Shaking The Money Tree
Nick Mulcahy explores the ideology underpinning the report of the Commission on Taxation and Welfare which urges government to ramp up taxation of capital and property
The concept of equity looms very large in the report of the Commission on Taxation and Welfare, which has laid out a blueprint for tax reform that Fianna Fáil and Fine Gael might prefer to gather dust on a shelf but which Sinn Féin and every other left-wing political party will latch on to.
Equity, as its proponents see it, is an ideological belief that is perhaps best understood by reference to another ideological concept, equality. Equality means that everyone is provided with the same amount of resources, whether that’s education, medical care or employment opportunities. To quote Global Citizen, ‘equity is when resources are shared based on what each person needs in order to adequately level the playing field’.
Both equality and equity are value judgements, which change over time. The entitlement to equality is taken as given in nearly all aspects of Irish society, and is underpinned by legislation. Equity is a more nebulous concept, not least due to its close cousin ‘fairness’.
In many circumstances fairness is a subjective judgement call. For instance, the worker who pays PRSI all their working life might wonder about the fairness of their state pension being not much larger that the pension received by the idler who never worked at all. Nevertheless, fairness has widespread buy-in as an unarguable tenet, similar to the undeniability of the science linking global warming to carbon emissions.
Fairness is a central plank of Ireland’s taxation system. In the tax world, it’s called ‘vertical equity’. As the Commission explains, the principle behind vertical equity is that those who have the ability to pay more taxes should contribute more than those who are not. Pursuit of vertical fairness by politicians and policy makers has resulted in a situation where the top 25% of earners in Ireland pay c.80% of income tax, while one in four taxpayers pay little or no income tax.
The high earners paying all that tax might wonder about the fairness of such a regime, but nobody is paying them any attention. Fairness and vertical equity are beyond dispute as tax policy drivers, and they have the additional benefit of being ‘progressive’, another favourite word among Department of Finance mandarins who enjoy earnings-linked defined benefit pensions when they retire.
Vertical equity is accepted as a sine qua non by the Commission on Taxation and Welfare, which was established in April 2021. The Commission was tasked by government to ‘review how best the taxation and welfare system can support economic activity and income redistribution, whilst promoting increased employment and prosperity in a resilient, inclusive and sustainable way and ensuring that there are sufficient resources available to meet the costs of public services and supports in the medium and longer term’.
‘Sufficient resources’ is the key phrase in the Commission’s mandate. For the past eight years or so, government coffers have been buoyed by exceptional corporation tax receipts, which never seem to stop escalating. In the eight months to August 2022, the corporation tax yield was €11.8bn, which was €4.8bn ahead of the same period last year. The business tax accounts for 23% of all taxes collected compared with around 10% a decade ago.
Using the excuse of tax confidentiality, tax officials, civil servants and politicians have never properly explained the reasons behind this ongoing windfall, though they have been upfront with their fretting that all good things must come to an end. Since 2015, corporation tax buoyancy has funded ever increasing current and capital spending by government departments. If the business tax reverted to a normal trend, what would happen then? As taking the axe to spending and entitlements is
not politically wise, the only alternative is to raise more taxes, which is where the Commission came in.
The 13-person body, chaired by Niamh Moloney, a law professor in the London School of Economics, delivered as requested. To scoop up more taxes, the Commission’s focus settled on people who have the resources to pay more tax. That largely means individuals and businesses who own property and who are already paying most of the income tax.
Besides referencing vertical equity, the Commission’s thinking was also informed by ‘horizontal equity’. This concept references the idea that people in similar circumstances should be taxed on the same basis. This means that capital gains, gifts and inheritances, lottery winnings and all other receipts are taxed at the same level as regular employment income.
Nailing its colours to the mast, the Commission report declares: “While there may be practical limitations to how precisely this principle can be applied, it remains essential to the design of the taxation system in terms of not just efficiency, but also, crucially, in terms of fairness. That two people who have the same income should be taxed similarly is a basic principle of tax design.”
In fact, this basic principle is absent from large swathes of the Irish tax system. For instance, people aged 70 or over with aggregate annual income under €60,000 pay a USC rate of 2% on income over €12,000 rather than the full USC rate structure applying. Grandchildren can receive €32,500 from their grandmother’s estate without paying any tax. Revenue rules allow for a tax-free lump sum of up to €200,000 to members of approved pension schemes.
In its report, the Commission says its approach to tax reform was also guided by the concept of ‘intergenerational equity’. This concept, also ideological, postulates that economic growth should be widely shared, so that each succeeding generation can expect its living standards and the opportunities it enjoys to be at least as good as those enjoyed by the generation that went before.
In this context, the Principal Private Residence (PPR) — the source of most Irish people’s wealth — was examined. The Commission’s view is that the complete exclusion of PPRs from Capital Gains Tax is an anomaly. However, Prof. Moloney and her colleagues shied away from really stirring up a hornet’s nest, and settled for recommending that PPR relief should be restricted ‘over time’.
There was no such hesitation on other property issues, with a firm recommendation for a Site Value Tax. This would apply to all land currently not subject to the Local Property Tax — i.e. commercial (developed and undeveloped), mixed-use, agricultural land (with a ‘differential rate’) and undeveloped zoned residential lands, state-owned lands, as well as all land