Saturday, 14 November 2009

Likely tax yield in 2010

An Saoi: Earlier this year in April the Dept. of Finance estimated that the tax take for 2009 would be €34,400M. Now, just seven months later they are suggesting a figure of €32,200M. My own view is that they will be very lucky to reach that figure, and that the final outcome will be in the region of €31,600M. However for the purposes of looking at 2010, let us assume that they are correct this time. The Department’s opening estimate for 2010 is €30,800M, a fall of €1,400M or 4.375%.

The tax yield is generally calculated by the Dept. using their macro economic projections, which are expecting a decline of 2% in GNP (1.5% in GDP) and a decline of just 0.75% in prices. In principle, the reduction looks reasonable based on their macro projections, as net tax yield moves at about twice the rate of economic growth (or decline) in the economy. Unfortunately, a detailed analysis by tax head is not provided and this is what I want to look at in more detail and see how the sum of the parts may change the whole.

Unfortunately detailed figures in relation to the Social Insurance Fund are not published on a monthly basis. I will try separately to do an analysis, based on the available information on the state of the Fund in the next few weeks.

Corporation Tax:
This is the only heading which looks positive. The 2009 figures were influenced by a number of things: a once off positive of around €400M because of fiddling with preliminary tax payment dates and then by a series of negatives. Companies making losses in 2008 paid no preliminary tax in 2009 received a refund of 2008 preliminary tax and also a refund of 2007 liabilities by setting losses back to that year.

The good news is that most of those refunds have been made and no further losses can be set back, other than be terminal relief. Almost all Corporation Tax is now paid by perhaps just 50 multi national firms, and the improving European market is likely to see them continuing to pay us our danegeld for allowing the laundering of their EMEA profits through Ireland. I am expecting Corporation Tax for 2010 to be around €3,700M.

Excise Duties: This heading covers a myriad of different charges, including VRT, various Excise duties on fuel, alcohol and cigarettes etc. The yield has fallen by over 20% since 2007 and it is hard to see any improvement in 2010. I cannot see any improvement in car sales, as this a purchase mainly funded by borrowed money and the purchase of a new car is for most people a vanity purchase. I would also argue that much of the decline in new car sales arises from corporate purchases, which have collapsed as much from the change in Benefit in Kind legislation some years ago,

Alcohol sales continue to decline. There are probably three different reasons, drop in consumption, less consumers because of emigration and smuggling. In the case of cigarettes and tobacco, smuggling is running at well over 30%.

Yield for excise duties was €5,443M in 2008 with a Govt. target of €4,635M in 2009, but with a probable outcome of €4,250M. It is hard to see the figure exceeding €4,000M in 2010.

Capital Gains Tax: The yield in 2007 was €3,105M and the Dept of Finance projection for 2009 is €625M. I would expect an outcome in the region of €430M. There are so many losses forward at this stage it is hard to see it breaking €350M in 2010. Most of the CGT currently paid is likely to be in place of income tax as withdrawals from businesses are structured accordingly. The increase in rate to 25% is unlikely to increase the yield without some restriction on losses forward.

Capital Acquisitions Tax: This is an intriguing tax, which with very little adjustment could become a major source of tax. In 2007 the yield was €392M with a 2009 target of €295M. I would expect the 2009 outcome to be in the region of €260M. The 2010 yield is likely to slip due to property prices, despite the cutting of the tax free threshold. There may also be substantial unpaid CAT because of the inability to dispose of assets. I would estimate a yield in the region of €240M for 2010.

Income Tax: In 2007 it was €13,572M and the Government’s expected yield in 2009 is €12,475M. However the outcome is looking like €11,550M. The Dept. of Finance is suggesting that employment will fall by 3.75% and is also intent on cutting €1,300M from the Public Sector wage & pension bill, though there is some overlap. The restructured levies will also hit from January. However assuming a 5% decline in wages would reduce the tax yield by between 9 & 10%, it is hard to see the figure breaking €10,500M in 2010.

Value Added Tax:
The Dept. of Finance is estimating a 3.5% decline in personal consumption and a decline of 0.75% in prices. This suggests that VAT will decline by at least 8% over 2009. However zero rated goods such as food are likely to decline by less than say, bottles of wine, chargeable at 21.5%. Assuming an outcome in the region of €10,400M, a decline of 8-10% would put us in the region of €9,300-€9,500M. Split the difference and we get €9,400M in 2010.

Stamp Duties: This also a heading which includes a variety of different duties. The yield in 2009 was expected to be €980M, but even with the Health Insurance Levy it is unlikely to break €825M. Let us assume €750M for 2010.

Customs: Customs duties belong to the EU, with a small amount retained by the home country for costs of administration. The expected yield in 2009 was €230M with the likely outcome being €185M. Let us assume the same amount again, €185M for 2010.

This gives a final total of €29,125M, or already a differential of €1,675M from the opening figure of the Finance officials. There is a further caveat which I would like to enter – bad debt. Assuming that the Revenue branch of the AHCPS are correct then new additional bad debts of €400M can be expected, dragging the figure below €29,000M. I throw the floor open for discussion.


Proposition Joe said...

Any thoughts on the interplay between the fall in income tax yield and the substantial rise in the marginal rate?

An Saoi said...

I don't think it is an issue. Almost all income tax is now paid by public servants and those employed by multi nationals. All of these employees are on salaries, which are paid and taxed at source.

Proposition Joe said...

@An Saoi

I really hope you're exaggerating there, otherwise our position is much more precarious than I thought.

If we really are dependent on the MNCs for almost all of the fresh (as opposed to internally recycled) income tax revenue, most of the corpo tax and also indirectly a good of the consumption taxes ... then our strategic position is exposed to an extraordinary extent.

An Saoi said...

Wake up and smell the coffee, Joe.

However, I don't follow what you mean by recycled income tax revenue. MNE's account for no VAT as all, unless they are exempt. VAT is paid by the final (unregistered) consumers, i.e. Seán Citizen.

Proposition Joe said...

@An Saoi

Would that coffee I'm smelling be backed up by any hard stats? ;)

By recycled, I mean income taxes collected from wages that are funded by taxes.

By us being dependent on MNCs indirectly for a good chunk of consumption taxes, I mean that MNCs pay out good money on wages, much of which gets spent on stuff, and much of that has VAT levied on it.

Of course, we're also almost entirely dependent on MNCs for keeping our balance of payments in the black.

So given those stark terms of Ireland being so utterly beholden to the MNCs, how do you see our corporation tax policy evolving?

I liked your figurative use of the Danegeld ... though to be pedantic, the payer and payee of that particular form of protection money were in exactly the opposite balance of power.

Me, I wouldn't even hint at any increase in our 12.5% kick-back on the profit laundering lest we scare off the golden goose.