MUCH COVERAGE HAS been given to the recovering economy over the last number of months with particular focus in the last few weeks on exchequer tax receipts. These have typically followed a pattern of comparative to the same quarter in the prior year to demonstrate the percentage increase year on year. Whilst obviously a percentage increase in tax take for the government is a positive, a percentage increase from a low base may not be that impactful.
That being said, after many years of stark economic trading conditions, any recovery – no matter how small – is to be welcomed. After many harsh budgets that have produced successive cuts to expenditure and hikes in taxes, it is no doubt a welcome relief to have a positive backdrop in the lead up to this year’s budget.
A lot of debate has arisen as to who has endured the most hardship for what has undoubtedly been a severe recession from the vast majority of sectors of society. There are calls for tax breaks to be given to those most in need and the difficult task of identifying the most worthy of such breaks has already begun – and the results will announced very shortly.
Swings and roundabouts
Considering the economics of tax may sound like a lofty or even academic pastime. However, this topic has overwhelming relevance for most of us no matter what sector of society we occupy. It is all swings and roundabouts, really, and what we take from one place we need fill from another.
This can be a very positive and effective way of shaping tax policy to achieve certain desired outcomes. For example, we are all very familiar now with the concept that a foreign company being attracted to Ireland to set up operations by, amongst other things, our low tax rate is a positive as these companies employ people. Therefore, by not taking too much tax from companies it achieves the result of lowering unemployment and giving the exchequer not just the boost of lower social welfare payments but also, at the same time, increases actual exchequer receipts as the levels of personal tax paid by working individuals is very high. This is a very clear example of the economics of tax, an illustration in cause and effect, if you like.
Keeping Ireland on the map
So, if we are discussing tax breaks it’s important not just to identify the worthy “receivers” in this budget but also to give consideration as to who or what will be the “payers”. Because where there is one, there surely has to be the other.
It is also worth considering what tax policies can be introduced to encourage further economic activity and growth.
High levels of personal taxes have no doubt had an impact on foreign companies’ willingness and ability to get senior executives to relocate to Ireland to grow their Irish companies. Concerns about Ireland’s competitiveness and ability to encourage foreign companies to establish trading operations in Ireland – and thereby boost employment – led to large tax breaks being given to foreign executives relocating with their companies to Ireland. This too has proved effective is keeping Ireland on the map.
What about homegrown entrepreneurs?
Ireland’s indigenous companies continue to be referred to as the ‘backbone’ of the economy and are described by many commentators as key to the economic recovery. However, little has been done to incentivise the founders of these companies which are so key to increasing employment.
As the UK has consistently, over the last number of budgets, introduced incentives for entrepreneurs in the form of tax breaks and is competing strongly for the knowledge economy by introducing low tax rates for patents; we in Ireland have had the exact opposite approach, and removed exemptions or increased taxes in the these key areas which has left us at a significant competitive disadvantage. The impact of these kinds of tax policy disparities with our nearest neighbour will no doubt be felt by the Irish economy as times goes on.
Rezoning land?
The property sector, has seen prices rise significantly in recent times with many commenting that there is a lack of suitable housing available. There is much concern over the lack of supply of suitable zoned land potentially creating yet another property bubble where prices spiral out of control. Generally, the economics of business show that property prices revolve around supply and demand. Too much demand and too little supply forces prices up.
Yet, despite this concern, we have a draconian 80% tax on those who get land rezoned. Hardly surprising, then, that many sites are not being rezoned for residential building purposes. Clearly this is an area where tax reform would boost the supply of suitably zoned land and create the follow on employment so desperately needed in this sector.
While the Minister for Finance has been very vocal in recent weeks on incorporating some tax breaks for middle- and low-income earners into this Budget, little if anything has been said about substantive tax policy incentives that will boost employment and a recovery in the economy such as those above – and it is these policies, or lack of them, that will have a far greater impact on how low- and middle-income earners fair over the next few years.
Darragh Kilbride, ACCA Ireland Tax Spokesperson and Tax Partner with Kilbride Consulting Tax Partners.
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