Tax institute makes two key warnings in pre-budget paper

Irish Tax Institute made five main recommendations in its pre-Budget submission

This year’s Irish Tax Institute submission highlights that the global economic outlook is uncertain, the risks of inflation feeding into tightening monetary policy and the prospect of energy shortages is casting a dark cloud over the economic outlook.

The Irish Tax Institute has made its pre-Budget submission ahead of this year's Budget Day, which two weeks earlier than usual is scheduled for September 27.

The Irish Tax Institute is a heavyweight when it comes to tax policy, of course, and there are many submissions by various vested industries and sectors be it farm organisations, charities or the construction sector.

In the year 2022, 118 such submissions were made by representative organisations giving an indication of the breadth of lobbying when it comes to divvying up Exchequer funding.

The Irish Tax Institute has to my mind a special relevance in that the submissions are grounded in an unrivalled knowledge of the tax system and the policy objectives are not skewed by sectoral interests.

This year’s submission highlights that the global economic outlook is uncertain, the risks of inflation feeding into tightening monetary policy and the prospect of energy shortages is casting a dark cloud over the economic outlook.

The document restates the ESRI’s prediction that the domestic economy will grow by 4.4% this year and by 3.7% in 2023, but that the forecast is heavily caveated with increasing inflation constituting the most pressing downside risk to Ireland’s growth outlook.

Added to this risk, and the three further risks recently set out by the Minister for Finance, Paschal Donohoe, during the hosting of the National Economic Dialogue being; the impact of rising borrowing costs on Ireland’s national debt on the back of interest rate increases by central banks around the globe; the risk to exports from a possible global recession; and Ireland’s dependency on a small number of global corporates for a large proportion of corporation tax receipts. 

Against this backdrop, for its part the Institute recommends the following:

• Have a relentless focus on competitiveness in all areas of the economy including our corporate and personal tax systems;
• Simplify the corporation tax code to make it more efficient and easier to administer;
• Deploy effective tax measures to promote innovation, incentivise investment and build capacity in the Irish SME sector, to broaden the productive base and make the economy more sustainable and resilient against external shocks;
• Provide certainty to investors in the property market and consider the longer-term impact of interventions in the market; and 
• Develop a formal stakeholder engagement process on proposed tax policy and legislative changes to ensure they are effective and to guard against unintended consequences.

Whilst the main focus on corporation tax policy hinges on continuing to make Ireland an attractive location for foreign direct investment, and for existing multinational companies, the relevance to individual citizens does translate, given that 23% of Ireland's total tax take is via corporate tax receipts, and for last year over 50% of those tax receipts came from just 10 companies or over €1,600 worth of tax receipts for every man, woman and child in the country.

As such, the importance of retaining such an income stream for the Exchequer and the population by extension is highly relevant.

On the income tax side, the paper details how Ireland’s income tax system is skewed heavily towards higher earners.

This is borne out by the fact that the top quartile of income earners paid 83% of the total income tax and USC collected. The corollary is that 75% of income earners paid just 17% of the income tax and USC collected.

The Institute points to this as a potential risk noting that ‘the reality is the Irish personal tax base is unusually narrow and overly dependent on higher-paid workers, a significant proportion of whom work for a small group of multinational companies. This leaves the Exchequer exposed.‘ 

What's your view on this issue?

You can tell us here

The rumours on the ground are that the acceptance now of the State pension age of 66, with increases now off the cards, will come at an extra social insurance cost which will need to be paid for by an increased PRSI take.

The Institute addresses this by suggesting consideration should be given to capping the level of earnings to which PRSI applies, as is the practice in other European countries.

On SMEs, the document suggests that Research and Development tax credits should be made more accessible to small and medium-sized businesses to help drive innovation, with innovation amongst Ireland’s indigenous sector being a stated objective of the Government.

On Capital Gains Tax, in Institute notes that Ireland’s capital gains tax rate is one of the highest in Europe, and in their view, it is reasonable to conclude that the current high rate is dampening transactions and growth in the SME sector with a calling for the rate to be reduced to 25% for active business assets.

The full content of the submission is available through the Institute's website. Whilst the document expectedly doesn’t carry sector-specific tax policy changes, such as those that may be applicable to farmers, the document is nonetheless hugely relevant given that a tax system that supports and productive economy benefits all.