Mairéad Farrell (Galway West, Sinn Fein)
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Níl aon leithscéal faighte. No apologies have been received.

Is mian liom na riachtanais bhunreachtúla seo a leanas a mheabhrú do chomhaltaí agus páirt á glacadh acu i gcruinnithe poiblí. Caithfidh comhaltaí a bheith i láthair go fisiciúil laistigh de theorainneacha shuíomh Theach Laighean. Ní cheadóidh mé do chomhaltaí páirt a ghlacadh i gcruinnithe poiblí nuair nach bhfuil siad ag cloí leis an riachtanas bunreachtúil seo. Mar sin, má dhéanann aon chomhalta iarracht páirt a ghlacadh ó lasmuigh den suíomh, iarrfaidh mé orthu an cruinniú a fhágáil. Maidir leis seo, iarraim ar chomhaltaí a dheimhniú go bhfuil siad i láthair laistigh de phurlán Theach Laighean sula ndéanann siad aon ionchur sa chruinniú ar Microsoft Teams.

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Today, the committee is meeting to discuss the topic of proposed retail investment schemes and tax on deemed disposals. This is the first of three meetings on this work item. I welcome Dr. Barra Roantree, assistant professor and director of the MsC in economic policy at the department of economics, Trinity College Dublin, and Dr. Enda Hargaden, assistant professor, UCD School of Economics, to the meeting. I also welcome Ms Katie Smith, a student of politics and history in DCU. I thank her for joining us today. I hope she will find the meeting interesting.

I invite Dr. Roantree to make his opening statement.

Dr. Barra Roantree:

I am assistant professor and programme director of the MSc in economic policy at Trinity College Dublin. I was a member of the 2021-22 Commission on Taxation and Welfare and a founder, along with Dr. Enda Hargaden and Dr. Nora Strecker of UCD, of the Irish Economic Association-affiliated Irish Public Economics Network. Much of my teaching and research examines the tax system and asks how it can best be designed to achieve economic and social objectives while limiting the costs that any kind of taxation inevitably imposes.

As with many parts of the tax system, the way we currently tax savings and investment is in need of reform. Taxes are levied at different rates and in different ways depending on the form the saving or particular investment takes. This has the effect of distorting when and how people save and invest, often on very weak grounds. One prominent example is the application of what is called deemed disposal to investments in exchange-traded funds, ETFs, which track some combinations of shares but not to direct investments in those shares. Not only are gains in the value of an ETF taxed at a rate of 38% rather than the standard 33% rate of capital gains tax, CGT, but the tax is applied after eight years whether or not any gains have been realised. This clearly has the effect of discouraging investment in ETFs and discouraging savers from availing of the many advantages they can offer, such as diversification, low fees and high liquidity.

However, the problems with how we tax savings run much deeper. Our current system bestows enormous tax advantages on particular types of saving, notably owner-occupied housing, most obviously through the exemption from CGT of any gains in price through principal private residence relief; certain owner-managed businesses, through revised entrepreneur relief, retirement relief and, if one intends to gift or bequeath the business to a relative, the step-up basis of CGT, whereby gains are wiped out on death, and capital acquisitions tax, CAT, business relief; and pensions, most clearly through the €200,000 tax-free and €300,000 standard-rated pension lump sums, which particularly benefit high-income public servants and, indeed, university lecturers.

These distortions create a strong set of incentives for individuals to hold assets in particular tax-favoured forums and until certain tax-favoured points in life. That has the effect of distorting the choices individuals make about when and how to invest, with potentially significant consequences for economic efficiency and productivity as well. Recent weeks have seen proposals to introduce another tax-favoured form of saving, with the Minister for Finance stating he supported the introduction of a new savings and investment account, subject to, as he described at a recent event, an annual flat-rate tax to the value of assets held in an account above a certain tax-free threshold, which could potentially serve as the sole form of taxation on investments made through the new account. That approach would mirror a Swedish scheme that is understandably very popular with beneficiaries, who currently pay a tax rate of around 1% on the value of funds each year above a tax-free threshold, instead of any income tax on dividends or any CGT on any increases in the value of the account. In following this approach, the proposal would bestow the biggest tax break on investments with the highest returns and would actually increase taxes on investments that yield a low or even negative return.

If we consider someone making an investment of €30,000 in such an account, following the Swedish approach would, for example, tax about 10% of the gain after eight years, if the investment grew at 2% per year, but would tax only half of that, about 5% of the total gain, if the investment grew instead by 8% a year. That is very difficult to justify in economic terms, given that high-return investments will generally be less responsive to taxation. There is also good evidence showing that wealthy and high-ability investors are the people who are much more likely to earn high returns.

Instead of following the Swedish approach, I encourage the committee to explore the Norwegian model. This subjects only returns in excess of an investor's risk-free return allowance to taxation, ensuring that essentially high-return investments are taxed while low return investments are not, so it is a much more sensible scheme. Alternatively, we could look much closer to home and the way we currently tax private pensions. Applying upfront tax relief to investments in the proposed new account while taxing any drawdowns would have the same effect of ensuring that high-return investments are taxed while low return investments are not. Either of these two approaches could help achieve the aims of policy makers without exacerbating the many existing problems with how we currently tax investments and savings. I am very happy to discuss these and any related matters with the committee.

Dr. Enda Hargaden:

I would like the committee to consider the following thought experiment. Imagine two citizens, each with an income of €50,000. The first earns €45,000 from a nine-to-five job and an extra €5,000 from investments. The second earns all of their €50,000 from a nine-to-five job. In some sense, the question before the committee is whether the tax system should treat these two equally. One natural benchmark is, yes, €50,000 is €50,000, and they should pay the same rate of tax. A second view is we should tax capital income more lightly, for example, to encourage saving. A third view is we should tax investments more heavily, for example, if we subjectively value human effort over the returns to capital. There is no purely technical or economic answer to this. It is a political judgment, and one for the Oireachtas to make. It would be a mistake to assume that this situation is simple and that, for example, a zero rate of tax on investment income is clearly and unambiguously the right way forward. The truth is more subtle. Recent media reports suggest the Tánaiste will propose something along these lines, broadly modelled on the UK's individual savings accounts, ISA, though perhaps not at a zero rate.

I see my job here today as outlining some of the benefits and costs of such a policy and pointing out some possible bumps in the road that the Oireachtas might avoid. Although deemed disposal is also on the agenda, I will focus on the proposals for an Irish ISA first of all. Let me start with the cost of such a policy. An obvious one is that it would be another hole in the tax base. These tax holes or tax expenditures already reduce the revenue of the State by about €8 billion per year. The consensus among the economics profession and the Commission on Taxation and Welfare is that the State should be reducing these holes in the bucket, not adding entirely new ones.

A second negative consequence of the proposed policy change is that it will be regressive. Based on international experience, I am highly confident of two things. First of all, the people in our society with lowest incomes, say the bottom 10% or 20% in terms of income, will not be able to engage with a policy like this in any meaningful way. Take-up will be low among this group and benefits will be small. Second of all, higher income people, say the top 10% or 20%, are the sort of people who might have access to a pensions adviser and will take up this programme in very large numbers. The benefits flowing to this group will be large. The consequence of these two elements is that any Irish ISA-style policy will surely be regressive in the aggregate. Regressivity may be insufficient reason to completely rule out a policy but I think all members will agree it is something that should at least be borne in mind.

As for advantages, I can think of at least two. First, it encourages Irish households to benefit from the equity premium. Over a working life, consistently investing in the stock market, as opposed to putting it in a low interest deposit account in a bank, can be worth tens of thousands of euro to the average household. If the policy encourages more people to invest in the stock market and to benefit from that equity premium, that is a real gain for Ireland.

Second the international evidence suggests that these products are very popular - by and large, they work. Eight years after opening, Canada's tax-free savings account, the TFSA programme, had enrolled nearly 50% of the adult population. However, research shows that contributions to these sorts of accounts are not entirely new savings, because approximately 35% of them are diverted from other taxable accounts. In this respect, tax incentives are not a magic bullet and should not be seen as such. Consequently, any tax incentives should be seen as part of a package.

Design and compliance costs may matter more than the headline rate. Perhaps the best evidence for this is that ordinary Irish workers routinely fail to avail of tax refunds already open to them. This suggests the problem is not only the tax rate but also the frictions of using the system. The behavioural economics literature is remarkably consistent on this point. Take-up depends on whether good choices are made easy and whether the product feels simple. If a saver needs an accountant to understand their position, or fears that honest mistakes in their self-declaration will leave them legally exposed, the scheme will fail in its stated purpose of broadening participation.

With all this in mind, the devil is in the details. It matters enormously whether the scheme has annual contribution limits and-or lifetime limits or not, whether unused contributions can be carried forward or not, whether the revenue or the financial provider will pre-populate a liability form for the taxpayer or not and how gains inside the vehicle are taxed if the holder passes away. It is not just the headline tax rate but the whole package that matters. I encourage the committee to consider the variety of options open to the Oireachtas and I am happy to give more details on any of these points.

On deemed disposal, Dr. Roantree has summarised the situation quite well. There is widespread acceptance that the current deemed-disposal regime is counterproductive. Diversification through purchasing a basket of stocks through an ETF is precisely the strategy retail investors should follow, rather than stock picking or concentrating their risk in one or two companies. Yet deemed disposal effectively penalises that safer approach. More fundamentally, the requirement to calculate and self-declare a liability is a significant barrier to retail investors. Retail investors always have the option to simply walk away, and if tax administration is too burdensome, many will and many do. A system that calculates liabilities and offers taxpayers the option of automatic deduction would serve our retail investors far better than the status quo.

I thank the committee for inviting me here today. I am very happy to take the committee's questions and I look forward to the discussion.

Mairéad Farrell (Galway West, Sinn Fein)
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They were very interesting opening statements. Thank you both so much.

Alice-Mary Higgins (Independent)
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I thank the witnesses for the presentations. Looking at a couple of the pieces here in terms of the concerns, as mentioned, the Gini coefficient will rise. One of the issues in Ireland is that we have a very high income disparity, which the witnesses might comment on. We rely very heavily on our welfare and tax systems to redress the fact that we have such an extremely high income disparity. Compared to some other countries where similar schemes might have been applied, we probably have a higher original income disparity. That idea of puncturing the base further means we have less scope to afford regression because we are covering a larger gap. The witnesses might comment on that piece.

I am conscious of the wealth research, of which we have had very little. The recent wealth research showed there is a huge cohort of people - not even the bottom 20% but the bottom 50% of the population - do not have much scope in relation to disposable or additional income. This comes to the hole in the policy piece. I agree with Dr. Roantree that the Norwegian model looks better. I am concerned when we look to our current private pension tax relief scheme. The problem with it is that it is deeply regressive but because it is so embedded, it is almost impossible to turn the ship. This is despite it having been listed as one of the demands from the Troika that there would be standard rating and despite the fact of infinite other approaches about what universal pensions could look like, etc. The fact is there is a huge attachment to it even though it is €3 billion a year that has been shown to disproportionately benefit those on higher incomes but it is so hard to move away from it. At a time when we know tax revenues from foreign direct investment and other areas have a certain insecurity, does this become very hard to turn around, much like the private pension tax relief?

It cuts across both. I am concerned about embedding a similar potentially regressive measure.

To come back to the point on high return and low return, I am concerned about ethics. This came up with regard to the auto-enrolment pension scheme. There is clarity with regard to the State's investment in our future planning, climate and nature fund and other investment that we cannot make in fossil fuels. There is clarity on investment in cluster munitions. If we look to high-return stocks globally, fossil fuels have very wild fluctuations at the moment and there is also military investment. These are things we should not necessarily be encouraging; they are things we have policies against in terms of our State public investment. They are high return.

There is a danger of incentivising investment in areas which the State has an ethical position against. This came up in relation to the auto-enrolment pension scheme and the then Minister was clear that it was different and that the ethical breaks we have in our State investment do not apply because it is people's own money, yet the State is subsidising this money, or is choosing to have tax expenditure that prioritises this type of investment. There is a real ethical issue, as well as a practical issue, regarding the inequity of high-investment return and people with clever accountants. There is also a question about what kinds of stocks, shares and investments are being rewarded.

Dr. Enda Hargaden:

On the ethical issue, the State can limit the type of securities if it so decides. I do not have a strong view on this. It is not for an academic to tell the Oireachtas what is ethical or not. What is perhaps more relevant to the economic perspective, but gets to the ethical issue Senator Higgins spoke about, is crypto, for example.

Alice-Mary Higgins (Independent)
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Yes, exactly. It is a huge issue.

Dr. Enda Hargaden:

Crypto is a good example of something that is typically not allowed into these accounts internationally. It would be up to the Oireachtas if it wanted to limit it further. I do not have an awful lot to say beyond this. We can limit the allowable securities whatever way is deemed appropriate.

On the inequality issue, it is certainly regressive in the sense that if it goes well, we can imagine that the top 50% of people might benefit but the bottom 50% will not. That will be regressive and there is no question about that. It is certainly regressive relative to an ideal sense. I want to make the important point that it is also democratising to a certain extent. If we look at capital gains returns, it disproportionately involves the top 10% or possibly even the 1%. Although it is definitely regressive in one element, there is an argument that it is progressive or democratising in another way.

One thing we could do to limit the top-end distribution, which is very common internationally, is to limit the amount that somebody can contribute to these vehicles annually or on a lifetime basis. Canada, for example, limits people to $7,000 a year. The UK is much more generous as it goes up to £20,000. We can, perhaps, imagine something in the middle. Some countries limit lifetime contributions rather than a certain amount a year, and I think France limits it to €150,000 over the course of one's life. This is one way to limit the benefits flowing to the real top. Senator Higgins is completely right that people who are barely scraping by are not going to benefit from this. It will be regressive in this way and absolutely the Oireachtas should bear that in mind.

Dr. Barra Roantree:

I will deal with the point on private pension tax relief schemes. My view is that the regressivity of pension tax relief as exists with private pensions is overstated because the focus is on the tax relief people get upfront and not on the tax they pay down the line. The Commission on Taxation and Welfare came down quite strongly in favour of the general principle, which is sometimes called exempt-exempt-taxed. This is the idea that we would exempt contributions and returns from tax but then tax drawdowns. In this sense, it is very important to look at both the contributions and the drawdowns. If somebody is getting 40% tax relief at the point when they are making contributions, many of them are also going to be paying 40% when they draw down the money, including on the return they made over that time. We often focus on the contributions but it is important to look at both of these.

From this point of view, I am often quite relaxed about the notion. It ensures that anyone who make super-high returns on their investment pays tax at the marginal rates. If they are a higher rate taxpayer on retirement, they will pay it at that higher rate. If they are not, then there is the question as to who we want to be taxing more. Do we want to be taxing people who have very high incomes during some period of their working life but then a lot lower on retirement? There is a very small number of people where it goes the other way. We do not have great data on this but I am fairly confident in saying that only a small number of people pay the 20% rate of tax over their working life but 40% on retirement. I do not think it is a significant group. We are talking about people who pay 40% during their working life and 40% on retirement, in which case it is neutral.

Ultimately people pay tax at 40% when it is drawn down, with the notable exception of the tax-free lump sum, which is something I commented on in my statement. This is where the pension tax system has its biggest tax giveaway. It is not ever included in any of the statistics on this because we have not had an official costing of it for, at this stage, almost two decades. This is what I would see as an actually big tax relief in the pension tax system. It is also one that is very hard to defend. We want people to save for retirement but the tax system encourages them to draw down €200,000 tax free and another €300,000 at 20%. These are amounts that are only really held by people with exceptionally large private pension pots or very senior public servants, not only in the Civil Service but university lecturers, university provosts and university presidents. They are the only people who will go above these limits. This is where the real egregious tax subsidy is on pensions. It is not with regard to the exempt-exempt-taxed model or the overall system design. This is a reasonably good approach and would be a much better approach to apply to what is being proposed in the savings account than the Swedish model, UK model or Canadian model. It ensures that when the money is drawn down, the returns are taxed. If a savvy investor gets an 8% return a year over 20 years, it means these returns will get taxed, as will the initial investment they make. They get tax relief upfront but they pay tax when they draw it down.

Like Dr. Hargaden, I do not think an economist at Trinity is very well placed to advise the Oireachtas on the ethics of this, but we can impose limits on these vehicles and what is allowed to go in. Something we would want to be conscious of is that if we are imposing a limit on what can go in, it means an extra layer of compliance will get built into it. The vehicle having a lot of layers of compliance is something to consider. I am not suggesting this would be the thing to push it over the edge, but we would want to consider that a person could buy the shares themselves directly with no restrictions. Something we would want to think about, if there is to be an ethical restriction on what we can invest for these accounts, is how it would apply across other investments. It could end up making the compliance burden more onerous than necessary, not just through this but through many things.

Alice-Mary Higgins (Independent)
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I have another question.

Mairéad Farrell (Galway West, Sinn Fein)
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Very briefly because you are over time already.

Alice-Mary Higgins (Independent)
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It is very brief and touches a little bit on what has been said. It is about democratising. I am unsure about it. Crypto has been mentioned and I am concerned that we see the gamification of stock trading being pushed a lot online. Very often it is those with very small resources who are being encouraged. I feel like they are almost hostages being attached to wider and bigger speculation games. They are often the ones who are hit hardest when something does not deliver. Is there potential for this to be created as an alternative to the type of high-risk amateur stock trading we see being pushed.

Mairéad Farrell (Galway West, Sinn Fein)
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If the witnesses want to respond, I ask them to be very succinct.

Dr. Barra Roantree:

If Senator Higgins is particularly concerned about these retail investors making investments that go wrong, she would want to be very careful about the Swedish model. When it does go wrong and people get a very low return or lose money, they will still be paying tax on the total amount they invested. That is one thing to think about in this respect.

Alice-Mary Higgins (Independent)
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We do not have this advice for those who are particularly vulnerable.

Shay Brennan (Dublin Rathdown, Fianna Fail)
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The topic for this session is the tax treatment of deemed disposal and savings and investment accounts. They are related but there is also a conflict to an extent. ETFs are products that should, as much as possible, be focused towards the retail investor, given that the mixed basket nature of ETFs represents a certain amount of safety. Schemes such as SIAs are also focused at the retail investor. From what I can see, most of the other schemes referenced in the witnesses' opening statements centre around ETFs as the underlying assets. That is not true of all but is true of most. It would be very odd for an Irish scheme not to have an ETF component, particularly given our position globally as a world-class ETF hub. Putting those two together, it would be strange if that were not a component of the SIA. There is, therefore, a problem. ETFs are taxed using the deemed disposal method. We are proposing putting together a savings and investment account that would have its own unique tax treatment. How can those two positions coexist? Would we be in a situation whereby for the proposed SIA to be effective, appealing and attractive to retail investors, we would need to strip out the ETF? Would we put in some complex tax reporting structure around it, which would certainly weaken the attraction to the non-sophisticated investor? How could this be structured with that conflict at the core?

Dr. Barra Roantree:

I may not be following the Deputy correctly but I agree that those things are in conflict. We could not have deemed disposal applying to ETFs while they are also sitting within the SIA. Legislation would have to be modified so that ETFs were instead taxed under whatever rules this new vehicle is taxed under. We must get the tax treatment right. The issue I am highlighting is, in particular, is that people end up taxing the high returns, and that applies more generally and not just to ETFs but could apply to any form of investment. If people want to buy shares directly and buy them through this account, the same tax applies. We should want uniform rates of tax treatment for all these different types of product. I agree with the Deputy that ETFs should not be subject to deemed disposal.

It is interesting to think about how we got here and why ETFs are subject to deemed disposal. My understanding is that there was an issue with some life funds and Revenue had concerns that some of these funds were being used for tax minimisation, or aggressive tax planning vehicles, and so a restriction was put in place to require this deemed disposal. Fundamentally, that arose because income was being taxed at different sources. Revenue was trying to plug a gap with one hand and, as a result, ended up applying this approach. It was applied more broadly to ETFs and it does not make sense for ETFs to be taxed in this way. There is a separate discussion as to whether we should have deemed disposal more widely. My colleague has views on that issue. It does not make sense to apply deemed disposal to just a subset of assets, particularly those held by retail investors. We are talking about replacing the deemed disposal regime for ETFs with whatever is applied to the SIA. That is why it is so important to get the SIA and its taxation right.

Dr. Enda Hargaden:

I complete agree with the Deputy. I tried to make the point that the tax rate should only be considered one element here. Behavioural economics really makes it clear that the choice architecture may be even more important than the tax rate. We would be wasting our time if we introduced this vehicle and people had to deem dispose if they have an ETF. It will not work. It will only flow to those with accountants and that kind of thing. It would absolutely require legislation. There is a good argument for getting rid of deemed disposal, regardless of whether we introduce this new tax vehicle but certainly within this vehicle, it needs to be as simple as possible or average people will not participate. They are too afraid. They are able to spend their money in many other ways and will not participate. It will not have any democratising effect if we continue with stuff such as deemed disposal. I imagine there would need to be a legislative change to ensure that ETFs are taxed differently within this vehicle.

Shay Brennan (Dublin Rathdown, Fianna Fail)
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I fully agree that simplicity must be at the core of this to attract the targeted retail investor. It is estimated that deemed disposal brings in approximately €150 million to the Exchequer per annum. That is not likely to be removed in one budget or in one go. The timeline around the SIA would seem to be a lot shorter than the timeline available to remove deemed disposal. Do the witnesses have any suggestions for a stopgap? Would they, for example, go ahead without ETFs to begin with or do they see it as essential to abolish deemed disposal before this product is launched?

Dr. Enda Hargaden:

That is a difficult one. I would encourage delaying this, perhaps by a year, to get deemed disposal closer to being simple for the retail investor. This needs to be delayed for a while. It is desirable. It would be a dangerous idea if we started this with a big splash to encourage people to invest and then they just went all-in on Ryanair. That would be quite dangerous. They should be going for ETFs. If it requires delaying implementation until legislative processes can streamline the administration, that would probably be desirable. I am not sure if that is legislatively feasible.

Dr. Barra Roantree:

I agree. History is rife with examples of rushed tax legislation leading to bad consequences and this is one situation where we want to ensure we get it right. If that involves taking longer than this budget cycle to get right what is really quite a big change in the taxation of savings and investment, it should be delayed until it can be done properly for those reasons.

On the simplicity point, I also agree. There is an analogy with voting that is worth making. It will not be lost on any committee member. Proportional representation with a single transferable vote, PR-STV, is a very difficult system to count, to do the transferring of quotas and all the rest, but it is a very easy system to vote in. I would apply that analogy to what we should be trying to do with investors. It should be very easy for them. They should not have to fill out any forms. That should be done at the source by whomever they have the investment account with. That should be pre-populated. That does not mean we must have zero tax on investment. I make that distinction. Having a simple system is important for retail investors. It must be simple for them in order that they do not have to make lots of tax returns or a self-assessment return. That is different to the tax that is levied. It does not follow from "It needs to be simple" that "There should be no tax."

Shay Brennan (Dublin Rathdown, Fianna Fail)
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I have a final question on deemed disposal. It brings in Exchequer funding, but is it not mainly a timing thing? It is brought in every year, as opposed to waiting for these funds to mature. The legislation has been in place long enough that probably even the timing aspect is not that important anymore. Is there any case at all to be made for retaining deemed disposal?

Dr. Enda Hargaden:

It does raise revenue. At a minimum, we could make it easier. For example, if retail investors were offered pre-populated forms and the opportunity to have tax automatically deducted, it would not necessarily be in their interests because they would lose the gains on the tax that they pay, but plenty of people might choose that if they have the option of having it automatically deducted to so they do not have to worry about it, a little like PAYE, then perhaps deemed disposal is less-----

Shay Brennan (Dublin Rathdown, Fianna Fail)
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I am sorry to interrupt. Perhaps we are confusing the two topics before us. My question was not in any way about the SIA but just about deemed disposal itself as a concept. I am trying to establish whether there is a case beyond the receipt by the Exchequer of an estimated €150 million, though I assume it is less than that because it is a timing thing, for retaining deemed disposal?

Dr. Enda Hargaden:

I can make an argument that it is a good idea to tax these things routinely rather than wait for 50 years. The argument can be made that taxing regularly is a better idea. For the arbitrary nature of eight years and the arbitrary nature of what exactly falls under deemed disposal, I could not come up with a good argument even if I tried. I can come up with a good argument for routinely doing this rather than leaving it until it is realised, but for deemed disposal as it currently exists, I cannot come up with a good argument.

Dr. Barra Roantree:

Likewise. I will draw an analogy.

There is an interesting debate, especially in the United States but not just there, about taxing unrealised capital gains. That would require deemed disposal. An interesting debate can be had about what is the right structure for applying capital gains and when people should have to pay them. There is an interesting debate around that and people can have different views. There is less of a case that deemed disposal should apply just to a particular set of assets. Where the complication arises is that I do not think it was the intention of the Oireachtas to subject to deemed disposal the funds retail investors probably should be using. They were caught in part of the net of an attempted clampdown on some aggressive tax planning activities. There is the question of exchange-traded funds, ETFs, which will be tricky - and Revenue are the right people to invite to discuss this - and how to disentangle ETFs from life funds in a way that minimises the lost revenue. I do not think the vast majority of the revenue the Deputy mentioned is necessarily coming from ETFs. A lot of it might be coming from something else, which the Oireachtas might well want to keep subjected to deemed disposal rules. There is a complicated debate around that which is more about the tax administration side of things.

Edward Timmins (Wicklow, Fine Gael)
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I welcome Dr. Roantree and Dr. Hargaden's comments on deemed disposal. I will talk about a small bugbear I have, namely, that capital gains tax has not been indexed since the early 2000s. That non-indexation is effectively a stealth tax. Does Dr. Roantree agree with me that indexation should be reintroduced?

Dr. Barra Roantree:

Yes, I do and the rate of return allowance approach effectively does that. The Norwegian model, the rate of return allowance, would essentially introduce indexation for inflation, but also a bit more. The economics are that there is a good case for exempting the risk-free normal return. That is probably inflation plus a little bit, so I absolutely agree.

Edward Timmins (Wicklow, Fine Gael)
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Even in the general tax system.

Dr. Barra Roantree:

Yes, in general taxation, there is a strong argument for doing that, but at the same time some of the other distortions of CGT should be looked at. If the indexation allowance were to be reintroduced, which it should be, people might also then want to revisit why the rate is so much lower than the rate on income. In essence, it would be the reverse of what Charlie McCreevy did. He cut the rate in half and then two or three years later he got rid of the indexation allowance. There is a stronger argument for the type of system that existed before that overall reform. There were rates that were more aligned with-----

Edward Timmins (Wicklow, Fine Gael)
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Thirty-three percent is high enough.

Dr. Barra Roantree:

It is, but there is a differential, particularly when we get into all the reduced reliefs. I agree with the Deputy about the indexation allowance, but it should be looked at with other things.

Edward Timmins (Wicklow, Fine Gael)
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Dr. Roantree cited the Swedish model where people pay less tax but we gain more. We still have a long way to go. The Tánaiste mentioned the Swedish model. He has also mentioned the UK model. We have a long way to go before we fine-tune the detail of how the gains would be taxed.

Dr. Hargaden mentioned the cover, but there was very little mention of the benefits. There are many benefits to putting this in place. The list goes on. I will only list a few today. One is dormant capital being made more productive. There is €2 billion on deposit in current accounts getting 0% interest. It is about making that money work for people. It would also reduce the pension burden on the State and the demographic challenges the State will face and is facing today. It would be a contribution to future pensions and will reduce reliance on pensions. It would also encourage financial literacy, which I think the witnesses will agree is pretty poor in this country relative to other countries. The idea of introducing to young people under 18 that they could contribute €3,000 per year, like in the UK, would have benefits for young people who want to save deposits for a house or a car in the future. There are a lot of benefits. We could also create an incentive to invest in the Irish stock market and Irish Government bonds, which would be positive for the Irish economy and create new employment in an Irish funds management industry. Do the witnesses agree that the system would put in place those benefits?

Dr. Barra Roantree:

I will come in first. We probably have divergent views on the strength of those benefits. The Deputy is right that there are many benefits. One question is whether the State should be paying for or subsidising some of those, through the tax forgone. That is a question which needs to be discussed. There are benefits, but if many of those benefits come, if the Government goes down the ISA model the Deputy mentioned, by having no tax whatsoever on the returns, we are into the question of whether the benefits are so big that the State should subsidise them through the tax forgone. I am not clear on that.

The second bit relates to that. Much of the reason for it is that if the scheme is designed poorly, there is potential for a large amount of the investment, that is, the cost of the tax relief, to come from people who do exactly what they did before. That would be a dead weight cost of the tax cut because there is potential for people to shift. They were investing in a particular form and they keep investing in shares, but now they do so in this account and do not pay tax. In that sense, the taxation will have been cut, but no behaviour will have been changed. I fear if the scheme is badly designed, it might be an important channel. That is one reason I am quite cautious.

Third, I am cautious about investing in Ireland, but for different reasons. In a way, the stated aim of the scheme is to encourage individuals to diversity their risk. That is part of the reason we want them to invest in ETFs rather than particular stocks. However, from the same point of view, we do not necessarily want to tie them to Ireland. We do not want people necessarily investing in Irish companies so that if there is a big recession and they lose their jobs, their savings also go down. One of the gains from what we are talking about - people investing - is that they are diversified and have invested in America, the UK, Asia and Europe first.

Edward Timmins (Wicklow, Fine Gael)
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The whole basket.

Dr. Barra Roantree:

Exactly. In a way, I am cautious about the underlying motivation for this being to tie people to investing in Ireland, because that is not good for them. It might be good for some of the businesses or those who gain from the more liquid capital market, but it is not necessarily good for the retail investor. I would distinguish those things.

Edward Timmins (Wicklow, Fine Gael)
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My next question is for Dr. Hargaden. He referred to his thought experiment about the €45,000 and €50,000 but he did not say that the €5,000 is invariably from after tax income. Does he not think that point should be made?

Dr. Enda Hargaden:

I do not think the point needs to be made for the horizontal equity argument. It matters if that €5,000 would not have happened if there was no incentive for saving. That is a valid point. I am sure many of the committee members are concept of the Laffer curve. It is often mentioned in legislative debates, but rarely seen in the wild. We probably have one in Ireland for the corporate tax rate. Most people would agree that lowering the corporate tax rate to 12.5% was a good thing in the long term. We have the possibility of some kind of Laffer uplift with this because many people do not really engage with the financial system, but I caution - I echo Dr. Roantree's points - that the first people who will benefit from this will just be moving from one pocket to another. However, there will be people who will take it from dormant accounts with 0% interest and move it into something that generates more money, and that is absolutely relevant.

I will make a quick point on indexation. CGT should definitely be indexed. Canada indexes it to the consumer price index, CPI, rounded to the nearest CA$500. Something like that would be very simple.

Edward Timmins (Wicklow, Fine Gael)
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My time is limited, but I will ask Dr. Hargaden to comment on a few issues. He talked about a hole in the tax base regarding tax expenditure. The Department was before the budget committee in February. There were international experts, including one from Germany, and when he talked about tax expenditure he said they talk about Ireland as an example of good practice. That was stated to us.

Dr. Enda Hargaden:

I think he was referring to the evaluation of the relief rather than necessarily its operation or the way we structure those reliefs. I am not sure I fully share his view on that. We certainly apply good evaluation to some, but not all, reliefs.

Edward Timmins (Wicklow, Fine Gael)
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Dr. Hargaden talked about the €8 billion tax haul and we had these discussions before the budget. It is a one-sided figure. Dr. Roantree alluded to it earlier. For example, it includes pension contributions. The State loses the tax on pensions on the way in, but gets the tax on the way out, often increased tax, and the figure for the tax paid on the way out is not taken into account, so it is one-sided. Similarly, for medical expenses people generally get 20% back and for some, such as nursing home expenses, it is 40%. However, in some countries those services are free. I caution that that €8 billion is often not a fair reflection of the full picture of what goes on in the economy.

Dr. Enda Hargaden:

That is fair. It is a choice of the Oireachtas to provide these and there are surely good reasons for a lot, if not all, of them. However I would caution that people are very sophisticated at this and probably more sophisticated than the Oireachtas might plan for. Members will remember the name Mitt Romney from American politics. The United States has had these investment products for a long time. There are Roth investment products and so on.

Mr. Romney, by all accounts, has managed to get $100 million into his accounts that he can withdraw tax free. This is the sort of hole in the bucket that I am afraid of, rather than legitimate medical expenses or whatever. These are things that the committee and Oireachtas should-----

Mairéad Farrell (Galway West, Sinn Fein)
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Be careful not to name names.

Edward Timmins (Wicklow, Fine Gael)
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I have one final question. Regarding being regressive, it is a small payback to those who earn over €44,000. We have one of the most progressive income tax systems in the world. I use the word "progressive" with caution, because it does not really have the meaning that we fully understand. In the context of the Gini coefficient, we rank pretty highly. We do not necessarily want to hit the maximum with the Gini coefficient because it is a relative measure. We could all be very poor, but we could have a very high Gini coefficient. If we have an existing Gini coefficient and those on middle or higher incomes may gain from this, that is not a reason to do it because that might reduce our coefficient slightly. Just because a certain cohort of a population will not benefit from this is not a reason to do it for the 70% or 80% who may do it. Does Dr. Hargaden agree?

Dr. Enda Hargaden:

I agree. However, I suggest that we should limit the benefits excessively flowing to the top 10%.

Edward Timmins (Wicklow, Fine Gael)
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I completely agree. Limit it like the UK, where it stands at £20,000 a year or whatever. I welcome Dr. Roantree's comments on the deemed disposal.

Colm Burke (Cork North-Central, Fine Gael)
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In relation to money currently on deposit in banks, what kind of figure are we talking about?

Dr. Barra Roantree:

There is a figure from the Central Bank of €180 billion or €190 billion that is oft quoted. It is not clear. If we divide by the number of households, that equates to €90,000 per household on average. There are some issues around the definition of that. For example, one household may include some institutions, charities or sole proprietorships. There is another series that the Central Bank published that suggested that once this is stripped out, it is more like €150 billion. That is still a very high amount. It is difficult to reconcile with some other sources that we have. Again, if we look at-----

Colm Burke (Cork North-Central, Fine Gael)
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Representatives from the credit unions were in with us recently. The credit unions have substantial moneys on deposit with them. Are those moneys included in that?

Dr. Barra Roantree:

They would be included. It would be important for the committee to get the Central Bank, the CSO and others before it in order to clarify some of the statistics on this. Again, this figure is often cited. If we look at the figure of €150 billion, we can see that we are talking about €70,000 or €80,000 per household on average. That is very hard to reconcile with other figures that we have from household surveys which suggest that if we line up all households, the one in the middle has €9,000. There are figures out there. It is very hard to understand how they can be reconciled. Reconciling the figures would be an important thing to do. I have tried, but I have not been able to do so successfully. It would be good for the Oireachtas to do that.

Colm Burke (Cork North-Central, Fine Gael)
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In my constituency of Cork North-Central, the people at the credit union in Gurranabraher, which would not be the richest place in Cork, told me that they have over €100 million on deposit. That is a surprising figure from the point of view of the make-up of the population. I accept, however, that people are being very careful. Many people who are retired and who would not have been and who are not on huge incomes have still been able to save that kind of money.

In the context of the €150 billion, the amount of interest paid out by the banks on it would be low. As a result, the return for the State would be extremely low as well. Obviously, if we can use that money effectively for the benefit of the person who has saved it, that it good, but it can also be used to create opportunities for others who want to get access to funding. Is there an advantage in doing that?

Dr. Barra Roantree:

There are advantages. If it helps Irish households and if there is a non-zero tax rate on this vehicle, it will help the Exchequer. There will be great advantages. One thing to bear in mind is that money in normal bank accounts earning 0% does not disappear. It is available to banks to lend out. The €150 billion will not magically appear. I am not saying that the Deputy thinks that. The effects may be a little smaller than some people might think. The main beneficiaries will be households that will be getting some of the equity premium instead of handing money over to AIB, Bank of Ireland or whichever institution and saying, "Mind this for me".

Colm Burke (Cork North-Central, Fine Gael)
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One of the problems at the moment is that banks have been very slow to lend to the building industry. Therefore, those in the industry are having to borrow from other sources within the financial sector and are paying extremely high interest rates as a result. Is there a way that can be used? I fully understand where the banks are coming from in the sense that they did lend very heavily to the building sector prior to 2008 and that this caused the crash. There has to be a balance. There is no lending at all to the building sector by the main banks at the moment, which means that we have to look at the effective use of this €150 billion.

Dr. Barra Roantree:

This is kind of similar to the discussion with Deputy Timmins earlier. We need to be clear about what the purpose of this scheme is. If it is to benefit households, there is a real risk in saying to households that we are going to give them an account into which they can put in their money and get whatever type of tax relief that might be involved in return or they can invest it in Irish businesses in the construction sector. We do not want a situation where households end up-----

Colm Burke (Cork North-Central, Fine Gael)
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I accept that. People can spread how they invest their money as well.

Dr. Barra Roantree:

Ideally, from the household's perspective, what we would like for individuals to be doing, if they are saving in these accounts, is not investing in Ireland. There is this tension between the objectives that are put forward of saying that we will get households a higher return and get them part of the equity premium and thereby free up a bunch of funds for Irish businesses. Those two things are fundamentally in conflict because we are just getting into the situation whereby if Irish people are investing their savings in Irish firms, it is not quite the same as during the crash as investing in the Irish banks, but it is not a million miles away from it either. We want to be cautious about encouraging that.

In relation to the interest, as well as understanding the amount of savings that are out there sitting in accounts. it is also important to understand why people having that money sitting. Again, that is something that we do not have clarity on. If it is a case that a large chunk of this reported amount relates to people who may have sold their house and are buying a new house or people who are saving on deposit, it is not very likely that we are going to see much of those funds shift. If we think about a couple or single person saving for a house, they are trying to get a deposit of €30,000 or €40,000 - 10% of whatever the price of the average home is - and they have that sitting in a credit union or bank account, they have it there because they need that 10% and they are not sure how much they are eventually going to bid. If they have that tied up in shares or ETFs, it could go well and after a couple of months, their deposit on hand goes up. However, it also could go badly. There could be a dip in the market when they are looking to buy a house or just before they want to draw down the deposit. We are very unlikely to get those funds being shifted around. As well as understanding the amount of funds that are sitting there, we want to understand why they are there. That is something that I wish to stress that we do not have clarity on. This aggregate figure does not give us clarity on it.

Colm Burke (Cork North-Central, Fine Gael)
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We need to be extremely careful. I have one item on my desk at the moment where someone invested €52,000. A management fee of €4,000 a year is being charged on that but the investment is generating nothing. There are two reputable companies involved in this. There is no accountability. They will not answer questions that I am putting to them. They are refusing to reply to correspondence. That has taught me a lesson about how careful we need to be on all of this. How do we set up a structure where there is full accountability?

The other issue is about making sure that when people are signing on the dotted line in respect of whatever new product we bring forward, adequate explanations and protections in place.

Dr. Barra Roantree:

I agree. Not enough attention is paid to fees. When auto-enrolment was put forward, I was very concerned that the fees would be very high on that. It does not look like they have been, but we are still waiting for some final clarity on that matter. It is such an important consideration. The fees that are charged on many private pensions are astronomical. On the regulatory fees, my colleague Dr. Hargaden has some views that he might share. An important thing to think about in this context is if we want households more involved and getting more exposure to equities, there are approximately 750,000 individuals who have just done that for the first time through automatic enrolment.

They are doing that in a vehicle that is designed for long-term saving and is going to have very low fees. In a way, auto-enrolment is aimed in large part at the problem that has been raised and that it is suggested this new savings account could address. It is worth thinking about these two things in tandem. What is the group we are trying to solve for here, given that the State is just spending significant resources? It is giving, particularly for low earners, more generously than exempt-exempt-taxed, EET, treatment to pensions. It is giving less generously for higher earners but lower earners are getting an additional bit of tax relief or an equivalent of tax relief. If we are spending money on that - and I think there are concerns around how that system is designed - it seems that the fees are going to be controlled by virtue of the way the scheme has been designed.

In one sense, there are lots of people you might be thinking of who are now going to be investing in shares. They will not hold them directly or in the ETF, but they will have them in a pensions account. That is going to be the best place for lots of those people.

Colm Burke (Cork North-Central, Fine Gael)
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In the witnesses' experience of other countries where there are safety measures in place, what do the witnesses believe is the best one to go by from the point of view of safety procedures and processes? We really need to have those, especially when we are starting something new but also because the legal structure here might be slightly different than those countries'. What is the protection that needs to be put in place?

Dr. Enda Hargaden:

I envisage that would be set up similarly to a sort of personal retirement savings account, PRSA, system. Where most people go through a broker, the broker charges maybe 0.5% or 1% and is regulated. If the broker breaks any laws, they are subjected to regulation from the Central Bank. On the products that are allowed to be invested, it is very common, for example, to limit those that are approved by the European Union. I cannot remember the acronym off the top of my head. It is the undertakings for collective investment in transferable securities, UCITS, I think. It is a very common kind of system to limit this and to avoid things like crypto, Russian assets or whatever people might want to limit. The State could go further if it so desired.

I will make a quick point on investment in Irish companies and directing this towards the Irish sector. One thing that will help alleviate that concern is that, internationally, people display a home bias, which is what we call it in the literature. We put on the green jersey and invest in Irish companies, or in France they invest in French companies. That might happen automatically. Economists generally think that sort of patriotism is actually quite a bad idea because it comes with diversification risk. It might alleviate the Deputy's worry that this might all go abroad and not be left over for Irish firms.

Cian O'Callaghan (Dublin Bay North, Social Democrats)
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Cuirim fáilte roimh na finnéithe chuig an coiste. There were some very important points raised by Deputy Burke, so I will return to a couple of them in a minute. On the behavioural economics side of things, it was referenced that you could have people with dormant accounts and 0% interest moving to these new accounts. Why would that happen? At the moment, if you are earning 0% in a dormant account, you can move to a savings account or a quick-access savings account with a lower interest rate and all the rest. There are already incentives for you to move from your 0% to get a return. It may be a bigger return but why would that start kicking in? Why would someone forgo 2% or 3% on savings and then say that there are these new things and, all of a sudden, they are interested in a return on their money?

Dr. Enda Hargaden:

It is an excellent question. The European Commission is trying to encourage a culture of saving and investing. We still have remnants of this old-fashioned money-under-the-mattress fear of banks. This sounds silly, but I think people are nearly afraid of filling out forms. It is quite easy to claim the rent tax credit from Revenue but people do not do it. It is quite easy to claim flat-rate expenses from the Revenue but they do not do it. I am not talking about 5,000 or 10,000 people; 500,000 people do not do this. Precisely why they do not fill out the forms I am not exactly sure but I think it is generally that they are afraid of engaging with this system in case they make a mistake. If there were this push to make people feel comfortable engaging with this system, I think that would get people going rather than switching for an additional 2%. It is a behavioural change rather than a strictly rational choice. I am not exactly sure, though, why people are not claiming what appears to be money on the table.

Cian O'Callaghan (Dublin Bay North, Social Democrats)
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There is friction with the tax reliefs, the forms, the complexities and all of that but there is very little friction with moving - if you have money dormant in a current account - to a savings account, potentially in the same institution. That is fairly easy to do, yet there are a significant number of people not doing that. I wonder how this is going to unlock those 0% holdings when it is relatively easy to go to a savings account.

On the issue that Deputy Burke raised about fees and commissions, one of the groups that has been lobbying for these new savings accounts comprises people working in the industry. They have been lobbying heavily for it. There could be different motivations there. Some could be really passionate about getting a better return for investors. It is what they work in and if they see people not getting the best return, they are genuinely passionate about that. There could be others motivated by the fees and commissions. There could be multiple motivations. It was said that sometimes a 1% fee was charged, and sometimes 0.5%. There is a really big difference for the individual saver or the retail investor in what fees are charged. Do the witnesses think that should be more closely regulated and there should be limits or is it something that should just be left to the marketplace to sort out? What are their views on it?

Dr. Enda Hargaden:

I do not think it should be left to the market. It is regulated at the moment, say, for standard PRSAs. Competition does not really appear to be working very well. The fees are quite high. That might be an added benefit of changing the retail investment culture in Ireland. If we were to have more people investing, we might get more firms setting up here and shaking up that market a little bit, which would, of course, be of benefit. I would not suggest leaving this to the wild west. The fees should be regulated.

Dr. Barra Roantree:

I agree. One place there really is insufficient attention given to is the fees that private pension providers charge. They are really egregious in some cases. We know that the people who pay the least attention often tend to be those who find these things hardest. It is not a kind of neutral thing as to who this hits. That is a situation where we do have the fees regulated, at least in some sense, but it clearly is not having the desired effect, in that we still get lots of people paying fees that are arguably much higher than they should be.

Cian O'Callaghan (Dublin Bay North, Social Democrats)
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In regard to how this investment should be taxed, what principles should be followed? What is Dr. Roantree's view on how they should be taxed?

Dr. Barra Roantree:

The view that guides me is that there is a good economic case for exempting what might be called the normal or risk-free return from saving. That is how much you get for essentially giving up consumption today for consumption tomorrow. That is one way of looking at it. As Dr. Hargaden mentioned earlier, there is not uniformity within the economics profession on this but I think a large share of economists think that that is a good way to design the system: in terms of how you tax savings, the risk-free return, which you could think about as what a Government might pay when there is not turbulence in the bond market or something like that, should be tax free but you should make sure that you are taxing things above that. Then again, there is an argument towards neutrality between the form that income comes in. That would kind of be my guiding principle. There are cases to be made for deviating from that but you would want to have a fairly strong reason for doing so.

That would push me towards the Norwegian type of approach or our own pension EET type of approach because both of them effectively achieve that. In our pension approach, you get tax relief up front but you pay it at the marginal rate when you draw down the funds, so you make sure that you tax those high returns. One drawback of that approach is you are giving all the tax relief up front, so when members have the Department of Finance in here, it would be very nervy about any extension of EET to any new product because there is a bunch of tax relief given up front. It will get the tax down the line but it does not necessarily want to do that.

The Norwegian approach is a different way of doing it. You do not give the tax relief upfront, but you give an allowance each year, which is based on this risk-free rate. You can achieve the same effect but without having all the tax relief upfront. Those two align for me with how I think you should try to tax savings and investment. Those are the two broad schemes, and I think they can achieve that. That kind of thinking would also lead you to say that you should not have any tax on the almost negligible returns that people get from saving on deposit. That is effectively probably below the normal return. There is an economic case for getting rid of DIRT for a lot of people on the savings they have lying in a fund. Again, what you want to tax are the high returns and that is my overarching concern with some of the discussions to date. If you go with the UK, Canadian or Swedish models those high returns are not being taxed, and I think that is problematic.

Dr. Enda Hargaden:

Similarly, whether tax rates are high or low is a choice for the Oireachtas. The question is if we want to tax somebody with an income of, for example, €50,000 differently to someone with €50,000 from a different source. On that, I think horizontal equity is a good baseline unless there is a good reason to deviate from it. There is a good reason to deviate from it if we believe people would like to invest but the tax system is scaring them away from it. That is a reason to deviate from horizontal equity. Although this is not based on strong evidence and there is a lack of research in this area, I sense that it is not really the tax rate that is discouraging people. It is the administrative and compliance costs. People would be happy enough with a 40% tax rate as long as they do not have to fill out a lot of forms at the end of the year. I am sure the members get plenty of complaints about PAYE, but perhaps not as many as we would if the form were more difficult to fill out. There is an tax compliance analogy that the Revenue should be like a pickpocket rather than a mugger. The idea is that money has to be taken, but the experience itself should not troublesome. The money needs to be taken but filling out the forms does not need to be difficult. In that way, it is less about the tax issue per se. It is about a package of ways to get people engaged in investing in this instance.

Cian O'Callaghan (Dublin Bay North, Social Democrats)
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We do not know what form this is going to take in terms of tax treatment. Some of the stuff being floated seems to indicate that the tax benefit will be on the high-risk return, and there will be no changes for standard savers who will still be paying tax. There will be favourable treatment for people going for the high-risk and high-return stuff, who will also make the most money. However, for the person who is just saving the way they have before, they will be contributing tax as is. What is the rationale for not taxing the normal rate of return for the high risk, just so we are clear?

Dr. Barra Roantree:

There are a couple of reasons. One is that it is a return for foregoing consumption. It is that kind of risk-free return. You are not consuming today, but you will consume in the future. That is the kind of return we want to offer people for deferring that consumption. You can think about it as the tax system being neutral about whether you consume today or tomorrow. Neutrality is really at the core of that. You exempt the risk-free return because that is essentially neutral between timing of consumption. The issue is that above that there are what we can call high returns or excess returns. They are returns in excess of the risk-free rate. There are multiple reasons you might want to tax them. One is that they are likely to be less responsive to taxation. One thing we should consider when setting tax rates is how responsive different incomes are to taxation. If you are in a situation where you tax something and people stop doing any activity you might want to have a lower tax rate on that. High returns are the types of investment where they will not be deterred so much by tax. If you are getting a high return, you are still getting quite a high return after tax. That is one strong argument for taxing those at a higher rate than the risk-free return. The other is the systematic composition of who earns the high returns. We know it is people who are high ability or savvy investors, so that is more about the distribution. If you do not tax the high returns you are effectively giving a tax cut to the people with the highest ability and who are the highest earners, and that will be over a lifetime, not just today. Those are the principles. Neutrality is really at the core of it and maintaining the progressivity of the system.

Cian O'Callaghan (Dublin Bay North, Social Democrats)
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Therefore, profits should be taxed but if you are doing standard saving, which is a responsible thing to do if you can, there is no reason that should be deterred through the taxation system.

Dr. Barra Roantree:

Yes.

Cian O'Callaghan (Dublin Bay North, Social Democrats)
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That is the rationale for it, apart from revenue raising.

Dr. Barra Roantree:

It should be neutral to it. Again, you can find reasons why you might want to deviate from that, but I think that is a good baseline position.

Mairéad Farrell (Galway West, Sinn Fein)
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It is my slot, and then anybody who wants to come in for a second round can do so. I have found this an interesting and helpful discussion. I appreciate that and I thank the witnesses for their time. It is interesting because we are talking about people who have savings and at the moment a lot of people are struggling. It is important we note that at this committee because that is the reality of many people's lives. They are really struggling as a result of the cost-of-living crisis. They are not in a position where this is reality for them. I am also conscious of young couples who may be living in their parents' box room trying to look at buying. They are saving and waiting but they cannot afford to buy anything. I am interested to hear the witnesses' views on how this might or might not be relevant for those people.

I also touch on the issue of ethical investment. I know Senator Higgins mentioned that at the beginning. Maybe it is not fair to say it is the younger generation especially, but I know they are acutely aware of where the money they invest is going. You can even see it in the way people shop. All those things have changed. I understand the witnesses have said they cannot tell the Government what to do. However, I am interested in the international precedent of ethical investment and if there is some type of international precedent for ethical investment criteria in schemes like this.

I will start with those two questions. People are looking at how companies and funds invest in the context of fossil fuels, war and the impact of investments on the housing crisis if you include certain types of companies.

Dr. Barra Roantree:

As Dr. Hargaden said earlier, there is a huge number of people for whom this is just not a reality. Not only are they not saving they may be drawing down loans to fund their day to day. That is important to note, and that is the case for many people.

The Deputy mentioned people who might be living in a box room and trying to save for a house. One way this relates is that, while not the only reason, part of why we have such a bad housing crisis is because owner-occupied housing is so favourably taxed. There is an obvious example. Someone who was able to get a mortgage during the crash may have bought a house at the bottom of the market for €100,000 or €200,000. If they sold it in recent years, particularly with how prices have gone in Dublin, they are selling it and might be making gains of several hundred thousand euro, which are entirely untaxed. That is one of the ways in which the tax system favours owner-occupiers and, while not the sole reason, that is part of why our housing crisis is so egregious. Our tax system encourages people to invest their money in owner-occupied housing. The Commission on Taxation and Welfare, which I was part of, called for CGT to be a limit on principal private residence relief, so that you would have fewer people being encouraged to do this. That relates to this debate. In my view, one of the biggest reasons you do not have people investing more widely is because our housing market is so dysfunctional. One of the reasons our housing market is so dysfunctional is because it is so tax favoured. That is where it makes sense for most people to try to invest. It is entirely tax free. There are many other ways in which housing is tax favoured, but that is the most obvious one. That is part of this, and it links the two of these things together.

Dr. Enda Hargaden:

I do not have an awful lot to add on the ethical investment. One person's ethical investment is another person's unethical investment. The State can limit it if it wants, but I do not want to get into it.

As regards the international precedent, the only thing I can think of that the committee might be looking for is EU-wide measures that can be taken against foreign aggression and that kind of thing. The State could go further.

Regarding the households that cannot afford homes, I would try not to link the two things. The reason why housing is so expensive, first and foremost, is that we do not have enough houses and homes. That is the fundamental cause here. If you try to make it more affordable for one group - first time buyers or whatever - it does not necessarily build any more homes. Person A cannot afford a house but person B can. In the same way here, if we have people getting some equity premium from investing, I am not sure whether it will have a positive or detrimental effect on the housing market.

Mairéad Farrell (Galway West, Sinn Fein)
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Sorry, I did not mean it in terms of the impact on the housing market. I was more saying that obviously, there is a huge issue with housing and it is the main thing we deal with. I am talking about those young couples who are trying to save. Deputy O'Callaghan asked why people do not shift their savings from their current account or whatever to something that is high-yielding, and I am thinking of those couples who are saving and hoping something might come up on Daft.ie that they can immediately invest in.

How is that going to be relevant to them? I am not saying this is going to have anything to do with the delivery or solving of the housing crisis, I am just saying the actual realities for people. My concern is that while we have had an incredibly interesting conversation, there are people who are locked out of this. There are people who cannot afford anything, who, as we said, are in debt and going into debt every day. We are then talking about that generation of those in their 30's, early 40's and some in their late 20's, who are trying to get on the property ladder but it is impossible for them at present.

How is this relevant to them? That is more the question I had.

Dr. Enda Hargaden:

The only direct relevance is, assuming these people are saving some money, this could potentially be a mechanism where they could save quicker. Instead of getting 0% in a standard bank account, they could invest it in a fairly safe product that might earn 5% or 6% per year, and they would get to their deposit or whatever quicker. However, if they get there quicker, somebody else will not be able to buy that house. I am not sure it would solve the problem for these people.

Mairéad Farrell (Galway West, Sinn Fein)
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I meant in terms of relevance. I do not think this is going to have anything to do with the housing crisis. I am just conscious of the fact that in this place, an awful lot of the time we can be talking to people who already have money and we are not talking to those people who are struggling. That is my concern here.

The witnesses have already spoken on the ethical investment, so maybe this is hitting the same issue again, but in respect of the State using this scheme to channel people's savings into speculative investments in the secondary market that might not deliver wider social and economic benefits, has there been a public investment fund where people know their savings will be used to fund publicly owned infrastructural projects on an international level?

I am talking on this because we are dealing with this in our proposals and because our report comes out of these things. I am interested in what has been done in other places.

Dr. Barra Roantree:

You can think of our savings bonds in that way. However, I do not necessarily think it is so explicitly linked. Maybe you assume whatever the money is used for is a good and productive use of funds, and you then hear examples like the French scheme, whereby it is invested into housing.

Again, you can design schemes like that. Looking at the place where this idea or proposal for a new savings account is coming from, I would be very hesitant about trying to encourage people to additionally invest domestically or in some kind of public institution. In a way, if it is to have a good purpose, its purpose is to allow people to diversify their risk and get some exposure to international equity markets. Requiring that to be done in particular ways is going to limit the number of people who will engage in this. That applies particularly to say-----

Mairéad Farrell (Galway West, Sinn Fein)
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I take that point and I know that is the plan here - I get that completely - but I am just wondering if there is something like this on an international level that is focused on investment into infrastructure that is publicly owned.

Dr. Barra Roantree:

Again, the French scheme is often mentioned, but from my point of view, I am not sure you would want a differential tax treatment of that kind of scheme versus whatever else.

Mairéad Farrell (Galway West, Sinn Fein)
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The international diversification in the markets. I thank Dr. Roantree for that.

I will now allow anyone to come in for a second round. Sorry, Senator O'Reilly has his first round next.

Joe O'Reilly (Fine Gael)
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I welcome the witnesses. I was caught in the Seanad for their presentations, but we had the advance paper which was good.

Starting with Dr. Hargaden, he said that the proposed scheme, as he understands it, is regressive. How does he think that could be broadened to facilitate greater participation among lower and middle-income households? In what way could you get over that element which he suggests is regressive?

Dr. Enda Hargaden:

I do not imagine any scheme like this will overcome this barrier of people who do not have anything to save. If we are going to pursue this policy, we need to take it as a given that people who have no ability to save will not participate in it. Consequently, my concern about progressiveness or regressiveness is focused on the top. It is about making sure the top 1% are not able to get enormous sums of money into these accounts.

Joe O'Reilly (Fine Gael)
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Given that we have high deposit levels here in Ireland, as is well known, how would Dr. Hargaden suggest we structure a scheme that would get Irish savings into high-impact investments in national infrastructure in social housing or whatever?

Dr. Enda Hargaden:

I would start by suggesting most economists would not support targeting the investments towards a particular goal. Most economists would let people invest what they feel comfortable with. We often observe that people tend to invest in economically sustainable things, if they tend to like that sort of thing, or we refer to the home bias of investment. People tend to invest in products in their own country.

This might happen naturally if we let people invest in whatever they want. These thing might occur anyway if they have a tendency to invest in Ireland. If a financial company were to come around, it would be a smart product to offer an opportunity to support Irish business. I expect you would see a lot of people signing up for that.

Joe O'Reilly (Fine Gael)
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It is widely assumed, and maybe the witnesses will contradict this too and that is fine - that is what we are here for - that the Canadian tax-free savings account scheme is a big success. What could we do in Ireland to adopt something similar that would be equally successful, or could it be applied in an Irish context as it stands?

Dr. Barra Roantree:

One thing I would caution on is what we mean by success. Yes, there is a very high participation in the Canadian scheme. There is also, as Dr. Hargaden mentioned earlier, a lot of diversion of funds. That is, funds that were already invested being invested in this scheme instead of something else. One thing I highlighted in my opening statement and which is particularly important for the committee in the Oireachtas to consider, is an issue with the Canadian, UK and Swedish schemes. They end up taxing low-return investments at a much higher rate than high-return investments. That is fundamentally down to the design of those schemes.

If you go down that approach whereby you essentially do not have a tax or you have a tax levied on the value of funds, that is what is going to happen. We have had a bit of discussion here as to why we think that is not a good idea. For one thing, those high-return investments are the ones which would be least responsive to taxation and, therefore, there is the greatest scope to tax. In addition, we know the people who tend to get the very high-return investments are the very well-off and high-ability savvy investors.

A much better approach to go down, which I have suggested to the committee, is to look at the Norwegian approach and the way it applies that. We could also look at the way we tax pension saving here, under what is called the exempt-exempt tax approach. That provides a much better approach than the Canadian, Swedish or British models.

Joe O'Reilly (Fine Gael)
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The witnesses have highlighted that people benefit from a long-term equity premium when investing consistently over their careers. Will they elaborate on the tangible benefits this type of investment could bring to the people of Ireland?

Dr. Enda Hargaden:

If this is successfully taken up by a large faction of the population, they will be able to have tens of thousands of euro from engaging in the financial markets that they would not otherwise have, be it at retirement or to help kids to go through college or whatever it is. If this is not taxed at a zero rate, the Exchequer will also benefit, and the benefits can flow to people that way too.

Joe O'Reilly (Fine Gael)
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Dr Roantree suggested that Norway provides a more appropriate model than Sweden for us to look to for designing a national savings scheme. Could he outline the specific features of the Norwegian model that he believes would be relevant for Ireland to emulate as opposed to the Swedish model?

Dr. Barra Roantree:

Under the Norwegian model, the amount a person initially invests is operated like capital gains inflation indexation, which Deputy Timmins mentioned earlier. The amount that someone initially puts in is increased, so they only pay tax on the amount that is above that allowance. That allowance is essentially determined by how much a person initially invested and also a risk-free rate that is decided by the tax authority in advance. It could be inflation, or it could be something a little bit above inflation to account for that risk-free rate, so in effect it steps up someone's investment each year, and they only pay tax if their gain has been above that stepped-up amount. From that point of view, what it achieves and succeeds in doing is that it does not tax the normal return to saving - there are very good economic reasons for not taxing that - whereas it does tax the higher returns, which are sometimes called the excess returns to saving.

Joe O'Reilly (Fine Gael)
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From a macroeconomic standpoint, do the witnesses see a well-designed national savings and investment scheme having the potential to increase domestic investment levels and to support stronger long-term capital formation within the economy?

Dr. Barra Roantree:

It could do a little bit of the latter. If it is well designed, it has the potential to increase the amount of savings and more importantly increase the rate of return that savers are getting and therefore would aid capital formation. It is very unlikely to have a meaningful effect on investment, particularly if there are no restrictions, as there should not be, placed on where these funds can be invested in terms of their location.

The motivation or rationale for the proposal sometimes shifts around a little bit, but this is one thing where it is not exactly like this country is short of investment at the moment. We are short of the capital stock, but in terms of the amount that is being invested day to day, public investment has ramped up significantly now after being far too low for so long. Private investment is also quite high. The greater constraint on our ability to achieve increases in infrastructure and the capital stock is actually on the capacity of the economy. It is not about a lack of investment.

From that point of view, I would be cautious about the idea that this proposal will somehow unlock some private investment in the economy that hitherto had been constrained. I do not think that is where we are at. The issue at the moment is that we have very large capacity constraints in terms of the number of workers and-----

Joe O'Reilly (Fine Gael)
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This is my final question. If I understand the witnesses correctly, they are basically saying that we should leave well enough alone and let things be as they are. Perhaps that is not what they are saying, but that is my superficial understanding of the issue. We also still have that €170 million on deposit. Is it healthier to leave everything as is?

Dr. Barra Roantree:

That is very much not what I am saying. As I outlined in my statement, the taxation of savings and investments is in need of radical reform. I think lots of these bits will not be done by the Oireachtas, in particular tackling the very enormous tax advantages for owner-occupied housing and people in pensions with a tax-free lump sum. There is a role for some kinds of personal savings product that is more along the lines of the Norwegian model than the Swedish model.

I would also encourage the committee and the Oireachtas to try to get a better handle on the statistics about how much deposits are actually there and who holds them because with regard to the €150 billion figure that is often mentioned, it is important to understand who the people are who hold that and why are they holding it.

Joe O'Reilly (Fine Gael)
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I thank the witnesses. I appreciate their answers.

Edward Timmins (Wicklow, Fine Gael)
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I have two quick questions to pick up on a couple of things. I am intrigued by Dr. Roantree's comment that the principal private residence tax relief is damaging and is contributing to the housing crisis because the non-principal private residence charge is the opposite situation. It is taxed very unfavourably with no indexation, which I referred to earlier. In fact, I would argue that it is stifling normal economic activity in second houses as people are holding onto them because they are going to get hit with a whopping tax bill.

Dr. Barra Roantree:

I would not disagree with that. There is a package of reform that could be done that essentially would limit the CGT relief on owner-occupier housing and some other things could be done through an indexation-allowance type approach to move towards a system where we do not just pay the capital gains on investment property on the sale because that is a disincentive for some people to necessarily invest.

The Deputy is right. There is scope for reforming the capital gains tax system in a way that would benefit the housing market, but it should involve limiting the CGT principal private residence relief for owner occupiers.

Edward Timmins (Wicklow, Fine Gael)
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Why does Dr. Roantree think that the principal private residence favourable tax treatment is negative for the housing market?

Dr. Barra Roantree:

It means that people want to invest in their house more. It also means that people do not want to move as much. It means that people invest more in housing than they otherwise would. It means that they are very happy to build an extension because they are building up the value of their asset in that way. It means that people want to save more and invest more in housing than they otherwise would. The tax system is inducing them to do so and that has knock-on effects. Think about the availability of construction. We have a huge boom - I am guilty of this in terms of extending a house - that is taking away from-----

Edward Timmins (Wicklow, Fine Gael)
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A principal private residence tax would favour people to sell their house and buy another one.

Dr. Barra Roantree:

Could the Deputy say that again?

Edward Timmins (Wicklow, Fine Gael)
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A favourable tax relief would incentivise someone to sell their house rather than build an extension.

Dr. Barra Roantree:

Not necessarily. A person has the incentive, particularly if they want to bequeath it to their kids, that the CTG will be wiped out, so if they make their house much more attractive, there are tax-free gains on two fronts. The first is that there is no CTG on principal private residences, and the second thing, which I mentioned in my statement, is that the step-up basis of capital gains tax is a huge distortion for the way and form in which people save.

Edward Timmins (Wicklow, Fine Gael)
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The witnesses alluded earlier to the fact that ETFs may not be resolved in the next budget and that this is a reason to hold off on putting this savings incentive scheme in place. I do not have the full technical answer as to what qualifies as an ETF, but could there be some basket of low-risk shares that would qualify as not being an ETF that could be availed of through this new proposal?

Dr. Enda Hargaden:

I hope so. I am not au fait on the exact legal details of the scheme, and we have not seen its exact details. We would ideally move towards a situation where ETFs were allowed if there was some interim measure that allowed "ETF-lite" in without being subjected to deemed disposal. That would be fine too.

Edward Timmins (Wicklow, Fine Gael)
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I am just trying to see a window where it could be facilitated without having to abolish the ETF deemed disposal overnight. I am not saying we should not do that. Perhaps we should do that anyway. Deputy Brennan spoke earlier about the tax take of €150 million. There may be other sides to that in that while we might lose that, we might gain elsewhere from there being disposals that would not have happened otherwise.

Dr. Barra Roantree:

That is why the details of the design of the scheme are really important to get right. That is why this is a really big radical reform of the savings and investment system for most households. It is important to get it right even if it means not necessarily rushing it through. As the members know, the Finance Bill is very complicated and is very rushed through sometimes with the number of changes that have to be gone through. It is more important to get the scheme right than to necessarily get it in for January.

Edward Timmins (Wicklow, Fine Gael)
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It is very challenging to get it right.

No matter what we do, people will not be happy.

Dr. Enda Hargaden:

I might add that it might be easier to get things right at the start as a package, rather than fixing problems that come at the end. Think of step-up basis at death, for example. It might be in the interests of the State to sort these things. It is a fantastic opportunity for the State. Regarding Senator O'Reilly's comment, we might have come across too strongly. Both of us would like a policy like this. We might disagree on the exact details, but I think it is a great opportunity. As long as it is implemented correctly, I think it is a fantastic opportunity.

Edward Timmins (Wicklow, Fine Gael)
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I was disappointed with the article in the The Irish Times online today. It seemed to be very negatively disposed towards it and quoted the opening statement-----

Mairéad Farrell (Galway West, Sinn Fein)
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I am sure we will all agree in this committee exactly what we want to see in this scheme. I am joking. It has been an interesting discussion, which is the most important thing. It is about people having different views, expressing them and talking them out. That is what we are all here for as a committee. I thank everybody. Go raibh míle maith agaibh.