An Saoi: The tax figures for July were published last Wednesday, slightly delayed by the Holiday weekend.
This month, however, there were no statements expressing encouragement regarding “green shoots”. We can only assume that Mr Cowen was busy in his garden selecting his prize produce for display at the Tullamore Agricultural Show.
Indeed, the underlying trend is worse than ever and points towards an end of year outturn in the region of €31,100M. The degree of collapse cannot be overstated. The current Dept. of Finance target of €34,400M is just four months old and was made with the figures for first three months known, and I presume knowledge of the trend for the fourth month. Tax yield in 2009 will be below that of 2003. Assuming the Central Bank’s economic assumptions are correct, tax yield for 2010 is likely to be in the region of just €28,000M. Remember, just 27 months ago Brian Cowen predicted in the Fianna Fáil manifesto that the tax yield for 2009 would be €57,034M.
What is to be done? Jim O’Leary writing in last Friday's Irish Times suggested that severe cuts in Government current expenditure were required. Mr. O’Leary clearly sees the immediate imperative as closing the gap between income and expenditure, which I accept. However, from a tax point of view, such cuts are likely to reduce tax yield even further, risking the danger of falling into a spiral of further decline.
It is unclear from Mr. O’Leary’s article whether he includes tax expenditure within his spectrum of cuts, because if he does, I certainly can agree with him. The biggest beneficiaries of the Irish tax/welfare system are the better off. Many of these arrangements have played a role in causing our current predicament. For example I would suggest,
• Removal of interest deduction against rents & other passive income
• Removal of mortgage interest relief on house purchase
• Taxation of inheritances as income.
• Limiting business retirement relief to the normal termination limits.
• Removing of relief on Social Insurance contributions on certain income, e.g. capital gains, inheritances etc.
• Terminating relief for all existing capital allowance schemes.
• Slashing private rent subsidies paid to landlords.
Looking at the current tax picture, our tax base has narrowed incredibly. I would suggest that perhaps 90% of this year’s corporation tax will be paid by perhaps no more than 20 multi-national companies. The native Irish contribution to Corporation Tax is likely to be negative, as tax paid in 2008 & 2007 is repaid. The losses for 2008 can be set back against 2007 earnings, leading to a refund of a) preliminary tax paid in 2008 b) creating a refund in 2007, and c) no preliminary tax in 2009.
Outside of workers with multi-nationals and in the Public Service, very little Income Tax is being paid. Tax may be deducted by many employers, but the union representing Tax Inspectors suggests that it is not being paid to the Collector General. Much of the collapse in employment has affected a core group of taxpayers, males in well-paid full-time employment.
VAT has collapsed and is back to 2004 levels. Much of this may be down to people having to live within their means. VAT is now at close to core levels and is unlikely to fall much further unless price differentials widen considerably with Northern Ireland. There is, I think, a strong argument to reduce the core rates, particularly if the UK increases its rate as planned.
Mr O’Leary refers to the need to regenerate private sector spending. But private sector debt is perhaps our biggest problem. NAMA will deal with one minor part of private sector debt - at what cost, we do not know. But the mountain of personal private debt is still sitting there hidden by the foothills of developers’ debts. Reliance on private sector spending may leave us waiting for ten or more years in a Japanese style depression.
Mr. O’Leary has argued in the past that everyone should pay something towards the upkeep of the State, and again I agree completely with him. The best way to ensure that they do so is to keep as many as possible in employment. The key is to ensure that the medicine does not kill the patient.
For the record I set out below my own current estimate of the outturn:
Excise duties 4160
Capital Gains Tax 402
Capital Acqs. Tax 233
Stamp Duties 547
Income Taxes 11770
Corporation Tax 3770
Total Revenue: 31145