Choices we make as a country in tax policy can have hugely positive or hugely negative impacts.
Sometimes, tax policy can boost a sector. One of the best examples has been urban renewal reliefs, which transformed dilapidated and derelict parts of our major cities, such as the Customs House Dock and Temple Bar areas of Dublin. Temple Bar has been transformed into one of Ireland’s top tourist destinations.
However, tax policy that over-stimulates property markets can be disastrous. When stamp duty of up to 9% was in place, an exemption was available for new properties less than 1,345 square feet — the fallout from this misguided policy is a current shortfall in larger family-sized homes (now bucking the falling prices trend due to under-supply.
Effective tax policy can have a positive influence at very little cost or no cost to the exchequer. Best of all, policy changes can deliver more benefit to the exchequer than they cost, if they stimulate growth.
The Budget news that the Finance and Agriculture Ministers will review farm tax policy can be given a cautious welcome, if the objective is the mutual benefit of farming and the economy. Such policy change can be a win-win for all. For example, here are some cost-neutral changes that could help farming expand and meet the Food Harvest 2020 targets, generate extra profit on farms, and increase exports.
* Encourage on-farm building work which will support our Food Harvest 2020 targets, by allowing farmers claim allowances for farm building over three years, rather than the existing seven years. The shorter time frame was used successfully during the Farm Waste Management Scheme from 2007 to 2009. The upswing to the economy is that such a scheme would support construction jobs, and purchase of local construction material.
* Income averaging should be revised. It should be opened up to facilitate farmers who may wish to create another self-employed income source. We should also consider measures to protect farmers faced with increased price volatility, through UK-style Individual Savings Accounts, or Australia/New Zealand-style farm deposit concessions (farmers are encouraged to save in good years so that they can manage in later periods of difficulty).
The current scheme of income averaging in Ireland is outdated and does nothing to help farmers manage price volatility. All sectors have experienced huge variation in price in recent years, with current milk prices up to 40 cent per litre, in contrast to an average 22 cent in 2009. This year’s grain harvest saw farmers face a price fall of more than 30%, from €220 per tonne of barley in 2011 to about €150 this year.
* The system for taking on temporary employees should be revised and simplified. Signing off from social welfare, registering as an employee, and signing back on is enough to dissuade any person from taking up temporary employment.
An ESRI report showed that most would be better off working — but one-parent families and couples with only one person working “face a very weak financial incentive to increase earnings”.
An employer should be allowed operate a flat tax for temporary employees, with the employee not required to go through the full sign-off/sign-on process.
* Farmers should be encouraged to expand production. Currently, a farmer is penalised when adding productive animals in his/her herd, because tax must be paid on a majority proportion of the increase in value of stock. A farmer who pays tax at the high rate and who decides to increase his milking cows — by 50 animals, for example — is likely to have incurred a tax of over €15,000 in notional profits tied up in additional stock. Acquisition of additional stock should be treated as an expense — or should qualify for capital allowances, like other functional assets used in a business. A 100% stock relief can be made cost-neutral, by applying a clawback in the event of a reduction in herd size at a future time.
* Farmers should be allowed access price and cost control strategies as part of their trade. Use of futures contracts, forward selling and derivatives is widespread in other countries similarly exposed to price volatility; but current tax rules do not facilitate such strategies here.
It is interesting to see that farm organisations are now reviewing these alternative tax policy initiatives. It is expected that a consultation process will be initiated by these organisations with the Agriculture and Finance Departments ahead of their review.
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