On Friday 21 May 2021, the ESRI hosted the webinar 'Options for raising tax revenue in Ireland' ESRI researchers, Theano Kakoulidou and Barra Roantree, presented key findings from the report of the same name. Research found that increases in taxes on income, consumption and property may be needed to fund future public spending. Read the publication here: https://www.esri.ie/publications/options-for-raising-tax-revenue-in-ireland

1. www.esri.ie
Options for raising tax revenue in
Ireland
Budget Perspectives 2022
Date
21st May 2021
Presenters
Theano Kakoulidou
Barra Roantree

2. 2
Likely need for higher taxes in the coming years
Spending rose from €87.2bn in 2019 to €106bn in 2020
• Deficit financed spending the appropriate response to COVID-
19 pandemic and should not be withdrawn prematurely
However…
• Budget 2021 raised non-COVID spending by >€5bn (IFAC)
• Big commitments to reform health system & expand social
welfare entitlements in Programme for Government
• Potential over-reliance on corporation & motor tax receipts
• => need for substantial tax increases in the years ahead

3. 3
Ireland raises slightly less in taxes than it used to
Source: See Figures 2.1 in “Options for tax increases”
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
1980 1985 1990 1995 2000 2005 2010 2015 2020
Tax revenue as a share GDP & GNI*
% of GDP % of GNI

4. 4
… with revenues coming from four main sources
Source: See Figures 2.3 in “Options for tax increases”

5. 5
Raising taxes on personal income could raise €€€
Source: See Figures 3.1 & 3.2 in “Options for tax increases”
-1.60
-1.40
-1.20
-1.00
-0.80
-0.60
-0.40
-0.20
0.00
All Lowest 2 3 4 5 6 7 8 9 Highest
%
of
disposable
income
Income tax - standard rate: €664 m Income tax - higher rate: €320 m USC - 0.5% rate: €270 m
USC - 2% rate: €200 m USC - 4.5% rate: €376 m USC - 8% rate: €160 m
Employee's PRSI: €700 m Self-employed PRSI: €110 m

6. 6
As could increases in VAT (though less progressive)
Source: See Figures 3.3 in “Options for tax increases”
-1.6
-1.4
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
All Lowest 2 3 4 5 6 7 8 9 Highest
%
of
income/expenditure
Income decile group
Reduced VAT rate - % of income: €440 m Standard VAT rate - % of income: €250 m
Reduced VAT rate - % of expenditure Standard VAT rate - % of expenditure

7. 7
Other options for broad-based tax rises include:
Increasing excise duties & the carbon tax
• 10% rise in all rates would raise about €600 million
• Burden would be more for lower-income households
• But better suited to addressing externalities than raising €
Revaluing and extending the Local Property Tax
• Currently based on 2013 property values
• Newly built owner-occupied dwellings currently exempt
• Extending to these & updating values would raise €275m

8. 8
Could also raise main rate of corporation tax
Though unclear what such a tax increase could yield
• Receipts highly concentrated among small number of firms
(51% from just 10 in 2019) => sensitive to their decisions
Increasing rate would have other economic effects
• Would discourage investment (both foreign and domestic)
• Some of burden would fall on workers, consumers & retirees
… and international environment is in flux
• OECD BEPS process nearing agreement; UK & US raising rates
• May be argument for leaving rate and structure of corporation
tax unchanged until implications of this are fully understood

9. 9
Or focus tax increases on higher-income people
-1.00
-0.80
-0.60
-0.40
-0.20
0.00
All Lowest 2 3 4 5 6 7 8 9 Highest
%
of
disposable
income
Decile of equivalised disposable income
1% rise in existing USC surcharge on non-PAYE income (€14m)
New 3% USC surcharge on PAYE income above €100,000 (€110m)
New 43% rate of income tax above €100,000 (€315m)

10. 10
… or on those with lots of wealth/inheritances
Recurrent wealth tax would need to exempt few people
or sources of wealth to raise substantial revenue
• 90% of household wealth held as property, even for top 10%
• But most property already subject to the Local Property Tax
More scope to raise taxes on transfers of wealth
• Less than 1/2 of deaths lead to an inheritance subject to CAT
• Average payee in 2019 had received c.€600k from parents/kids
• Reducing tax-free threshold from €335k to €250k would raise
c.€63m (more if accompanied by increases in the rate)

11. 11
Potential to improve design of taxes while raising €
Many reliefs poorly targeted at achieving stated aims e.g:
• CAT Business and Agricultural Relief (€360m in 2019)
• €200k tax-free pension lump-sum (cost €134m in 2014)
• Help-to-Buy (c.€100m per year)
• Entrepreneur relief (€92.4m in 2018)
Self-employment is highly tax favoured vs employment
• No equiv. of employer PRSI (8.8-11.05% of pay for employees)
• Blanket lower tax rates poorly targeted at entrepreneurship
• Very similar access to contributory benefits (93% in value terms)
• Equalising rates could raise €1.15 bn

12. 12
Conclusions
Need for substantial tax increases in coming years likely
• While many ways to focus tax increases on ‘better off’, would
struggle to raise substantial €€€ unless set at very high rates
• Relatively straightforward to raise substantial €€€ by increasing
broad-based taxes on income, consumption & property
• Can still achieve distributional goals with such tax increases
Wide range of anomalies in the current tax system
• Create distortions which raising rates alone could amplify
• Addressing these could raise revenue while leaving tax system
better designed for the coming decades