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Governments should not be concerned about the economic consequences of higher taxes on the rich
The study by the LSE's International Inequalities Institute ‘The Economic Consequences of Major Tax Cuts for the Rich’ uses data from 18 OECD countries covering the last fifty years to investigate the effects of major tax cuts for the rich on income inequality, economic growth, and unemployment. The report finds that the economic case for keeping taxes on the rich low is weak. Major tax cuts for the rich since the 1980s have increased income inequality without any offsetting gains in economic performance. In fact, major tax cuts for those on very high incomes increases the top 1% share of pre-tax national income by 0.8 percentage points. Tax cuts for the rich do not lead to higher growth in either the short or medium run - the trajectories of real GDP per capita and the unemployment rate are unaffected by significant reductions in taxes on the rich in the short and medium term.
The findings of this report should inform the changes that we make to our tax system in order to restore public finances and fund the public services and infrastructure that people expect as our society and economy recovers from the pandemic. In particular there are a number of specific proposals that should be implemented by Government that would increase our overall tax take and make our tax system fairer. The proposals detailed below would be a good starting point for Government. The OECD has recommended tackling inefficient tax expenditures, and a focus on raising revenues from tax bases, that will be the least detrimental to growth, including recurrent taxes on immovable property and general consumption taxes as areas for Governments to consider for base broadening.
Include the Cost of Tax Expenditures in the Budget Process
Include the full cost of all tax expenditures to the State in the annual budget process and in our annual accounts. This would give Government and all members of the Oireachtas a clearer view of the full cost of this foregone revenue to the State. It would also allow greater scrutiny of each tax expenditure, and a decision to be taken in the budget process whether it would be better to generate revenue for the exchequer by removing this tax expenditure rather than the State forgoing this revenue and generating fund elsewhere in the tax system to fund public services. Tax reliefs are essentially financial subsidies from the Exchequer (i.e. the taxpayer) to the beneficiary and require higher taxes among the non-recipients to make up the difference. Including the full cost of tax expenditures in the budgetary process and implementing an automatic review for each tax relief should be the very least Irish taxpayers can expect.
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. 2016, the latest year for which data is available, tax reliefs amounted to approximately 10 per cent of total tax revenue and 9 per cent of government expenditure. This is very significant. However, unlike direct government expenditure, tax reliefs are not subject to annual assessment as part of the budgetary process.
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 in the tax system to maintain the same level of service provision, so the cost of tax reliefs are spread among all tax payers. Yet not everyone can benefit from these reliefs, and it is almost always those with the greatest income that are best placed to avail of them.
For this reason, tax reliefs represent a departure from the equity principle of taxation, as they typically benefit higher earners to a much greater extent than lower earners.
Social Justice Ireland proposes that as part of the budgetary process, the cost of tax reliefs (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 relief, government should be obliged to state publicly:
- The objective the tax relief aims to achieve;
- The other options considered, and why the tax relief is deemed to be the best approach;
- The economic impact the tax relief likely to have;
- The estimated cost.
There should also be, at the very least, scope for automatic periodic review of each tax relief. The preferable option would be for a sunset clause on each relief, so that the relief/expenditure can be reviewed and judged on its merits. Questions that should be asked include:
- How much did the tax relief cost?
- What was the impact of the tax relief?
- Was it efficient?
- Is the tax relief still relevant?
Reintroduce Windfall gains tax at 80 per cent
Reintroduce the Windfall Gains Tax at 80 per cent. The vast profits made by property speculators on the rezoning of land by local authorities was a particularly undesirable feature of the recent economic boom of the early 2000s. Re-zonings are made by elected representatives, supposedly in the interest of society generally. It therefore seems appropriate that a sizeable proportion of the windfall gains they generate should be made available to local authorities and used to address the ongoing housing problems they face. For some time, Social Justice Ireland has called for a substantial tax to be imposed on the profits earned from such decisions. A windfall tax level of 80 per cent is appropriate and still leaves speculators and land owners with substantial profits from these rezoning decisions. The revenue generated by this tax could then be ringfenced by Local Authorities to provide additional housing and upgrade existing housing stock.
Replace the Local Property Tax with a Site Value Tax
Social Justice Ireland believes that the Local Property Tax should be replaced by a Site Value Tax. A Site Value Tax (SVT) is a charge on the value of land (i.e. the value of the site), not taking into account any of the physical capital built on the land. It is a charge on the ‘unimproved value of the land’. In this way, the charge is related to the value of the location. It is calculated as a percentage of the value of the site. This provides a fairer and more appropriate policy instrument than the current value-based local property tax. It would lead to more efficient land use within the structure of social, environmental and economic goals embodied in planning and other legislation.
From an efficiency perspective, an SVT would be a major step toward securing the tax base as it could not move to any location providing greater tax reductions. It would also shift the tax incidence away from transaction taxes like stamp duty. An over-reliance on such taxes can make the tax base vulnerable as it is dependent on maintaining and increasing the scale of the transactions. An SVT would switch it instead to an immovable physical asset which is a much more secure base. It would have other efficiency impacts, such as encouraging the development of derelict sites, and disincentivising the holding of land to create artificial scarcity in order to increase its value.
The need for a broad, stable tax base that can collect the revenue required to support our social, economic and environmental goals is an essential pillar of any new social contract. We must explore all tax options available to us, including redesigning old tools and introducing new ones. Reforming the current system and making it more equitable must be the starting point.