Dr. Tom McDonnell:

I thank the members and staff of the committee for the invitation to appear at this meeting. NERI is grateful for the opportunity to present our views on the report of the Commission on Taxation and Welfare. As a member of that commission, I would personally like to pay tribute to the professionalism, creativity and diligence of the commission's chair and secretariat and acknowledge the dedication and conscientiousness of the other members. We took the job very seriously.

Before I turn to the four chapters being examined, I must first note the fiscal context of the report. The commission is strongly of the view that Ireland faces major fiscal challenges and risks over the medium term and that these threats are of such scale that the overall level of government revenue will have to increase materially as a share of national income. This is the first recommendation of the report and by far its most important. The issue is therefore not so much whether taxes and social contributions will have to increase, but which revenue sources we should focus on increasing the yield from, given our five high-level policy goals of sustainability across fiscal, environmental, political and all other dimensions, reciprocity, adequacy, equity across all dimensions - horizontal, vertical and so forth - and efficiency, both in terms of administrative complexity and economic efficiency as regards minimising distortions.

The first part of chapter 6 focuses on horizontal equity. This is the principle that those with similar incomes should pay the same proportion of those incomes in taxes.

This means that taxpayers' age, legal status or where they are domiciled, their source of income or other factors unrelated to their total income should be irrelevant, at least in principle, for determining their tax liability. This is broadly the position of the commission, and it is a principle NERI fully supports.

The second part of chapter 6 focuses primarily on reforms of VAT. NERI agrees with the commission that the use of zero and reduced rates should be limited, that VAT reductions should not be used as a short-term stimulus, and that the 9% and 13.5% rates should be merged, and increased progressively, over time but of course cognisant of the current cost-of-living crisis. The timing of these changes should only begin to take place once annual inflation rates are brought back close to ECB target levels, and probably not even immediately then. While consumption taxes are often regressive in themselves, and increasing these rates are likely to be regressive, the revenues generated can be used to support our adequacy, equity and sustainability goals via enhanced resources for free universal basic services and for increased income transfers.

It is worth noting that many of the recommendations in other chapters are relevant in the context of this matter. The recommendations made in many of those chapters to do with welfare should be understood. These recommendations should be understood in terms of their happening within the context of those other recommendations, in particular around benchmarking and so forth, also happening.

In addition, NERI supports the chapter 8 recommendations regarding the overall level and tax treatment of the lump-sum, the benchmarking of the standard fund threshold and, as noted already, the ending of concessionary tax treatment based on age.

Chapter 7 notes the scale of wealth and wealth inequality in Ireland, the very low tax yield from wealth compared with income and consumption, and the need to increase the yield generally from capital taxes. The Commission’s recommended approach is that there be a substantial reworking of existing taxes on capital and wealth in order to deliver a much higher tax yield. On the other hand, it notes that attempts to introduce a new tax on net wealth should be put into temporary abeyance until the outcome of these attempts to amend existing taxes on capital and wealth was known. So capital acquisitions tax, CAT, and capital gains tax, CGT, should be tried first.

The report notes the major deficiencies in the way capital gains tax and capital acquisitions tax are currently structured, and the deleterious impact on the amount of tax collected on intergenerational asset transfers. The current highly regressive system of tax breaks effectively imbeds inequality of opportunity across generations and does so without any economic justification or rationale. In particular, CAT is a tax on windfall gains, and is likely to have much less of a negative economic impact than taxes on income and consumption.

In such circumstances, NERI strongly supports the recommendation that transfers of assets on death be treated as a disposal for CGT purposes, that the CAT group A threshold should be substantially reduced, and that the level of agricultural and business relief from CAT be reduced and reformed. Enterprise policy should focus instead on supports for new businesses and innovation not on supports for the intergenerational transfer of wealth and assets. In addition, we agree that the CGT principal private residence relief has no economic justification, benefits better-off households and should be materially restricted over time. We support the recommendation that a modest capital charge be applied to gifts and inheritances generally.

I turn finally to chapter 14. The main residence, other property and land cumulatively make up three quarters of household wealth. There are many economic and social arguments for materially increasing taxes on property and land. We know that the tax structure influences growth and that the economics literature generally finds that recurrent taxes on immovable property are the least distorting to economic activity. Therefore, they are the least damaging or most beneficial to long-run growth prospects. The taxation of land is the optimal form of tax from an efficiency perspective as it has no effect on supply and does not discourage development of the property. On the other hand, property taxes are preferable from a vertical equity perspective. Ireland has an extremely modest tax on property and no site value tax on land. NERI agrees with the view of the commission that the composition of taxation should materially shift towards the taxation of land and property. This is for equity, efficiency and sustainability reasons, all of which I am happy to elaborate upon.

Our view is that the local property tax should be significantly increased, made progressive and contain surcharges for vacancy and non-principal private residences whether for the owner or a registered tenant. This should be accompanied by the gradual introduction of a site value tax over time with a yield significantly in excess of the current yield from commercial rates.

As a quick clarification, the commission recommends that local authorities should lose the ability to reduce the rate but not necessarily lose the ability to increase it. Effectively, the rate would become the floor but there would still be the capacity for democratic engagement at the local level to allow those decisions to be made. At the same time we are cognisant of asset rich and income poor situations. The best way to resolve this problem is through a generous deferment system. The deferred amount along with interest could in these cases only be payable on the sale or transfer of the property. This resolves the hardship issue and simultaneously protects Government revenue over the longer term.

We agree with the commission that tax incentives, for example, section 23-type reliefs and the help-to-buy scheme, should not be used in order to stimulate the supply of or demand for housing. Past interventions in this area have been calamitous resulting in distorted incentives and significant deadweight. The Government should desist from using the tax system as a means to fuel the property market.

I am happy to take any questions.