Budget 2020 ignores the need for reform of tax expenditures

Posted on Friday, 8 November 2019
Tax avoidance

In our Budget Choices 2020 submission, Social Justice Ireland called for increased scrutiny of tax expenditures as part of the budgetary process. We regret that, at a time when the Minister for Finance has made a point of repeatedly noting the scarcity of available resources, government has ignored a real opportunity to increase the total tax-take whilst making the tax system fairer.

Tax expenditures - or tax reliefs, as they are often known - are policy tools for reducing an individual’s or firm’s tax liability, usually with the goal of encouraging certain behaviours. They can be politically appealing as they don’t increase direct government expenditure, so it is often overlooked that they represent revenue to the government that is being foregone and so there is always a cost attached.

In 2016, the latest year for which data is available, tax expenditures amounted to approximately 10 per cent of total tax revenue. However, unlike direct government expenditure, tax expenditures are not subject to annual assessment as part of the budgetary process. It is extraordinary that this is the case given the cost involved.

As part of the budgetary process, all such expenditures and reliefs should undergo proper administrative scrutiny and parliamentary debate to ensure they remain fit for purpose and cost-effective. The cost of tax expenditures (by type) for each past year should be published in the lead-up to the Budget, as should the estimated cost of tax expenditures for the year ahead.

More generally, when considering whether to implement a proposed tax expenditure, government should be obliged to state publicly: the objective it aims to achieve; the other options considered, and why the tax expenditure is deemed to be the best approach; the likely economic impact of the tax expenditure; and the estimated cost.

There should also be, at the very least, scope for automatic periodic review of each expenditure. The preferable option would be for a sunset clause on each expenditure so that each must be reviewed and judged on its merits as each annual Budget approaches. At present, only 13 per cent of tax reliefs have a sunset clause, and 23 per cent have never been reviewed.

Tax expenditures are, by their very nature, regressive. Because government revenue is being foregone, this funding needs to be made up elsewhere  to maintain the same level of service provision. The cost of tax expenditures is spread among all tax payers, but not everyone can benefit from them, and it is almost always those with high incomes that are best placed to avail of them.

Tax expenditures have even been acknowledged to be regressive by the government’s own Commission on Taxation, which has commented that ‘in general, direct Exchequer expenditure should be used instead of tax expenditures’ and asserted that ‘to the extent that the beneficiaries of tax expenditures are those with higher incomes... this results in a transfer of financial resources to these beneficiaries by the rest of the taxpaying community, including those on low income’.

It is time for reform of how this policy instrument is used and scrutinised.