs — or tax expenditures, as they are often known — are policy tools for reducing an individual’s or firm’s tax liability, usually with the goal of encouraging certain behaviours.
They are often politically appealing as they don’t increase direct government expenditure and there is little extra administrative burden.
All this sounds so wonderful that it is usually overlooked that these tax reliefs represent revenue foregone by the government, so there is always a cost attached.
In 2016, tax reliefs amounted to approximately 10% of total tax revenue.
This is a huge amount of money. However, unlike direct government spending, tax reliefs are not subject to annual assessment as part of the budgetary process. It is extraordinary that this is the case given the costs involved.
Additionally problematic is the fact that, by their very nature, tax reliefs are regressive. Because they result in government raising less money, this funding needs to be made up elsewhere or services and spending must be cut.
These costs are spread among all taxpayers — by which we basically mean all Irish residents, as everyone pays tax of some kind — but not everyone can benefit from them, and naturally it is those with the greatest income that are best placed to avail of them.
For this reason, tax reliefs are a departure from the equity principle of taxation, as they typically benefit high earners to a much greater extent than lower earners.
They have even been acknowledged to be regressive by the government’s own Commission on Taxation, which has asserted that, “to the extent that the beneficiaries of tax expenditures are those with higher incomes or substantial capital, this results in a transfer of financial resources to these beneficiaries by the rest of the taxpaying community, including those on low income”.
Or in plain English: Tax reliefs lead to those at the bottom subsidising the investments and savings of those at the top. Among the more perverse examples of this are the reliefs for private pension savings, and those related to research and development (R&D) in the corporate sector.
The Government incentivises people to invest in private pensions using tax reliefs which employees receive at source. Many workers on middle incomes benefit, but overall the system is extremely regressive.
Higher earners receive the benefit at double the rate that lower earners receive, and more than 70% of the money goes to people in the top 20% of earners.
In fact research suggests that only small fractions of the amounts saved in pension schemes represent “new” savings, which means these reliefs — which cost hundreds of millions of euro every year — are an expensive means of supplementing saving that would take place anyway, particularly for high earners.
It makes sense to encourage firms to invest in R&D, particularly as scientific R&D often has beneficial spill-over effects for the rest of the economy.
Yet the Government’s own Economic and Evaluation Service estimates that about 40% of the Government’s expenditure in this area is dead weight, i.e. money spent on research that would be conducted anyway. The R&D credit costs taxpayers more than half a billion euro a year, on average.
For these reasons, and others, it is important that tax reliefs — particularly the costliest ones — are scrutinised and that there is proper parliamentary debate to ensure they remain cost-effective and fit for purpose.
Social Justice Ireland believes that as part of the budgetary process, the cost of tax reliefs (by type) for each past year should be published, as should the estimated cost of tax reliefs for the year ahead.
Furthermore, when considering whether to implement a proposed tax relief, the Government should be obliged to state publicly:
Most importantly, there should be a sunset clause on all tax reliefs so they expire and require proactive renewal, rather than being allowed to drift indefinitely. This ensures policy is periodically reviewed, and the continuation of the policy must be publicly justified by the finance minister.
Even the European Commission has called for a limit to the scope and number of Ireland’s tax reliefs.
They are essentially financial subsidies from the taxpayer to the beneficiary and require higher taxes among everyone else to make up the difference. Implementation of the recommendations above should be the very least Irish taxpayers can expect.
Eamon Murphy is economic and social analyst at Social Justice Ireland.