This tax committee is made of senior officials and advisors from the Departments of Finance; the Taoiseach; Public Expenditure and Reform; Jobs, Enterprise and Innovation; Social Protection; and the Revenue Commissioners, with the purpose of proposing and considering the various options for the Budget and for the medium and longer term.
Reviewing the working papers of the TSG gives a useful insight into the direction in which tax policy in Ireland is heading.
Getting down to the detail, the papers deal firstly with Vehicle Registrations Tax, noting that VRT dropped from over €1.1bn in 2008 to €437 million in 2013, correlating with the drop in the number of new cars sold, from 146,000 in 2008 to just 71,000 cars in 2013.
However, although car sales halved over the period, an even greater drop in VRT has occurred, reflecting the lower tax collected, as car buyers shift their purchasing patterns to cheaper and more fuel-efficient vehicles which attract lower VRT rates.
There has been a stark increase in the percentage of cars purchased in Band A (0 to 120g of carbon dioxide per km). Just 13% of car purchases falling into band A in 2009, compared to 68% of car purchases meeting these high standards in the first half of 2014.
The TSG papers make reference to EU Regulations which have mandated reductions in average carbon dioxide emissions for motor vehicle manufacturers and notes that as these targets are achieved, more and more new cars will fall into the lower VRT bands, thus reducing VRT receipts.
Notably the TSG report suggests that a re-evaluation of the VRT bands will be required in the coming years, presumably in order to maintain the current tax-take.
This could come in the form of either an increase in the VRT rates applicable across all bands (for example, increasing VRT rates by 1%); or the VRT goal posts could change, meaning only ultra- efficient cars will now fall into the low tax band A.
Continuing with VRT, the TSG papers recommend extending the reliefs on electric vehicles to 2020.
Moving on to Capital Gains Tax, the report notes the significant drop in tax yield from over €3.1bn in 2007 to just €367m in 2013, due to a combination of lower asset values and a reduction in the number of property and share transactions since peak.
Interestingly, although CGT rates have increased on four separate occasions since 2009, rising from 20% to now 33%, the tax take has dropped every year since 2007.
The report notes that recent rounds of increases in CGT rates have had a negative effect on the total tax take, in a reverse of the Charlie McCreevy effect (in 1998, Charlie McCreevy cut CGT rates from 40% to 20%, but actually boosted the total tax yield by 78%).
With capital taxes such as CGT and CAT, as tax rates increase, taxpayers often defer undertaking transactions, as the tax cost of undertaking the transaction becomes unbearable.
The Tax Strategy Group working papers suggest that due to the significant drop in property prices over recent years, capital gains tax receipts may be suppressed for years to come, inferring that in many cases individual taxpayers disposing of property in future will not experience gains; but the report also highlights the ability for taxpayers to utilise prior capital losses against future gains.
The options explored for increasing capital gains tax collections include restricting the amount of losses that can be used in any one year, a limitation of principal private residence relief to houses worth less than €1m, and the potential for lower capital gains tax rates for low earners as well as higher CGT rates for large transactions.
However, the findings don’t place any great emphasis on recommending these approaches, due to adding complexities and adding a drag on disposals.
On Capital Acquisitions Tax (CAT, commonly called gift and inheritance tax), the TSG report notes that the most recent rise in CAT rates from 30% to 33% coincided with a reduction in the tax yield.
On options for amending the CAT tax base, the TSG proposes that a reduction in agricultural relief and business relief from 90% to 75% could be a useful measure in terms of base-broadening and ensuring equity for different classes of taxpayers. However, it could have a negative impact on the development and growth of family businesses.
An alternative suggestion is that a taxpayer could choose either to avail of their lifetime tax free threshold (€225,000 in the case of a parent to child); or the taxpayer could avail of agricultural or business relief where appropriate, rather than being able to claim both, as is the case at present.
As the TSG report outlines, this would mean that at least some CAT would be payable on most inheritances/gifts of agricultural and business property. Thankfully, Budget 2014 did not include these measures. Instead, it tailored Agricultural Relief to favour active or trained farmers or those willing to enter long term leases with the active or trained farmers.