The ESRI has recommended the need for an increase in income tax, VAT and local property tax to ensure future funding by the Government is maintained.
According to The Irish Times, ‘higher rates of income tax, VAT and property tax may be needed to fund future government spending, the Economic and Social Research Institute has warned'.
The think-tank said future spending pressures combined with potential declines in corporation and motor tax receipts were likely to result in higher taxes in the years ahead.
While increasing tax should be avoided until the economy has recovered from the COVID-19 Pandemic, the report said increases in income taxes, VAT or the local property tax could ‘raise significant sums of revenue’.
The Irish Times elaborated further by saying that ‘increasing the standard and higher rates of income by 1 percentage point – from 20 per cent to 21 per cent and from 40 per cent to 41 per cent respectively – would raise almost 1 billion euro a year, mostly from the top third of income earners'
The programme for government agreed last year, not to touch income tax or universal social charge rates, while Fine Gael has promised to reduce the income tax burden on middle-income earners.
Alternatively, raising the standard and reduced rates of VAT by 1 percentage point could generate an additional 690 million euro per year, the ESRI said.
Further, The Irish Times said that ‘an extra 275 million euro could also be raised by bringing recently-built properties into the scope of the local property tax (LPT) and using updated valuations for properties'
The LPT currently applies only to homes built prior to 2013. The ESRI also looked at the possibility of a wealth tax but concluded that one which exempted property would raise little revenue unless levied at very high rates.
The report said the pressure on public spending was made ‘more pressing’ by the exchequer’s increasing reliance on volatile corporation tax receipts, which are heavily concentrated among just a small number of firms.
The planned shift towards electric vehicles also put at risk more than 3 billion euro per year of taxes related to motoring.
The report further added that ‘substantial, permanent increases in spending cannot – even at ultra-low interest rates – be sustainably financed through higher deficits, it said, but instead require either reductions in spending or increases in government revenue… While there is no political appetite to cut existing levels of spending, ‘it seems likely that there will be some need for sizable tax increases in the years ahead,’ it said’.
All of this raises the question, should the Government consider the recommendations set out in the latest ESRI report and consider increases in income taxes, the local property tax and VAT?
Firstly, the mistakes of the past cannot be repeated as previous Governments which inevitably led to the catastrophic impact of the Great Financial Crisis of 2008.
Successive Fianna Fáil – Progressive Democrats’ coalition Governments led consistent increases in public spending, particularly in social protection, whilst consistently decreasing taxes. Inevitably, this resulted in public finances became overwhelmed. Meanwhile, the property bubble burst and fuelled the significant impact of the financial crash in Ireland.
The current government cannot repeat the mistakes of previous Governments and ensure that there is no imbalance between increases in public spending and taxes.
For taxation measures, the Government should consider an alternative to the local property tax or reforming the system. The local property tax was first introduced as a measure under a range of austerity measures, under the Fine Gael – Labour coalition Government.
While it is intended to be a measure that raises money for local authorities across the country, a significant portion of this local property tax goes towards central government in Dublin.
Local authorities should retain the entire revenue derived by these taxes. Meanwhile, as recommended by the ESRI, the LPT should apply to the updated valuation of properties after 2013 too.
A minimum of a 1 percent income tax increase on those on higher incomes would not be a radical proposal, as recommended by the latest ESRI report. Alternatively, a 4 to 5 per cent increase on the higher rate of income tax should be considered on the higher rate of income tax.
Further, on the issue of reliance on corporation tax for tax revenue from the exchequer, another issue that must be taken into consideration, is our reliance on GDP in measuring economic growth. If one were to analyse Ireland’s economic performance in the past year, in terms of GDP growth, its economy grew.
According to Reuters, ‘Irish gross domestic product probably grew 2.5% last year despite a series of national COVID-19 lockdowns as a strong multinational sector lifted the economy’.
Instead, the Government should consider paying more attention to HDI (human development index) and well-being indicators in measuring economic growth and ensuring that income inequalities are limited and if present, are addressed through Government measures.
Ireland’s reliance on the multinational sector for economic growth hides the real economic performance of Ireland and income inequalities that exist, particularly for lower income people.