Oireachtas Joint and Select Committees
Wednesday, 16 November 2022
Committee on Budgetary Oversight
Report of the Commission on Taxation and Welfare: Discussion (Resumed)
Neasa Hourigan (Dublin Central, Green Party)
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Apologies have been received from Deputy Mairéad Farrell. All those present in the room are asked to exercise personal responsibility to protect themselves and others from the risk of Covid-19.
In the first session today, we are dealing with the Commission on Taxation and Welfare report. I welcome Ms Sarah Perret and Dr. Bert Brys from the Organisation of Economic Co-operation and Development, OECD. I thank them very much for attending. This is our second meeting to discuss chapters 6 to 8, inclusive, and 14 of the report.
Before we begin, I must explain some limitations to parliamentary privilege and the practice of the Houses as regards references witnesses may make to other persons in their evidence. The evidence of witnesses physically present or who give evidence from within the parliamentary precincts is protected, pursuant to both the Constitution and statute, by absolute privilege. However, if evidence is being given remotely from a place outside the parliamentary precincts, witnesses may not benefit from the same level of immunity from legal proceedings as a witness physically present may. Witnesses are reminded of the long-standing parliamentary practice that they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable, or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. Therefore, if their statements are potentially defamatory in respect of an identifiable person or entity, they will be directed to discontinue their remarks. It is imperative that they comply with any such direction.
Members are reminded of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him, her or it identifiable. I remind members of the constitutional requirement that they must be physically present within the confines of the place where Parliament has chosen to sit, namely, Leinster House, in order to participate in public meetings. I will not permit a member to participate where he or she is not adhering to this constitutional requirement. Therefore, any member who attempts to participate from outside the precincts will be asked to leave the meeting.
I invite Ms Perret to make her opening statement.
Ms Sarah Perret:
I thank the Chair and the committee very much. I am here with my colleague, Mr. Bert Brys. We are very happy to be here to discuss chapters 6 to 8, inclusive, and 14 of the Commission on Taxation and Welfare report
Many of the issues that are highlighted in the report are quite common across OECD countries, including high levels of income and wealth and inequality, with trends towards an increasing concentration of income and wealth in a number of countries, reductions in housing affordability, with an unprecedented growth in house prices since the 1990s that accelerated even further during the pandemic, and declines in homeownership rates among younger generations, as well as increases in public debt levels.
Tax systems have an important role to play in addressing some of those issues. The chapters we are discussing focus in particular on taxes that can play an important role in strengthening horizontal, vertical and intergenerational equity.
The OECD has recently done work on a range of taxes that are discussed in chapters 6, 7 and 14. In 2018, we released two reports, one on taxation of household savings and the other on net wealth taxes. In 2021, we published a report on inheritance taxes. Earlier this year, we released a report on housing taxation in OECD countries. Our studies have generally shown that the taxation of household savings is highly heterogenous across types of assets and is sometimes regressive. The reports also show that taxes such as inheritance taxes and property taxes can play an important role because of their comparatively less distortive economic effects compared with other types of taxes and also because of their good properties from an equity point of view. In practice, however, we observe that these taxes are often underused and poorly designed in OECD countries, which leads to reductions in revenue, equity and efficiency.
Our study on net wealth taxes concludes that there might be less justification for such taxes in countries that adequately tax personal capital income, including interest on dividends and capital gains, and wealth transfers. Where this is not the case or might not be possible through reform, there may be more justification for a wealth tax. However, a country deciding to put in place a wealth tax would need to ensure it is well designed to avoid the pitfalls of previous taxes of this type. We are conducting ongoing work on the design and impact of taxes on personal capital income, mainly dividends and capital gains. This is an area in which we believe there is scope for reform, especially given the progress made on international tax transparency and the fight against offshore tax evasion, most notably through the automatic exchange of information, AEOI.
In general, our work has shown that the tax systems of OECD countries could be reformed in ways that simultaneously enhance efficiency, equity and tax revenues, although we recognise such reforms may be politically challenging. Of course, the need for reforms depends on country-specific circumstances, but international comparisons are always helpful. For instance, Ireland's total tax revenues amounted to approximately 20.2% of GDP in 2020, compared with an OECD average of 33.5%. This was the fourth-lowest tax-to-GDP ratio in the OECD after Mexico, Colombia and Chile. In terms of the composition of tax, Ireland collects a comparatively larger share of total revenue from income taxes and a lower share from social security contributions compared with the OECD average. It collects relatively similar shares of total tax revenues from property and consumption taxes. We hope our participation in this meeting will provide the committee with useful elements of international comparison.
It is critical to remember that taxes are only one of the instruments governments have at their disposal to address policy issues. In general, no matter what the objective, taxes cannot on their own address issues. When it comes to inequality, three quarters of the reduction in income inequality in OECD countries, on average, occurs through transfers and only one quarter directly through taxes. This highlights the importance of transfers but also of taxes that might appear less directly connected to inequality reduction but may nonetheless play an important indirect role by raising the revenue needed to fund redistributive transfers.
Housing market affordability is another area in which taxes need to be considered alongside other policy instruments. In fact, it is an area in which non-tax policy tools may be more effective. In most cases, non-tax policy measures to encourage housing supply will be more effective than tax measures in enhancing housing affordability.
I thank the committee again for inviting us. We look forward to the discussion with members.
Neasa Hourigan (Dublin Central, Green Party)
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I thank Ms Perret. I now open the floor to members, starting with Deputy Boyd Barrett.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I welcome the witnesses from the OECD. I certainly am in favour of wealth taxes. Ms Perret said any country looking to introduce a new wealth tax should avoid the pitfalls of previous such taxes. Will she give examples of wealth taxes she considers were poorly designed? Has she any examples of wealth taxes elsewhere in the world that were better designed and that have, in her opinion, worked?
Ms Sarah Perret:
I thank the Deputy for his question. Wealth taxes are indeed not a new concept. As I said, we released a report on the topic in 2018. To give the Deputy an idea, in 1990, 12 OECD countries had wealth taxes in place, while only three still have them today. Those countries are Norway, Spain and Switzerland. The taxes were repealed for a variety of reasons but there were some common elements across countries. One big reason is that they were relatively burdensome from an administrative perspective and, at the same time, they generated relatively limited revenue. Generally, in the countries in which wealth taxes were levied, they accounted for less than 1% of total tax revenues.
An exception to this was in Switzerland, where the cantonal wealth taxes that are still levied raise approximately 4% of total tax revenues. That is still low but it is much higher than experienced in other OECD countries. The fact Switzerland collected significantly higher revenues is explained by a number of the feature of its wealth tax. There is a much lower tax exemption threshold, which means the tax applies to part of the middle class. The base is relatively broad and applies to a wide range of assets. The relatively higher revenue is also linked to the fact there are a lot of wealthy individuals in Switzerland.
I have referred to the administrative burden associated with wealth taxes as one factor in their repeal, as well as the fact they raised limited revenue. Another reason for their removal is that wealth taxes were often less progressive than they were supposed to be. They often weighed more on part of the upper middle class, let us say, or on households that counted among the wealthiest but the wealth of which was predominantly in the form of real estate. The reason for this is that a lot of wealth taxes, mainly in OECD and European countries, were levied on relatively low levels of wealth. The level of net wealth people needed to become taxable under the wealth tax was relatively low, which meant it applied not only to the very rich but also, in a number of countries, to a part of the middle class.
At the same time, the taxes were quite easy to avoid or evade for those at the very top of the wealth distribution, either because they could have their wealth in assets that were exempt under the wealth tax or they could evade taxes by hiding their assets offshore. Another factor is that there was some anecdotal evidence of people leaving countries with wealth taxes, although the migration effects of such taxes is something on which we are still missing solid evidence. There were some high-profile cases of people leaving countries with wealth taxes.
These are some of the elements that explain why wealth taxes were repealed in many countries. They are factors that would need to be taken into consideration if countries want to implement such taxes.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Was a wealth tax introduced recently in Chile or elsewhere in South America?
Dr. Bert Brys:
I cannot remember exactly in respect of Chile, but in Colombia, they had a temporary tax that has been prolonged over time and they will now make that permanent. However, it is as Ms Perret said. One has to see that wealth tax also in relation to the other taxes on capital that already are in place. The Colombian or Chilean setting is a different setting from Ireland. There is much to say. It is not necessarily that we in the OECD are against wealth taxes; we just highlight the advantages and disadvantages and what the experiences are in countries.
As Ms Perret said, it poses many base challenges. Making sure there is a broad base is not easy. Just to repeat a bit perhaps and I am sorry for that, but as Ms Perret said, we are dealing with many people who have their wealth in pensions and land. It is all not that straightforward to include that type of wealth also in the wealth base. Given the design of Ireland’s capital income tax system and also some of the interesting propositions made in the report, which goes into the direction of strengthening the capital income tax system, I want the committee to keep in mind that if a wealth tax is added on top of that, Ireland might end up with a very high effective tax rates on certain types of capital income. On that, we typically give the example that a wealth tax is similar in nature to a proportional tax rate on a presumed and imputed type of income. Therefore, the committee can turn the thinking on a wealth tax into a type of income tax. Let us say a 1% wealth tax is equal to a 25% income tax - a proportional tax on an imputed presumed 4% return on that wealth. When thinking about overall tax burdens, that 1% wealth tax or 25% on 4% imputed comes on top of the dividend taxes and capital gains taxes that Ireland already levies and would end up in very high effective tax rates.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Okay. In the OECD statement, property taxes were referred to as having various pitfalls and as “under-used and poorly designed”. Could the witnesses elaborate a little bit more on good and not so good examples?
Ms Sarah Perret:
Yes. The Deputy can find information on this in the report we just released on housing taxation in OECD countries. It covers all the taxes levied on housing, the main one being the property tax. For the property tax, the assessment is that, in general, this is a tax that is among the most economically efficient forms of taxation, largely due to the immobility of the tax base, which reduces the potential behavioural responses of taxpayers. Empirically, it has been found to be among the least damaging taxes for long-run growth in GDP per capita. There is a strong case for property taxes.
The issue that we have highlighted in our report is that despite those good properties, there are some OECD countries that have well designed property taxes, but there are also many OECD countries that have property taxes that rely on very outdated property values. I have a few examples here. For instance, property values used for property tax date back from 1973 in Austria, from 1975 in Belgium, from 1970 in France and 1991 in the UK. Some of these countries, of course, apply some corrective factor, but it is not the same as revaluing properties for the purposes of the property tax. What that means is that it reduces the revenue potential of property taxes. What we show in the report is that we have seen a tremendous increase in house prices, but the property tax revenues have not kept up with that increase in property values, largely because of these outdated property values that are being used for the property tax.
It also reduces the efficiency and the equity of the tax because it means that people who have seen increases in the value of their homes may not be paying more tax. That is the predominant feature that limits the revenue potential, the efficiency and the fairness of property taxes in OECD countries. There are definitely countries that regularly value their properties, whether it is yearly, like Australia or Lithuania, or every three years, like New Zealand. Norway also updates property values frequently. There was a recent reform in Denmark as well. It used to rely on very outdated property values and shifted to a system of regular property valuations.
That is definitely the main issue with property taxes in OECD countries.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Yes, absolutely.
Dr. Bert Brys:
The category of property taxes is broad and includes transaction taxes, which is not a type of tax that is most favoured. We talk about recurrent taxes on immovable property. It is definitely an important and a good tax to have in a country's tax mix. That fits and is very nicely aligned with the report that we are talking about. We are clearly in support of that. The point that we make is that the recurrent tax on immovable property needs to be designed well. The key point there, as Ms Perret said, is the valuation. If property is not valued, at some point the tax becomes unfair. People living in similar houses, where one household bought the house in the 1970s and the other just recently, might be paying different amounts of tax, despite the fact that they live in a similar house in the same location. The regular update, also as recommended in the report, is something that we fully agree with. Also, we agree that strengthening the role of recurrent tax on immovable property, when well designed and at levels that are efficient, fair and remain affordable for houses is an important reform as part of the mix of reforms that were recommended in Ireland's report.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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This is my view now, rather than the report’s view. The difficulty is that in recent times – this is the second time in the past 20 years – we have seen property values and house prices, whichever way one wants to look at it, shoot up to astronomical levels. We saw it pre-2008 and we are just about to see us reach the same levels of property prices that we had before the crash in 2008. The difficulty that many people feel here about taxes on their family home is that they have no control whatsoever over that rise in prices. Do the witnesses know what I mean? It bears absolutely no relationship to their income. In fact, I think most people looking at the Irish housing market at the moment would say it is completely dysfunctional. One aspect of that dysfunctionality is the value of people’s homes have just gone through the roof - in particular areas as well. There are huge anomalies there. If a person happens to live in a certain part of an urban centre, a very modest home could be massively over-valued in real terms. That person then gets hit for a tax based on that value. I do not know whether our witnesses have any comment on that and whether that is an issue that arises elsewhere with property taxes. I am just curious as to whether it exists anywhere else. Certainly, I would favour distinguishing between a property that is somebody’s home and property that is wealth beyond their own principal private residence - in other words, where people have multiple properties.
There is quite an important distinction between those two things, namely, a place that is just a home and a place that is an asset but is not necessarily a home or is even an asset from which revenue is generated by renting it out, speculating on it or whatever. Are there any comments on those points?
Ms Sarah Perret:
I will comment on what the Deputy said about the increases in property values. One of the advantages of a property tax is that it is capitalised in house prices, so, in theory, it could help to stabilise house price growth. Indeed, there are OECD studies which indicate it does that. I agree that we are in a situation where house prices have been growing tremendously, and so the question of regular value updates is tricky. Some countries do that not on a yearly basis but over a certain number of years, which might help with this issue.
On distinguishing between somebody's home and other properties, it is usually the case that owner-occupied housing in OECD countries tends to be tax favoured. That is probably a common approach across countries. Fewer tax reliefs are available for secondary properties. Some countries have progressive rates in respect of secondary properties. That is a common approach among OECD countries.
Dr. Bert Brys:
I will add my views on that. I agree with the point and concern raised. The affordability of tax is very important. In an abstract setting, if all property values go up, that does not necessarily mean the taxes people pay will also have to go up because the rates could be adjusted downwards in order to keep a level of tax that is fair and that remains efficient and affordable. That is a clear point. To be very precise on the exact example the Deputy gave, other issues might come into play in that case. If we imagine the centre of a capital city where land is very valuable because it can be used for many central capital city functions but it is not used for those functions, the value of that land will be very high, which will then have an impact through the tax liability. Often, market systems will work to incentivise and induce people to adjust their behaviour in order that land will be used for its most optimal function. Those aspects come into play as well. That is clearly a balance that needs to be struck between the different concerns.
As Ms Perret said regarding owner-occupied properties, many OECD countries have come out of a situation where the owner-occupied house has been tax favoured because of mortgage interest relief. Mortgage interest relief has been phased out in many countries, which we believe is a good because it is a very regressive relief. In many countries, it is also the case that the rental income of let properties, second properties, properties used for investment purposes and so on, is not fully taxed. It is also tax favoured. An opportunity is also there to revisit and reconsider in general how OECD countries tax rental income as one of the ways to avoid too high price rises although, it has to be said, that is not only a tax issue. Many factors are at play that drive prices up to levels that raise concern in many cities. The tax system can be used but it is definitely not only about the tax system. There are many other factors as well.
Seán Canney (Galway East, Independent)
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I thank the witnesses. I have come across a situation where people who save money and are frugal with incomes are penalised when they want to help out their family by transferring money to their children, for instance, if their son or daughter is going to build or buy a house and they want to give them a gift or inheritance. Those people have paid tax on that money all their lives and have saved money for a rainy day or to help out their families. However, this money can also be taxed because in Ireland a gift tax exemption can only be €2,500 a year or whatever. What is the best practice in a situation where somebody has worked all his or her life, has been a regular saver and builds up a cash deposit in the bank or whatever, but when that individual tries to access benefits such as the fair deal scheme, which is a nursing home support if people have to go into a nursing home, he or she is penalised, while the person who enjoyed life to the full and did not save any money gets State benefits? Is there a balance to be struck in the context of the taxation of people who save money? Should we not encourage people to save money so that we are not adding to inflation and people just being spendthrifts? I ask for the representatives' views on that.
Dr. Bert Brys:
The Deputy asked about best practice. I am hesitant to answer because Ms Perret is more informed about this. From reading our reports, Ireland has the best practice regarding the amount of money that can be transferred tax-free over a lifetime, unless I am totally confusing it with another country. To put it in broader perspective, the problem with gift and inheritance taxes, which have also become very unpopular in the OECD, is that they were poorly designed in the years when they were levied at high amounts, including the 1970s when they originated. They were levied at very high rates with very narrow bases. Again, they were a tax on people with low wealth and, in particular, the middle-income class, while the very rich did not pay much of that tax eventually because of tax avoidance opportunities.
It fits together with the role of capital income taxes. We believe that strengthening the design of capital income taxes, and well-designed inheritance and gift taxes, is important as part of the tax system. That needs to be done at rates that are not excessively high and, in the case of the examples the Deputy described, at rates that are not excessive. These rates should allow an amount of wealth to be transferred during someone's lifetime, or when one of the partners passes away, and should include a certain amount of extant wealth that is perceived as fair. We can give the Deputy information on that amount and what other countries do, although we cannot advise the committee on the decision that needs to be made. We should not start levying gift tax if, for example, €100 is given to someone. That does not make any sense of course. The actual tax-exempt amount is open for discussion. This is really Ms Perret's area. She can answer the Deputy's question better than me.
Ms Sarah Perret:
There were different points in the Deputy's question. One related to the impact of inheritance and gift taxes on savings and wealth accumulation by individuals. We cited some research in our recent report which shows that inheritance taxes have a small negative impact on savings and wealth accumulation.
It is smaller than for other types of taxes on wealthy individuals. That is one point on the savings disincentives. It is not as strong as some people assume it is, at least according to empirical studies.
If I am correct, the other element of the Deputy’s question related somewhat to the double taxation elements of inheritance and gift taxes. Double taxation is something which comes up a great deal when one discusses inheritance taxes. Double taxation is far from unique to inheritance taxes. In fact, consumption taxes can be viewed as a form of double taxation. One pays VAT most likely with one’s labour income, which has already been taxed. There is double and triple taxation in tax systems. This is not a unique feature of inheritance taxes. The other point is that, economically, what matters is not how many times something is taxed, but the overall level of taxation.
The final point on this double taxation element is that it is always viewed from the perspective of the donor, where the idea is that they have already been paying tax on the income and are now paying tax again. The reality is, however, that most wealth transfer taxes are paid by the recipients. Some 20 out of 24 OECD countries that levy inheritance or estate taxes levy them on the recipient. From the perspective of the recipient, it is not double taxation. There is one layer of taxation from the perspective of the recipient. Again, most wealth transfer taxes in OECD countries are recipient-based. Those were some of the elements I wanted to add by way of response to the Deputy’s question.
Seán Canney (Galway East, Independent)
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I thank Ms Perret very much for that response. One other aspect I want to add relates to the transfer of family farms or of small businesses. These are valued, etc., and capital gains tax is levied on the recipient. There is reduced tax in this regard. Where a farm and the stock relating to it are being handed down from one person to another and where everything has been valued, there is not a great amount of gain to be made by the recipient because they still have to make a living from it. It is as if there is a penalty attached to the fact that they are taking over a family business. Is that something Ms Perret comes across where the tax is penal, especially for a smaller family farm or business? Is too much of a burden being imposed when these assets are being transferred from generation to generation?
Ms Sarah Perret:
That is something we also look at in the inheritance tax report. Most countries that have inheritance or estate taxes apply preferential tax treatment to the transfer of businesses that are family owned. Strict requirements are attached to those transactions, whether it is an exemption or a relief more broadly, but usually there are some requirements of business continuation once the heirs have inherited. This is a common form of relief in respect of inheritance and estate taxes.
Neasa Hourigan (Dublin Central, Green Party)
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I am sorry to interrupt Ms Perret but we will need to suspend for a short period. There is a vote in the Dáil and Deputies Canney and Boyd Barrett will need to be in attendance for that. I apologise for interrupting the session.
Neasa Hourigan (Dublin Central, Green Party)
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I thank the witnesses for holding on for that suspension. We do not have a huge amount of time left, I am afraid. Deputy Canney is probably on his way back from the Chamber so if it okay, I might ask a few questions of my own. One of the things that came up in the chapters we are dealing with today was capital acquisitions tax. In our session last week we talked a great deal about windfall taxes as a concept. There is a lot of discussion at the moment in public discourse on windfall taxes as they relate to things like energy. We have had a long-standing discussion in this country about rezoning and windfall taxes. I would be interested in the witnesses' views on the capital acquisitions tax piece. What do they think the report got right there? Where do they think Ireland sits in regards to that? The main thrust of the report in general is that Ireland needs to broaden its tax base. I would be very interested in the OECD's view on that in particular.
Ms Sarah Perret:
I can respond on the capital acquisitions tax. The windfall taxes are a bit different so Dr. Brys might want to take that bit of the question. In general, when it comes to the capital acquisitions tax the report is fairly in line with the recommendations contained in the report we released last year on inheritance taxation in OECD countries in terms of ensuring the capital acquisitions tax has a broad base and also in terms of ensuring a closer or more aligned tax treatment between different types of beneficiaries of gifts and inheritances. Generally, I believe the recommendations contained in the report are quite close to what our report states.
Dr. Bert Brys:
In the current debate on windfall taxes, there is often the dimension that certain businesses are making windfall gains because of energy prices and so on. That is another topic. That is not part of the chapters we are discussing so let us move away from that. On the concept of windfall gains, that is a gain that someone gets as a windfall so there is a good argument to tax that. That is why countries have a capital gains tax, ideally with a broad base, and aligned with a lot of the recommendations in the report by broadening the capital income tax base. Perhaps that could be linked to the second question. If there are follow-up questions I would be happy to deepen the argument. It seems to us a good approach to broaden tax base. I want to put that in the broader context of Ireland's tax system. There are particular elements where the base can be broadened. Let me take a step back and look at the broader context. Looking at the design of many elements, personal income tax, supports, VAT and income support for low-income groups, Ireland has made an interesting choice of having on the one hand a very low tax burden on low incomes and a not-so-low tax burden on middle incomes, or even a bit before they might be considered middle incomes and then the higher incomes in particular non-labour incomes. The tax burden is for higher incomes, not particularly low but it is very low in international comparison for low incomes. That design in itself can result in reaching the equity objectives you want to achieve. However, it comes with the challenge that certain provisions targeted at low incomes are tapered out when income rises, which can possibly disincentivise people from working longer or more, entering the labour market or staying in the labour market. There are some disincentives there. That is a particular choice Ireland has made. Linked to that, there is not only that particular choice on the income tax side but a particularly narrow VAT base. We have a lot of reduced rates and a narrow base also there with a lot of equity objectives.
The report touches upon elements of this with suggestions. We have been discussing what we would recommend in support of what is included in the report. The report calls for more analysis and a distributional analysis of the impact of certain base-broadening measures that are suggested. More analysis using actual household budget survey data and calculating through what the distributional impact would be of certain base-broadening measures would be very welcome as part of any future reform on the indirect tax side to broaden the base.
The report focuses a lot on base-broadening on the capital income side. A key element that we wanted to flag, and we have already touched upon many issues, is to use the opportunities that the automatic exchange of information brings for tax administration. We know that in the past when a person who was tax resident in Ireland and who had income and wealth in an account offshore and did not report that, Ireland could not touch either because there was no information. That has changed with the automatic exchange of information. Many countries are now implementing this, which means that tax administrations automatically share that information with each other. This represents a great opportunity to broaden the base and strengthen the equity of the tax system.
The report contains many other elements that need to be evaluated. We have spoken a bit about housing, and there are reform opportunities in that space also. As the report refers to looking more at intermediaries and the possibilities there in terms of the differential tax treatment between direct savings and savings through intermediaries. That is an area where more analysis would be welcome. In particular, what we focus on is that there might be a lot of arbitrage opportunities still within the regime that allow people to play with the rules in order to minimise their tax liabilities. That space requires and deserves a lot of attention in order to level the playing field and make the tax system less distorted because, basically, if you induce people to change their behaviour towards a strategy in order to minimise liabilities , that creates distortions. At the same time, it allows strengthening the equity of the system.
Neasa Hourigan (Dublin Central, Green Party)
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I thank Dr. Brys. I am mindful that we do not have much time left. Does Deputy Ryan wish to ask a question?
Patricia Ryan (Kildare South, Sinn Fein)
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Yes. I apologise to the committee and our guests because I have had to run into and of the meeting. I ask our guests to outline how inheritance taxes operate in other countries. Is there anything that other countries are doing that our guests feel we should do in order to make things better?
Ms Sarah Perret:
Yes. I shall give a bit of background on inheritance and estate taxes in OECD countries. The majority of OECD countries levy inheritance, estate and gift taxes. As many as 24 out of 38 OECD countries levy inheritance, estate and gift taxes. As I said earlier, 20 of those 24 countries levy inheritance taxes on beneficiaries and the remaining four levy what we call estate taxes on a donor's overall estate. What we have noticed - this is in our report - is that despite the fact that a majority of countries levy these taxes, they actually represent a small source of revenue in the countries where they are levied. On average, in the countries that levy inheritance, estate and gift taxes, those taxes account for 0.5% of total tax revenue, which means it is a really small source of revenue. Plus there are only four countries where revenues from these taxes exceed 1% of total taxation. Those countries are Belgium, France, Japan and Korea. What that shows - it is the same story with wealth taxes - is that many of these countries have these taxes but that the tax base is very narrow. It is narrow because some countries have very high tax exemption thresholds, and especially for direct descendants. An extreme example is the United States, where the threshold is more than $11 million for children. Below that figure, a person does not owe any estate tax. Obviously, many countries have lower thresholds. Some countries have high thresholds, which means that a lot of wealth can be transferred to children tax-free. There are also many assets that benefit from preferential tax treatment or are completely exempt. The main ones are business assets, main residences, pension savings and life insurance policies, so, again, the tax base is narrowed.
Another major factor is that there are significant tax avoidance and evasion opportunities. Obviously, the fact is that there are exemptions and reliefs that favour tax avoidance. Also, in many countries, giving during the donor's lifetime is tax favoured. There are often these renewable tax-free gifts that one can make. The way one does it is start early in one's life giving to one's children and enjoy these gift tax exemption thresholds. There are also additional avoidance opportunities through a trust or charitable bequest. Obviously there is evidence of tax evasion as well. I would say that in general those are taxes that need to be designed better because these taxes, in addition to raising very little revenue, are not as progressive as they could be. In some cases, they can be regressive.
Patricia Ryan (Kildare South, Sinn Fein)
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I apologise, but I must stop Ms Perret there. I have to leave to attend a vote. I am very grateful to the witnesses for their contributions.
Neasa Hourigan (Dublin Central, Green Party)
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We must conclude. We have reached the end of the time allocated for this first session. I thank the witnesses for attending and for taking the time to look at the report, which, I believe, is quite an important one for us. It will be instructive in the next few years in terms of developing the tax and welfare policies in this country.
I propose that we suspend proceedings in order to allow people to attend the vote in the House and for the next set of witnesses to be admitted.
Neasa Hourigan (Dublin Central, Green Party)
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I welcome Ms Anne Gunnell and Mr. Brian Brennan from the Irish Tax Institute. I thank them for waiting for the division to conclude. It is appreciated.
Before we begin I must explain some limitations to parliamentary privilege and the practice of the Houses as regards references witnesses may make to other persons in their evidence. The evidence of witnesses physically present or who give evidence from within the parliamentary precincts is protected pursuant to both the Constitution and statute by absolute privilege. However, if evidence is being given remotely from a place outside the parliamentary precincts, witnesses may not benefit from the same level of immunity from legal proceedings as a witness physically present may. Witnesses are reminded of the long-standing parliamentary practice that they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable, or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. Therefore, if their statements are potentially defamatory in relation to an identifiable person or entity, they will be directed to discontinue their remarks. It is imperative that they comply with any such direction.
Members are reminded of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable. I remind members of the constitutional requirement that they must be physically present within the confines of the place where Parliament has chosen to sit, namely, Leinster House, to participate in public meetings. I will not permit a member to participate where he or she is not adhering to this constitutional requirement. Therefore, any member who attempts to participate from outside the precincts will be asked to leave the meeting.
I invite Ms Gunnell to make her opening statement.
Neasa Hourigan (Dublin Central, Green Party)
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That is fine.
Ms Anne Gunnell:
We thank the committee for the invitation to attend the meeting today to discuss the report of the Commission on Taxation and Welfare. The commission has produced a comprehensive and thought-provoking report that deserves the attention of all who take an interest in public policy. The institute broadly welcomed the report's recommendations, many of which echo suggestions we made in our submission to the commission last January. Central to the commission’s approach was its guiding objective of broadening the tax base within and across tax heads, while also being conscious of the principle of equity. This resonates very strongly with the institute’s view that a broader tax base would enable the Government to correct the current over-reliance on economically regressive labour taxes and to tip the balance in favour of indirect taxes such as VAT, property taxes and environmental charges, which would also support the decarbonisation of our economy.
Turning to the specific chapters the committee has asked us to focus on, we strongly agree that in the interests of equity and fiscal sustainability, taxpayers should not be exempt from income tax or USC by reason of their age or any other personal circumstance. We also share the commission’s concern about the narrowness of the VAT base. Ireland zero-rates more goods than any other member state. The European Commission has moved to provide member states with more flexibility over VAT rates and has updated the list of goods and services to which reduced rates can be applied. The new VAT rules also provide for the phasing out of preferential treatments for environmentally harmful goods, such as fossil fuels. We agree with the Commission on Taxation and Welfare that now would be a good time to review the VAT treatment of goods and services in Ireland to ensure our rates are in line with EU rules.
In chapter 7 of the report, the commission sets out its recommendations for a significant reworking of capital acquisitions tax, CAT, and capital gains tax, CGT, to increase the share of taxes from capital and wealth. While we agree that capital taxes should contribute to a broader base and more equitable tax system, we have concerns about the impacts and implementation difficulties of some of the commission's recommendations, for example, the proposal to treat the transfer of assets on a death as a disposal for CGT purposes. This would be a major change to the tax code, which the commission accepts, and would require detailed consideration at both a policy and operational level. In effect, this would mean two different taxes being levied on the same event which would in many cases result in the CGT payment being offset against the CAT liability. The commission itself recognises that the net revenue gain for the Exchequer could be limited. The institute’s concern is that this recommendation, if enacted, would make the process of administering an estate difficult and costly for ordinary taxpayers, with minimal benefits for the Exchequer. The commission also recommends certain restrictions to some CGT and CAT reliefs relating to retirement and agricultural and business assets. The institute agrees that these reliefs should be subject to review, but we would also point out that there are clear policy objectives underpinning these measures, chief among which is facilitating the smooth transfer and continued operation of income-generating farms and businesses all over the country.
The commission makes a serious point when it says capital taxes should be raising more revenue for the Exchequer. CGT receipts are subject to behavioural impact and our contention is that the current 33% rate, which is high by international standards, is having a dampening effect on economic activity. A reduction in the rate could improve the environment for start-ups and mature businesses, leading to an increase in transactions and Exchequer revenues. In our view, a reduced CGT rate of 25% should apply for active business assets. I will now hand over to my colleague, Mr. Brennan, to address matters raised in the other two chapters.
Mr. Brian Brennan:
In chapter 8, we welcome the conclusion by the commission that tax relief on pension contributions should be given at an individual’s marginal income tax rate because these contributions are essentially a deferral of income. The commission also acknowledges there are concerns about anomalies which could lead to inequitable treatment between unfunded pensions, including public sector pensions and the broader private pension landscape. We welcome the recommendation that such anomalies should be eliminated as far as possible.
Moving on to chapter 14, which deals with land and property, as the commission points out, the family home is the main source of wealth for the majority of households in Ireland. The institute regards the local property tax, LPT, as a key stabilising component of our tax system, and we were pleased that changes introduced last year rescued the tax from atrophy. We agree with the commission that the tax base, rates, exemptions and deferrals should be kept under constant review to ensure that they are up to date and reflect current circumstances. If the LPT rate were to increase significantly, we believe it would be appropriate to allow outstanding mortgage debt to be offset when calculating the value of a residential premises, so that LPT would be a tax on the equity held in a home and would avoid those in negative equity being liable for the tax. On the question of a site value tax, we believe that there is merit in considering it as a replacement for the existing commercial rates system. Care would need to be taken in designing such a measure to ensure that less profitable activities, which are valued by communities, would not become uneconomic as a result of the operation of the site value tax. Finally, the commission has provided an array of options for the Government to consider as it seeks to address future challenges. Ultimately, decisions on tax are a matter for the Government, but all tax policy changes have consequences - many of them unintended. Successful implementation is greatly assisted by consultation with key stakeholders, and we welcome this committee’s consideration of the report as part of this process.
Neasa Hourigan (Dublin Central, Green Party)
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I thank the witnesses for their presentation. I will open the floor to questions. Deputy Boyd Barrett is up first.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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According to the institute's opening statement, we should reduce the CGT because it "is having a dampening effect on economic activity", and that reducing it could "improve the environment for start-ups and mature businesses, leading to an increase in transactions". I ask the witnesses to elaborate on that point. I do not really understand it.
Ms Anne Gunnell:
Historically, when CGT was at a lower rate of 20% the yield was much higher because there was more activity. It encouraged more transactions to happen. The feedback that we get from members, businesses and entrepreneurs and even in our engagement with other Government agencies in helping start-ups and businesses, is that the rate is high at 33% when compared with the OECD median of around 25%. It almost discourages businesses from selling their assets and thereby crystallising the tax. The experience is that CGT has had a behavioural impact, generally speaking. If the rate was at a more acceptable level, it would encourage more transactions to take place.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I do not know much about this particular tax, so I am not trying to catch the witnesses out. Could the witnesses give me examples so that I could understand it? I just do not quite get the dampening effect and why it is problematic. To me, CGT is a tax on the appreciation of assets. I think that is fair enough. I would be inclined towards increasing it, not reducing it. I would like to hear the argument as to why that would be problematic. I just do not understand what Ms Gunnell has said. I am trying to visualise who this is impacting and what sort of activity it is dampening that is good activity.
Ms Anne Gunnell:
For example, a start-up may want to scale up so much but the only way that it can actually move on is to sell it to somebody else, but it is reluctant to sell it because it is going to be crystallising 33% tax, whereas it would be more inclined to do so if the tax was at a lower rate. Perhaps Mr. Brennan wants to comment on that point.
Mr. Brian Brennan:
It would also have an impact on the valuations. It does influence behaviour. For example, if a vendor is disposing of an asset or a business and they are looking at a 33% rate of tax, they are going to try to get an inflationary increase on the consideration on the disposal of that asset. In terms of evidence, a number of years ago the rate of CGT in Ireland was 40%, and it was reduced to 20%. The effect of that was that it had a behavioural impact, in the sense that the country's CGT receipts actually increased almost tenfold. There was a substantial increase in CGT receipts as a result of the reduction of the rate. We talk about consideration in sales. With inflation at around 10%, those gains are actually inflationary rather than economic. If these assets were bought many years ago, there has been no increase in the actual base cost to deal with inflation, for example.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I am still struggling a bit, but I appreciate the witnesses' answer. Mr. Brennan referred to the LPT as "a key stabilising component of our tax system". In what sense is it stabilising? I do not understand that either. What is it stabilising?
Ms Anne Gunnell:
The Deputy may have heard the point in the previous session with representatives of the OECD. When we talk about taxes that are damaging or have distortionary effects on the tax system, property taxes are the least damaging to economic growth. We are in favour of having a property tax. That is why the LPT should apply to as broad a space as possible. That is where we are talking about it being a stabilising factor. We really welcomed the revaluation of the LPT and the removal of some of the exemptions last year. For example, new builds were previously exempt and have been brought into the tax space. Legislation now provides that the tax will be revalued every four years. The changes made last year have really helped the LPT to be a stable contributor to the Exchequer.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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What does the institute say to the arguments that the likes of us would put forward that it does not take into account the income of the people who own their family home, in that sense it can be very unfair on people and they have very little control over the price and the value of their property, particularly in a market which most people would agree is pretty dysfunctional at the moment? There are very high property prices and values that are another symptom of a housing crisis and a dysfunctional market, but yet people get penalised with a property tax even though the value of their property may bear no relationship whatsoever to their ability to pay.
Ms Anne Gunnell:
What I would say, first of all, is that there are some allowances for deferral within the LPT and account is taken of hardship cases. We encourage the regular revaluation of the tax. The fact that we did not have those revaluations for a number of years meant that the LPT was not functioning as it should. Last year, when the revaluation was done, there was an attempt to take account of the fact that property prices had gone up, with the adjustment to the rates, so that the increases in values did not have too much of an impact on people. There was an attempt to take account of the fact that property prices had gone up significantly in the rebasing, the rates applied and the adjustment to the bands. If there is a regular review every four years, that should not have as much of an impact on people.
With every tax we are trying to see what will have the least harmful impact on the economy, and a property tax certainly fits that.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Okay, but when we are trying to work out what is fair and so on when choosing between taxes, does it not seem more reasonable to direct taxes on wealth or property more towards those who have excess wealth or excess property, rather than those who only have a family home?
Ms Anne Gunnell:
The difficulty with Ireland is the majority of our wealth is households; it is the family home. If we take the family home out of the tax base, then we have very few assets to be subject to a property tax. It is then a very narrow tax base and will not be contributing to the Exchequer.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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We were discussing a figure for the breakdown of household wealth here the other day, though maybe it was in the finance committee. Net household wealth is in excess of €1 trillion. How many family homes are there roughly? Perhaps 1.5 million. We could multiply that by the average house price of €300,000. I do not know what the exact maths are but it probably ends up being 40% or 50% of that €1 trillion. Is that, therefore, the majority of our wealth?
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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It is 52.4%.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Okay, so it is about half.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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It is my view the other 50% is real wealth. What does Ms Gunnell think?
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Yes.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I am sure the farmers would say that, and rightly so maybe. Does Ms Gunnell not see any merit in distinguishing between people's family home or even a small family business and excess wealth, for want of a better phrase? I mean surplus wealth beyond what a person needs to keep a roof over their head. They are two different types of wealth.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Yes. I hear our guests' opinion. I have a slightly different opinion in that if you have enough wealth to have a second property you can rent out and generate revenue from, it is quite a different thing than if you do not. In fact, what if we got rid of the tax on the family home and paid for it by significantly increasing the amount we charge for second and third properties and maybe have it escalate for multiples above that? As a person's assets increase, and they are clearly not assets a person needs to live but assets in the real sense, and often wealth-generating, it would be fairer to have an escalating tax on them.
Mr. Brian Brennan:
It would have a negative effect in that it would discourage people from investing in rental properties because if rental income alone is subject to marginal income tax rates and then you apply a 10% LPT rate on top of that, it becomes inequitable for certain landlords to own second or third homes.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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What would they do with them then?
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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It depends who buys the properties, does it not?
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I appreciate the institute's contribution.
Patricia Ryan (Kildare South, Sinn Fein)
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I thank our guests. I will be as quick as possible. Will they expand on the concerns around the recommendation to treat the transfer of assets on death as a disposable for CGT purposes?
Ms Anne Gunnell:
Yes. Obviously, it is a very sensitive and difficult time for anyone and no one wants to go through it. It is also a very complicated process already in that there is CAT, you must value your assets, get probate and all that kind of thing. Trying to value the assets on the death of the disponer would be adding another layer to that administration at a difficult time. It would be complicated. We would be imposing CGT on the assets of the disponer but there would equally be CAT on the beneficiaries. As that is the same event under our legislation, the CGT liability is offset against the CAT, so in most cases it would be a limited return to the Exchequer. We feel the associated costs of that and the distress for ordinary taxpayers of it being administered are not worth the return, which could be quite minimal. It seems to be a complicated thing to do.
Patricia Ryan (Kildare South, Sinn Fein)
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At the end of the institute's opening statement Mr. Brennan referred to unintended consequences. Will the witnesses expand on the measures to which their concerns relate and how they might be mitigated?
Ms Anne Gunnell:
Any tax, because of its very definition in legislation, is complicated. We must evaluate what the impact will be. The design of a tax is very important. Often we see something introduced that is well intended from a policy point of view but when conditions, exemptions and the various rules that underpin a piece of tax legislation are layered on, it can have an unintended impact on a particular cohort of taxpayer, a type of transaction, or whatever. That is why we say everything should be properly evaluated and why we encourage proper stakeholder consultation so those things can be considered in advance of introducing any kind of new tax.
Mr. Brian Brennan:
Yes. Part of that is also geared at the long-term economic impact for the country if we increase taxes. Does it have the intended impact of actually increasing Exchequer receipts or do we find it has a negative economic impact going forward? We are saying that, in consideration of the recommendations from the commission, we should also look at the longer term economic impact for the country.
Patricia Ryan (Kildare South, Sinn Fein)
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I am going to backtrack to the LPT. Maybe I do not understand enough about this but do the witnesses believe it would be appropriate to allow outstanding mortgage debt to be offset against valuations? How do they envisage that working in practice, if that makes sense? I need to get a handle on what they mean.
Ms Anne Gunnell:
The rate of LPT is currently quite low. There is talk in the report of increasing the rate. The commission itself did not go into recommending rates and ultimately that is down to Government, but if the LPT rate is increased to 10% or much higher, we were saying there would then be merit in considering looking at the equity in the property when determining the valuation.
Mr. Brian Brennan:
With regard to equity as a wealth tax, if the rates were increasing, it would make sense to look at the equity value in the house. To go back to the Deputy's point and the impact on household income, a way of countering this would, for example, be to take account of the mortgage that the majority of households have on their principal private residences.
Patricia Ryan (Kildare South, Sinn Fein)
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The mortgage debt could be offset against valuation. Do I have that right?
Patricia Ryan (Kildare South, Sinn Fein)
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I thank the witnesses.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I apologise for having to leave, but I would like to catch the end of the Committee Stage debate on the Finance Bill.
Neasa Hourigan (Dublin Central, Green Party)
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I want to return to the issue of VAT. In their statement the witnesses spoke about VAT and stated that new VAT rules also provide for the phasing out of preferential treatment for environmentally harmful goods. In the past the committee has spoken about the greening of VAT and how it might be possible. I would like to hear more about this. The witnesses also spoke about a review of the VAT treatment of goods and services in Ireland to ensure that our rates are in line with the EU. I am interested to hear the thoughts of the witnesses on the greening of VAT. Do they think Ireland is particularly out of line with EU norms? The Irish Tax Institute and the Commission on Taxation and Welfare have identified the review of VAT as a possible way to broaden the base. The committee often speaks about VAT not as being regressive but as not being a progressive tax because it hits everybody the same. Perhaps we could also deal with this issue.
Ms Anne Gunnell:
There is an intention in the EU. VAT is based on EU rules and we have to follow them. As part of the rate review the EU did in the context of the new directive and the changes being made, it is trying to ensure that there should not be preferential rates for anything that is damaging with regard to the green agenda. We should ensure that items such as fossil fuels are at the higher rate.
Neasa Hourigan (Dublin Central, Green Party)
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This is a very broad definition. I have been speaking to the Department of Finance about repair and rental issues. Being able to repair something and being able to rent something is a green initiative, even though that is not necessarily obvious. The definition of that constitutes the greening of VAT is quite broad. I know there is a list. Phasing out preferential treatment for fossil fuels is very narrow. There is a whole lot more we could do on VAT when it comes to environmentally friendly measures.
Neasa Hourigan (Dublin Central, Green Party)
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Are we out of line with the EU?
Neasa Hourigan (Dublin Central, Green Party)
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Are we out of line by far?
Neasa Hourigan (Dublin Central, Green Party)
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Are we the most by 0.1% or by 30%? I must look into this.
Ms Anne Gunnell:
This is to compensate for it. We are saying that now there has been a review at EU level, we should take the time to look at everything and that whether it is at 0%, 9%, 13.5% or 23%, we should do a full review. In its report, the Commission on Taxation and Welfare looked at increasing the reduced rates of 9% and 13.5%. This was its recommendation. We are saying that we should look at everything. We should look at the whole base and all of the rates being applied to see how they compare with what is allowed under Annex III of the VAT directive for goods at 0%. We should ask whether it make sense that all of these goods should still be at 0%.
Mr. Brian Brennan:
In looking at the recommendations from the Commission on Taxation and Welfare, it is important to look at the economic impact of increasing any VAT rate. At present, for example, the sale of a house is subject to a VAT rate of 13.5%. It would have a detrimental impact on the housing sector if that rate of VAT were to be increased given where we are with housing prices at present.
Neasa Hourigan (Dublin Central, Green Party)
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Who would the witnesses identify as most appropriate? Obviously, there is the Department of Finance. Who is it at EU level? It is a science in itself to identify the most progressive ways to do this. VAT is an incredibly complex area. Do we have a dearth of data in this country on the impacts? Something that comes up over and over at the committee is that sometimes it is hard to understand the impact a particular change might have because we do not always have access to the information. We need more access and we need more data gathering. We need more access to disaggregated data on what the impacts are when we make these changes.
Neasa Hourigan (Dublin Central, Green Party)
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I call Deputy Durkan who is also attending the meeting of the finance committee.
Bernard Durkan (Kildare North, Fine Gael)
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I am running between posts. I have been looking in on these deliberations from time to time even though I have not been physically present. I want to issue my usual warning to economists and any budding economist about what happened a few years ago. Everything in the garden was supposed to be rosy and all of sudden there was a most unmerciful economic crash. Everything went through the floor. All of the wise guys from all over Europe and the rest of the world were advising about what might be done to salvage it. Everything they advised was wrong. Fortunately, nobody followed their advice. Unfortunately, before that, nobody mentioned the way things were going wrong until it had gone wrong. It was very easy to see it then.
I am concerned, and I have expressed this view previously, with regard to what looks simple in terms of general taxation, property taxes, capital gains taxes and wealth taxes, which I have also mentioned before. We need to tread very carefully because we can scare people. I know there are those who say we should not worry about scaring people because we do not need people like that. We are an open economy. Things move very fast. We can see from bigger economies than ours what can happen in a very short space of time. My strong advice based on what I have seen during my time in the House, and I am sure others have seen it too, is on the way things move when they start to slide. It is the slide that is the worrying part. We cannot avert it once it starts. It goes until it hits the bottom. Capital gains tax and capital acquisitions tax look very attractive. People complain they paid income tax on the assets beforehand. Distributing the assets among the rest of the community in theory looks well but in practice it could create problems.
I do not make the following point out of maliciousness. When things start to go wrong, nobody wants to accept responsibility. Nobody comes forward and says they advised it. In 1977, interesting things were happening in the country. Several economic theories were advanced. All of a sudden, within two and a half years, everything was gone. The International Monetary Fund was sniffing around, and there was no need for it. There were economic policies that did not stand up. What it all comes down to in the final analysis is that in the current climate, we need to have some reserve somewhere.
We need to proceed very cautiously. We wish to ensure we do not scare those who are in the business of investing or providing jobs or whatever the case may be. We need to guard it very carefully. We should never forget the fact that, right across the globe, we have competitors. Our competitors are watching what we are at all the time. They do not wait. They keep nudging along the same issues all the time until they get to a point where they can close the gap. That is why we need to be alert and ready and ensure that we have not done any damage by act, thought or speech. We have to protect ourselves because we have an open economy. When it started to slide for our next-door neighbours, who have a much bigger economy than ours, it was gone overnight, within 24 hours. Therein lies my final lesson.
Neasa Hourigan (Dublin Central, Green Party)
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Do you wish to respond to some of the points Deputy Durkan raised?
Ms Anne Gunnell:
I agree with much of what Deputy Durkan is saying. That speaks to the point we made at the very end about unintended consequences. It is always very important to evaluate any tax measure before it has been implemented because it could have an unintended impact and such as an economic impact, whether increasing a rate or a change in an exemption that already exists. I know the Commission on Taxation and Welfare recommending changes to retirement, agriculture and business relief for capital acquisition tax, CAT, purposes. It is trying to address very good policy intentions with regard to intergenerational transfers and trying to protect income-generating assets with regard to farms and businesses, because there could be liquidity issues by forcing a tax liability that could force sale. What the Deputy is saying is right.
With regard to the wider piece about competitor countries, we should always try to make sure that Ireland compares as favourably as it can with regard to its tax offering especially with the country across the water being outside of the EU-----
Bernard Durkan (Kildare North, Fine Gael)
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That is correct.
Neasa Hourigan (Dublin Central, Green Party)
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Could we return to site value tax? We have a policy on site value tax in my party on which I worked. Economists tend to like the look of it and it is very hard to implement. Will you say a little more about her concerns with regard to such a tax. We heard in the session last week there was a general feeling that the system of commercial rates in Ireland has broken down somewhat and does not operate very well and that site value tax might be a way of dealing with that. I take the point in the statement that we would not wish to have community or soft influence to be run out of town on the basis of site value tax. When it is in operation even in a hybrid model in other countries, they make exemptions for just that sort of thing. Will you expand on its being a kind of replacement for commercial rates?
Ms Anne Gunnell:
We are in agreement with the Commission on Taxation and Welfare report. Its report states it is in favour of site value tax to the extent it is not applying to residential property. Local property tax, LPT, is our best way forward. It is very well administered by the Revenue Commissioners already and accepted by the population. We should leave that tax as it is and build on it. If there are merits for a site value tax, it is in the context of replacing commercial rates. I saw LPT discussed in committee with regard to the Finance Bill and the vacant home tax. That is being changed and the LPT will be built on but it does not address where there is dereliction and such issues. Site value tax has a role to play provided that commercial rates are also removed. I heard some of the comments last week and agree with the contention it is problematic.
Neasa Hourigan (Dublin Central, Green Party)
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Commercial rates are levied on the tenant at present, in effect. This would not be the same. Will that throw up problems or is it a more effective method of taxation?
Ms Anne Gunnell:
We agree with what the Commission on Taxation and Welfare is saying with regard to levying it on the property owner. That would be similar to LPT which is levied on the property owner. The Commission on Taxation and Welfare does not go into the ins and outs of the site value tax. I would wish to see the rules and provisions before commenting further on how it would work.
Neasa Hourigan (Dublin Central, Green Party)
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Working out how a site value tax might operate is labyrinthine. It was probably not the right forum to do so but last week I said that doing so would need an incredibly robust valuation system. We may be a little bit far away from such a system at present.
Neasa Hourigan (Dublin Central, Green Party)
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There are a couple of suggetions in the Commission on Taxation and Welfare report. I did not put it to the OECD because I suspect it is so used to some of these taxes, it is a given one would implement them. However, I suspect it would be a bit more difficult in this country. Does Ms Gunnell take a view on accommodation tax for visitors to the country?
Ms Anne Gunnell:
I am neutral with regard to accommodation tax but, like anything, the economic and impact analyses are needed. I would also wish to see what the legislation says on how such a tax would work before I would form a view. The Irish Tax Institute does not have an opinion on whether we should have accommodation tax.
Neasa Hourigan (Dublin Central, Green Party)
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Have you ever done any research on it?
Neasa Hourigan (Dublin Central, Green Party)
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I am aware that almost every capital city in the EU has some version of a tourist tax where Dublin does not. I know it is very difficult for local authorities to levy their own taxes but it seems Dublin City Council which has a €50 million hole in its budget might think an accommodation tax sounded pretty good.
Mr. Brian Brennan:
It would be interesting to do an economic assessment to see what impact, if any, it has on the tourism sector here because we have a thriving tourism sector. However, the sector is considerably more expensive compared to other countries within the European Union. While those territories may well have an accommodation tax, they may well be cheaper to visit compared to Ireland. One would wish to be cautious that introducing an accommodation tax does not have a negative impact on the tourism sector. A pretty detailed analysis would be needed before introducing such a measure.
Neasa Hourigan (Dublin Central, Green Party)
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Do you feel that whatever favourable VAT rates might be in place would interact and perhaps dampen the tourism sector?
Neasa Hourigan (Dublin Central, Green Party)
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The tourist industry will come before us which may have some opinions on that. I am sure it will. We have talked a little bit about site value tax and inheritance tax. We have not talked too much today about agricultural land and rezoning more specifically. We talked about it last week and a little bit about the removal in 2014 of the windfall tax for rezoning. Do you have an opinion on it?
Neasa Hourigan (Dublin Central, Green Party)
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It was during a recession. I suspect if we had held on for a year, we might have taken in some money on it.
Ms Anne Gunnell:
We have not done any analysis on a windfall tax so I could not honestly say. Again, I would caution by saying that irrespective of the tax, if you are imposing it at a higher rate, you look at what the unintended impact might be and whether it will discourage or encourage. We do not know what the behavioural impact would be.
Neasa Hourigan (Dublin Central, Green Party)
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I will put to the witnesses what I put to the OECD and to the witnesses before the committee last week, which is that the underlying or maybe overarching thesis of the commission's report is that we need to broaden the tax base and that we need to do that for a number of very pressing reasons such as the climate crisis, demographics and services requirements. What is the witnesses' response to that general principle that we need a higher tax take and we need to broaden the tax base?
Ms Anne Gunnell:
We agree we need to broaden the tax base because there are things that have to be paid for. It is interesting. Even though the Irish Fiscal Advisory Council also had its report today on the commission, it will be a matter of Government deciding how we do that and whether some, all, or none of these recommendations are implemented. We agree with the general principle the commission puts forward, that we should broaden the tax base.
Neasa Hourigan (Dublin Central, Green Party)
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I ask this in the context of LPT, which we have talked about a lot today. We managed to change that tax but not increase our revenue from it, which seems extraordinary to me, that we would reform a tax and not end up with more money from it.
Ms Anne Gunnell:
I suppose, but it is now in a better place so that tax should return more in the coming years because we are regularly reviewing it. The difficulty was, for example, we had the exemptions of the new builds. They are now coming in each year whereas they were completely exempt since 2013. That is going to generate more revenue.
Neasa Hourigan (Dublin Central, Green Party)
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Are there any other changes Ms Gunnell would make to the LPT?
Ms Anne Gunnell:
No. The regular review is the most important thing. The strongest recommendation we had all the time was the fact it was not being reviewed, that it was being ignored and that those new builds were exempt but have now come in. We really welcome that. I think it is working well now so let us keep on this track.
Mr. Brian Brennan:
I will go back to the Chairperson's previous question. I think everyone agrees that, with an ageing demographic and because of climate change etc., we need to broaden the tax base and increase the tax revenues. Obviously, the commission's recommendations deal with many of those issues. It is important to focus on the economic impact of any new tax policy changes to see if it they are positive or negative over the long term. It is also important for us to consider if there are any tax incentives we can introduce as a policy measure to seek to generate further economic activity and additional tax receipts for the Exchequer. That would be an important consideration as part of the overall consideration of the recommendations.
Neasa Hourigan (Dublin Central, Green Party)
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More productivity and more activity lead to more tax.
Neasa Hourigan (Dublin Central, Green Party)
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That is a good point. Should we have a commission more regularly? There seem to be long gaps between when we do these kinds of big reviews and reports. There is no rolling or regular timeframe for that; it is really based on political will. Would the witnesses like to see these done more regularly? Do they think it would be useful?
Neasa Hourigan (Dublin Central, Green Party)
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As Deputy Durkan knows. He looks tired.
Ms Anne Gunnell:
There is very limited time. A long-standing recommendation or a wish from the institute would be that there would be more stakeholder consultation. It has worked well when there are international tax changes to be transposed. That has worked well with the corporation tax roadmap. Feedback statements issue and there is back and forth with stakeholders, Revenue and the Department of Finance. It leads to better legislation, to be honest. There was a commitment at the previous roadmap that the Minister would introduce a policy forum. We have a forum where we engage with Revenue. It is called the tax administration liaison committee, TALC, which is more focused on the administrative aspect of the tax system. We would like to see an equivalent forum happening on tax policy formation. In fairness to the Minister for Finance, that is in the roadmap and there is a commitment to rolling that out. If that comes in, it will be extremely helpful. It would be annually, so we would not be waiting until the Finance Bill. I know we have the tax strategy papers but it would build on that and happen much earlier in the year, and it would be a case of coming back each year, reviewing what has been implemented and seeing if it is working.
Neasa Hourigan (Dublin Central, Green Party)
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Has Deputy Durkan any other comments?
Bernard Durkan (Kildare North, Fine Gael)
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I was thinking, fortunately not out loud, that it was aimed at me when my hair went grey - the colour it is now - when there was mention of the pensions time bomb, which we were always talking about and which was coming down the track in 2038. Nobody has ever conceded there has been a huge influx of people into this country in the intervening period, most of whom - nearly all - have been in the younger age group. There is a theory that a diminishing minority will have to fund all the people who will be retiring and so on, but that equation does not stand up at all. I have not seen it put to the test yet.
In respect of what we were talking about earlier, the most important thing is not to scare people in terms of taxation in general. We did all those things in the past and tried things out that did not work. For instance, I heard a discussion the other day about zoning tax and in theory it is a good idea but people will tell you it should be at a higher level. Well that depends on what the purpose of the exercise is. If it is to get more money out of it to spend in various other areas, obviously what is going to happen is the people who go into the houses are going to have to fork out for that at some stage. On the other hand, if the purpose of the exercise is to encourage people who have zoned land to get rid of it, by getting houses built and so on and so forth, that is a different thing. There are two totally different purposes envisaged there. One is to encourage the owner of the asset in that case to make it work and move it on. The other is to wreak havoc and drag a large amount of money out of it every year without doing any good for the end in sight, which is to build houses.
The point I want to make is, if we had solved everything in this country at the present time, which unfortunately we have not done, the issue of housing would still remain to be dealt with. As a Deputy, I have never seen more pressure on young families and young couples who cannot afford the deposit, let alone anything else. They will tell you it is impossible now to buy a house. You find out about the various assistance schemes available, which is a waste of time because all the various supports are counterproductive. They run against each other. They raise prices, demand and do all kinds of things. To go back to the pipe dream, a family needs a minimum of €100,000 and it depends on how many people are working in the family as to where the €100,000 is coming from. Nobody comes home with 100% of their salary. It does not happen that way. Generally 50% is gone. When all the talk and the discussion comes about, nobody ever says that to get €100,000, you need nearly €200,000. Now we are into really dangerous territory and we are heading back into the inflated prices we see at present. It is sad, really.
I am aware we have had the Covid-19 pandemic and 100,000 things recent years that have impeded progress in housing. The problem has been we have never agreed on how to deal with it. Everybody has had the answer but it has had to be their way. Some people thought that local authorities should hire plumbers, plasterers and roofers and so on. It does not work that way anymore. There are people who specialise.
Nobody would go to a consultant surgeon who is part-time and only does an odd job now and again. We would not try that out. It does not work that way. We go to specialists. These are people who have done all the economics on how to do the job, so this is what we must do in this regard as well. Various things can still be done, however, to correct this situation, if we hold our nerve. There is a little bit of light at the end of the tunnel.
Neasa Hourigan (Dublin Central, Green Party)
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It is worth putting this point to the witnesses from the Irish Tax Institute. If they were to focus on one aspect of tax in the context of addressing the housing crisis, what would this core goal be? What should we be doing?
Ms Anne Gunnell:
In our response to the Commission on Taxation and Welfare on housing, we provided a list of all the interventions in recent years, on the supply side, concerning affordability etc. The most important thing, though, is to have a clear strategy, because there are all these different measures-----
Neasa Hourigan (Dublin Central, Green Party)
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Exactly as Deputy Durkan said.
Neasa Hourigan (Dublin Central, Green Party)
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Does anybody have any further questions or is everybody happy enough?
Bernard Durkan (Kildare North, Fine Gael)
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I could ask many more questions when it comes to the housing crisis-----
Neasa Hourigan (Dublin Central, Green Party)
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We both could.
Bernard Durkan (Kildare North, Fine Gael)
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-----but the Chairperson will be equally glad to know that I will not.
Neasa Hourigan (Dublin Central, Green Party)
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When it comes to the housing crisis, we could all sit here and commiserate for quite a long time. I will conclude the session, however, because I do not want to depress us all. I thank everyone for staying so late. I appreciate the witnesses' time, their submission and their taking the time to look at the report of the commission.