The tax burden will probably continue to edge upwards, even if the Government sticks with its commitment not to increase actual tax rates, writes Cliff Taylor, Economics Editor
As Minister for Finance, Charlie McCreevy spent his first few years reducing tax rates. It now looks like he will devote much attention in the second half of his tenure to ensuring that as much income as possible is exposed to tax. It is an approach made necessary by the tight Exchequer finances and - in so far as it hits the wealthy - one that is politically popular.
The Minister's explanation of the thinking behind this is clear enough. If tax rates are low, he argues, then the tax base - the amount of income exposed to tax - must be wide. He is committed to lower tax rates, arguing they are essential to support economic growth, but says that this means the case for special allowances and reliefs is much reduced.
The Minister signalled clearly yesterday that such allowances and reliefs would remain under the spotlight over the next few years, as indeed the Government has agreed with the social partners as part of the proposed new national programme. Over the next couple of years he will have information on the amount foregone from relief on stallion fees, forestry and greyhound stud fees. And a range of other reliefs are either due to end or will be put under the microscope. Even the artists may not be safe!
Total discretionary reliefs and allowances in the system cost the exchequer an estimated €8 billion a year, out of a total tax take of some €29 billion. Many of these are legitimate and normal business and personal tax measures. However all the signs are that there is plenty more gold for the exchequer to mine from the hills in the years ahead.
In part, of course, this approach is driven by the necessity of more austere economic times. Such was the extent of the boom that, in many cases, even though the tax rates were lowered, the revenue actually increased.
Now, however, a shortage of revenue has led to a new focus on the tax base - and on the necessity of introducing other revenue raising measures such as the new bank levy. It also means that this year the Minister did little to adjust the income tax system for inflation. This means that the real tax burden will increase for most earners.
Closing tax loopholes is good politics too, of course. It allows the Minister to claim that he is targeting schemes which allowed the better off to avoid tax. As a recently-published Revenue Commissioners study showed, nearly one in five of the top earners in the State had an effective tax rate (the tax take as a percentage of total income) of less than 15 per cent in the 1999/2000 tax year.
Much of this was attributable to their use of various property-based schemes, which are now being gradually closed off. Many will end completely at the end of next year.
Whether the closing of loopholes and the end of special schemes will lead to an increase in the tax contribution of the rich remains to be seen. No doubt the tax advisers have a few other schemes in their lockers. However it does seem as if many of the more lucrative reliefs are now being gradually closed off.
This will take some years to be reflected in the tax take, as the Minister generally cannot close off schemes retrospectively. This means that people who get into such schemes before the Department discovers them and closes them off still benefit.
In previous years something of a game has gone on, with the Department of Finance closing off allowances, only to see tax advisers discovering new ones. As the Minister himself declared: "The ingenuity of tax advisers knows no bounds".
Some of the tax avoidance schemes are, indeed, mind-bendingly complex. However the cleverest ones are often fairly straightforward schemes to avail of loopholes, or use incentives in ways which were never originally intended.
The Minister, much criticised in a previous ministry for his "dirty dozen" social welfare cuts, came up with a dozen tax loopholes to close off yesterday. Among this year's gems was one under which investors exchanged a stream of rental income they were owed on a property with a bank, in return for which the bank paid them a lump of cash. The bank took a profit margin on the deal, while the investors avoided income tax at 42 per cent on their rental income, instead paying capital gains tax at just 20 per cent - or less when various allowances were taken into account.
Under another scheme being closed off, a married couple renting out a property increased their mortgage interest relief and availed of rent relief by selling the property from one spouse to the other.
The Revenue and the Department discover these schemes in various ways. Some are uncovered by the Revenue as they examine unusual tax patterns. A couple of them surfaced in recent newspaper articles.
The average PAYE taxpayer may take some little solace that at least many of these schemes are now ending. However all the signs are that the tax burden on many earners will edge upwards over the next couple of years.
Speaking at yesterday's press conference, the Minister referred to a recent EU Commission study which showed that the tax burden on low earners here was one third the EU average and was lower even than the low-tax US. It was as clear an indication as has come from a senior Minister that the days of significant tax cuts are over. With pressure to increase spending on social services, a rising public pay bill and the need to maintain investment in infrastructure, there will probably be little scope in the next few budgets for lower taxes.
Indeed, the tax burden will probably continue to rise, even if the Government sticks with its commitment not to increase actual tax rates. This year, most PAYE earners will find the real income tax burden increasing slightly due to the Minister's failure to adjust credits and the standard rate band. Meanwhile a host of other indirect tax rises and charge increases from State organisations will hit after-tax income.
Next year, many will see their tax bill rise, as PRSI is imposed on benefit-in-kind such as company cars and the Minister may again have to try to squeeze income-tax payers a little further to hold down borrowing, depending on the economic performance in the meantime.
So it isn't likely to be only the rich that find themselves paying more tax. Closing off loopholes is essential to have demonstrable fairness in the tax system and to provide a long-term revenue base. But in the short-term, a little more PAYE, excise duty and VAT does a lot more to help balance the books. As does a good old-fashioned bank levy.