Saturday, 2 May 2009

2009 Tax Profile: already optimistic

An Saoi: The Dept of Finance has finally published its Tax Profile for 2009. The expected tax yield is €34,400M. However this figure already appears to be extremely optimistic.

The first three months have become much more important in recent years. In 2005, they represented just 22.99% of the annual tax yield, increasing to 23.6% in 2006. This had jumped to 27.24% in 2008. The main reason was the slow down or actual decline that occurred in economic activity as each year progressed. Corporation Tax for months from May onwards may be distorted by the once off change in preliminary tax. Any gain by this sleight of hand will be more than offset by refunds arising from losses made in 2008, particularly in the financial sector. While there has been some reference to co-relative adjustments, these are an ongoing risk to low tax regimes such as Ireland.

Table 1 shows the proportion of total tax paid in the first quarter in 2007 & 2008 by taxhead. Table 2 provides an estimate of the 2009 tax take based on the payments received in the first quarter 2009.

However as the economy is expected to continue its steep decline during the rest of the year, it is reasonable to presume that the projected figure using the 2008 percentages are as good as it gets. It is unclear whether the Dept. of Finance has factored in a substantial decline in prices.

The projected figure for Income Tax is very close to that of the Dept of Finance. This is perhaps because of the captive market of employees, in particular those direct State employees & those employed by foreign multi-nationals. The Income Tax yield did not keep pace with jobs growth on the way up and the decline will be less on the way down. This emphasises that most of the growth in job numbers was in low paid service type work and in part-time employment.

The major discrepancies are in relation to the Excise Duties (-€927M or -20%), Corporation Tax (-€769M or -20.6%). However a continued collapse in consumer activity could substantially reduce VAT yield to perhaps €10,500M or even less. There are also substantial differences with the minor taxes. Stamp Duties show a differential with Dept. of Finance figures of €354M or –36%, Capital Gains Tax €200M or –32%.

Taking various other items into account I would suggest the figures here may be closer to the end result for 2009, e.g. once off changes in CT payments, refunds of 2007 & 2008 CT based on 2008 losses, further drops in retail activity etc.

An additional gap of say €3,000M in tax in the current would leave Government targets in tatters. It is already very late in the year to take additional money out of the economy with a further Public Service pay cut. A 10% cut would save no more than €160M per month gross or perhaps less than €80M net. This however will only further squeeze spending. Lack of access to new borrowing and even repayment of massive personal debts has already reduced the ability of the public to spend - even if people wished to spend.

The lack of any coherent plan or strategy is stark. Increases in unemployment for the rest of the year will be mainly among the native Irish. They will give a different edge to unemployment. Thousands of temporary staff will be let go from the Public Service over the next few months and there will also be the school and university leavers streaming on to the jobs market. Mass emigration as favoured by the late Brian Lenihan seems to be his son’s only hope.

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