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Sunday 3 December 2023 Dublin: 0°C
taxing matter

Higher, more progressive taxes could be needed to fund future government spending, says ESRI

Unwinding ‘questionable’ tax reliefs that distort the property market could also be considered.

TAX INCREASES SHOULD be avoided until after the economy has recovered from the pandemic but may be necessary to fund future public spending, the Economic and Social Research Institute (ESRI) has warned.

The government could also look to unwind certain tax reliefs that “have questionable underlying economic rationale”.

One example is the Principal Private Residence exemption from Capital Gains Tax, which the ESRI said creates property market distortions.

“An ageing population, commitments to future spending increases, and potential declines in both corporation and motor tax receipts made the need for significant future tax rises likely even before the pandemic,” report author Dr Barra Roantree said.

“Increases in broad-based taxes on incomes, consumption and property may therefore be needed in the years ahead.”

In particular, extra tax revenue may be needed to fill the gap left in Ireland’s corporation tax receipts over the coming years with the Irish government facing into international headwinds over the controversial 12.5% rate.

Ongoing talks at the OECD around global tax reform, the Biden administration’s proposal for a 21% global minimum rate of tax and a European Union push to harmonise business taxes across the bloc have placed Ireland’s 12.5% rate under scrutiny in recent weeks.

‘Potentially volatile’

Corporation tax receipts topped €11.8 billion in 2020 for the Irish exchequer last year, roughly 16% of the State’s total tax take.

But over half of these receipts were paid by just 10 companies, “raising concerns about over-reliance on a potentially volatile source of tax revenues”, the ESRI said.

“The Department of Finance has made a provisional allowance in its latest forecasts for a €2 billion reduction in corporation tax reviews by 2025,” the ESRI said.

“However, the eventual impact could be much larger or smaller depending on the detail of any agreement eventually reached. As a result, there may be arguments for leaving the main rate (and structure) of corporation tax unchanged until the implications of any international agreement are fully understood.

The “most straightforward way” to boost tax revenues would be to increase the main rates of the largest taxes like income tax, PRSI and VAT.

Increasing the higher and standard rates of income tax by one percentage point, for example, would raise almost €1 billion per year, the ESRI said, “mostly from the highest-income third of households”.

On the flip side, raising income taxes in this fashion “can be expected to affect financial incentives to work” and reduce the supply of labour, although the effect on behaviour is “theoretically ambiguous”.

Instead of broad-based solutions, future governments could opt to zero in on high earners.

Wealth tax

Last month, the International Monetary Fund said that governments should consider temporary “one-off” solidarity taxes on high earners and high performing companies to pay for Covid-related spending.

In general, the IMF said that advanced economies should “increase reliance on inheritance or gift taxes and property taxation”, the burden of which tend to fall on higher earners.

A one-off tax on the wealthy “could raise substantial amounts of revenue” for the State, the ESRI said, given that half of Ireland’s €667.4 billion total gross wealth is held by just 10% of households.

A 1% tax applied to wealth in excess of €1 million could raise between €53 million and €248 million depending on whether certain properties like farms and businesses are exempt.

However, the report argues that a one-off tax would not eliminate the need for permanent increases in tax revenue to replace existing sources that are “in terminal decline”.

One way to do this would be to increase the top Universal Social Charge (USC) rate for high earners, the ESRI said.

Currently, an 11% rate applies to non-PAYE income.

Increasing this to 12% would yield “a modest” €14 million per year.

However, a new 3% USC surcharge on PAYE income could raise an extra €110 million per year, according to the report.

The ESRI said, “This increase would again primarily affect those in the very highest income decile, with an average loss of just over 0.50 per cent of disposable income, compared to less than 0.10 per cent for others in the top half of the income distribution and negligible impacts for those in the bottom half.”

Another option would be to increase income taxes by introducing a new 43% rate for those earning over €100,000, which could generate an extra €315 million for the exchequer.

This would be less progressive than a new USC rate, the ESRI said, because “income tax is levied on the joint income of most married couples”.


Unwinding some of larger tax exemptions with “a more questionable underlying economic rationale or are poorly targeted at achieving their stated aims” would also be an option for policymakers.

Standardising VAT by increasing the zero and reduced VAT rates to the standard rate of 23% could raise €2.2 billion and €2.4 billion per year respectively, the ESRI said.

An overhaul of Capital Gains Tax exemptions could also be considered and could “form part of a wider and radical reform of housing taxation”, according to the report.

For example, the Principal Private Residence relief, which applies to any gains made on the disposal of a property that is also the seller’s main residence, could be removed.

Although the Revenue no longer publishes details on the cost of this scheme to the State, the report cites a 2006 figure of €2.4 billion.

“The relief also creates a distortion towards living in a residential property since, while income from rent is subject to income tax, that from selling owner-occupied housing is tax-free,” the ESRI said.

Another option would be to remove CGT relief for entrepreneurs, which allows company shareholder-directors to pay a reduced 10% rate on assets owned by a trading company.

The justification for this exemption is “far from clear”, the ESRI said, and it also creates a number of economic distortions.

For one, it provides “a strong incentive” to set up a business for the sole purpose of retaining profits, “putting pressure” on anti-tax avoidance rules “which attempt to define when companies are ‘artificial’ avoidance devices”.

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