It’s the small, innocuous tax hikes that hit hardest

There was no shortage of tax developments this year, some good and some bad, writes

‘The art of taxation consists in so plucking the goose as to obtain the most feathers with the least possible amount of hissing.’

This maxim of Colbert, finance minister to Louis XIV of France in the 17th century, is often trotted out when commenting on budget announcements and tax changes, but it seems there was much more to the man’s thinking.

A man ahead of his time, Colbert recognised the importance of international trade to his nation’s prosperity. He also recognised that bad tax policy could do more harm to a nation’s finances than any amount of corruption.

Thanks to Brexit on this side of the Atlantic and President Trump’s propensity to criticise or discard trade agreements on the far side, prospects for international trade are surely less robust now than they were a year ago.

But there was no shortage of other types of policy initiatives and tax developments during 2017; some good, others bad.

This year’s budget was short on tax relief measures, but did include a significant tax exemption to do with electric cars.

A zero rate of benefit in kind tax is being introduced on electric cars; in other words an employer can give an employee an electric car to use, without any income tax consequences for the employee.

Coupled with another budget announcement that the recharging of cars on employer premises would also be tax-exempt, this holds out the prospect of completely tax-free motoring over the next few years, at least from the employee perspective.

Not all workers are in the fortunate position of being offered the use of an electric car as part of their package but the budget announcement will undoubtedly make it more common. That won’t alleviate traffic congestion. Nor will it necessarily delight all of the motor industry.

That industry benefits from sales, but is also reliant on the number and complexity of moving parts in an internal combustion engine for its market in servicing and repairs. As with any tax change, there are always winners and losers.

Lionel Messi, Cristiano Ronaldo, Jose Mourinho, Rangers football club. These are names you expect to read on the sports pages, not the financial pages of the newspapers.

Yet earlier this year, Messi and Mourinho and the others were hitting the papers for non-sporting reasons — all to do with how their tax affairs are managed.

More big names were listed in connection with tax planning in the Paradise Papers episode in November — that episode being the leak of confidential documents from the Appleby law firm.

Later that month, Revenue issued a statement noting that it was aware of, and was “actively examining” the information and revelations published in the media. Revenue went on to say that “as further information becomes available from this or any other source, we will likewise examine it”.

There is no suggestion of illegal activity on the part of anyone mentioned. Nevertheless, the leaking of confidential information damages lives and reputations irrespective of the circumstances.

While most income tax comes from employees through the PAYE system, or from withholding systems like the Dirt tax levied on the interest earned on savings, the self-employed pay significant amounts in taxes each year. Every month about €1.5bn of income tax flows into the national coffers.

Last November that amount doubled due to the contribution of the self-employed because most self-employed pay the large part of their income tax liabilities in November. The tax take from the self-employed is critically important to the national finances.

While it may be an advantage not having to suffer PAYE throughout the year and make a tax payment in one lump sum, the tax system is harsher on the self-employed in comparison with how employees are treated.

The self-employed tend to pay more tax than employees on similar earnings because the PAYE tax credit of €1,650 is higher than the earned income credit for 2017 of €950.

High earning self-employed people pay USC at a rate of 11% on income over €100,000 — the employee rate stays at 8%.

On the other end of the scale, a minimum PRSI contribution of €500 means that the effective PRSI rate on low incomes is far higher than the 4% paid almost universally by employees.

The earned income credit for 2018 was increased in the budget from €950 to €1,150 and, therefore, is still €500 less than the PAYE tax credit. It’s unjust to tax people by reference to how they earn their money, rather than by reference to how much they earn.

Buried deep in the fine print of budget announcements in October was the detail of a 0.1 percentage point change in employers’ PRSI contributions. The levy is expected to increase further in 2019 and 2020 respectively, which would increase the employer PRSI to 10.95% and 11.05% in those years.

The 0.1 percentage point increase in employers PRSI will increase the amount going into the national training fund.

In effect, employers are being asked to make more of a direct contribution towards the development of the national skills set in the workforce.

It mightn’t sound much, but it has a big impact. Employer PRSI is a tax which is pretty much invisible to everyone except to the employers who must pay it.

While employees and the self-employed are well familiar with the 4% PRSI which comes out of their wages, employers currently pay an additional 10.75% tax on the gross wages of most of their employees.

That’s a hefty sum, because in most cases there are no allowances, no reliefs and no limits on the amount due.

In 2015, the last year for which audited accounts were published, the Government collected about €6.2bn in employers PRSI.

Over time, that innocuous looking 0.1% raise will collect an extra €20m from employers. By contrast, employees PRSI came to about €1.2bn and the self-employed paid in €400m.

At the start of the year, no less a person than Bill Gates, the philanthropist and co-founder of Microsoft, kick-started a debate on whether or not robots should be taxed. Robots mean different things to different people and in different parts of the world.

In the West, our view is conditioned by years of watching advertisements for cars coming off automated production lines, or from Star Wars movies with shiny gold humanoids behaving as, but not quite like, human beings.

In South Africa, you’ll frequently hear people giving out about the robots, which is what traffic lights are called in that country. Mr Gates seemed to be tending towards the production line interpretation, as he spoke of robots cleaning rooms and making burgers.

Computers are also robots, in the sense of being machines which replace humans. Routine office jobs involving bookkeeping, analysis and other forms of number crunching, dictaphone typing, document assembly, duplication and filing — all these have been phased out by information technologies.

The prospect of driverless cars and trucks will pose real issues for the taxi and haulage industries. The higher the tech, the fewer the employees.

While I am not aware of any country preparing concrete proposals to tax machines, the issue will doubtless raise its head again in the coming years.

I can only wonder what Colbert might have made of these developments, especially the ones involving robots and electric cars.

I think he might have been very interested in the increasing amounts of information available to revenue authorities, whether collected and analysed for tax returns, provided by foreign revenue authorities, or available in the public domain via leaks such as the Paradise Papers.

At the time of writing, all the indicators suggest that the government will collect by and large what it hoped to collect in taxes during 2017.

Any new developments or debates on tax policy initiatives will always come second to the overriding objective — always make sure to get the money in.

That’s as true now as it was in the 17th century.

Brian Keegan is director of public policy and taxation with Chartered Accountants Ireland