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Delivering Fair Taxation in Budget 2022 - Tax Expenditures

Given the current state of government finances, a review of Ireland’s approach to tax expenditures is urgently needed.

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 are often politically appealing as they do not increase direct government expenditure. Consequently, it is sometimes forgotten or overlooked that they represent revenue to the government that is being foregone.

An examination of the most recent comprehensive tax expenditure data published by the Revenue Commissioners, which is for the tax year 2016, is informative. In total it provides data for 120 tax breaks ranging from those associated with tax credits for earners (Personal, PAYE, Couple, Single Parent etc.) to reliefs on capital investment and films. Thirty-one per cent of tax breaks did not report any cost data either on account of delays, non-collection or discontinuation. These include the tax breaks for some pension reliefs which are only available for earlier years. Overall, the tax breaks with available data involve revenue forgone of €32bn.

While there have been notable improvements in the publication of tax expenditure details since the 2008-09 Commission on Taxation report, it remains the case that, unlike direct government expenditure, tax expenditures are not subject to annual assessment as part of the budgetary process. Social Justice Ireland welcomes the annual report on tax expenditure included as part of the annual Budget documents, but this is limited and receives limited attention despite the scale of resources involved.

Additionally problematic is the fact that, by their very nature, tax expenditures are 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 the greatest income that are best placed to avail of them.

For this reason, tax expenditures represent a departure from the equity principle of taxation, as they typically benefit higher earners to a much greater extent than those with lower incomes.

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 or substantial capital, this results in a transfer of financial resources to these beneficiaries by the rest of the taxpaying community, including those on low income’.

For these reasons it is important that tax reliefs - particularly the most costly ones - undergo proper administrative scrutiny and parliamentary debate to ensure they remain fit for purpose and cost-effective. Social Justice Ireland believes that as part of the budgetary process, the cost of tax expenditures (by type) for each past year should be published, as should the estimated cost of tax expenditures for the year ahead.

Furthermore, 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.

Budget 2022: no new tax breaks

Calls for new tax breaks, or the return of old-ones, are a feature of most periods of economic and social recovery. However, as outlined above, their provision involves great cost to the state and the unequal allocation of these resources to small groups of beneficiaries. Few of these initiatives have proven to be worthwhile in the past; in particular the opportunity cost of using the revenue in a better way is frequently overlooked.

In the context of renewed calls for income tax cuts, VAT reductions for certain sectors, long tax holidays and exemptions etc, Budget 2022 should commit to not introducing any new tax breaks.

Sustainable Capital Spending

The OECD has called on governments to systematically evaluate the environmental implications of support and recovery measures to businesses and industries and their alignment with longer-term decarbonisation plans and environmental objectives. They note that “whilst Covid-19 has caused a severe international health and economic crisis, failure to tackle climate change may threaten human well-being, ecosystems and economies for centuries”.

It is therefore vital that any post-Covid-19 stimulus packages help the economy ‘grow back greener’, with lower emissions, and that any sector-specific financial supports or ‘bailouts’ are given in exchange for concessions and commitments on emissions reductions and improved environmental performance.

Recovery and stimulus packages in the aftermath of the Covid-19 lockdown will help to shape the economy for the long-term. Consequently, Government must steer investments towards productive and sustainable investment in physical, social and human capital, whilst also addressing existing concerns about poverty, inequality and social inclusion.

Pursuing this approach has obvious implications for Ireland 2040 (the National Development Plan) and the aforementioned unemployment challenges about to emerge (see p9). Renewable energy and clean energy infrastructure are job-intensive and offer high potential returns on investment. Similarly, residential and commercial retrofitting are also areas worth focusing on.

The investment plans associated with post-pandemic recovery will be critical in setting the environmental pathway for the next few decades, and crucial for Ireland’s climate ambitions and targets. Budget 2022 should commit to aligning all post-pandemic capital spending commitments to the achievement of long-term economic, social and environmental objectives.

Read the full text of our Budget Choices 2022 Policy Briefing - Delivering a Fair Recovery - HERE.