An Saoi: Seamus Coffey from UCC has produced an excellent analysis of the October Tax Returns on his site Economic Incentives. There you will find a variety of tables providing a seriously good overview of the tax movements, not just of the year to date, but also of the position at this stage for each of the last four years.
The tax figures are ahead of where I expected them to be, the reasons for which I will discuss later. But in discussing the tax figures, the old adage of lies, damn lies and statistics comes immediately to mind. The majority of media stories have correctly pointed out that the Government is for the first time ahead of its forecast. However it is of course substantially below the position of any recent year. We are now back to 2003 tax levels and are unlikely to move much from those levels for some time.
Corporation Tax is the only reason tax figures are ahead of forecast, though even it is €200M down on 2009 figure. The money laundering fees received for facilitating tax avoidance described in a recent article by the journalist Jesse Drucker published by Bloomberg and available here, make up most if not all of this source of tax. My hunch is that Corporation Tax for 2010 will finish with a flourish and will probably end up around €500M over target, with the additional yield coming from just a handful of international fairy godmothers.
The heading Income Tax covers a myriad of different sources of tax including withholding taxes stopped on State service contracts (PSWT), Construction related withholding taxes (RCT), taxes retained on dividends (DWT), taxes retained on deposit interest (DIRT) as well as “normal” income tax paid over through the PAYE system as Income Tax & Income Levy or remitted directly to the Revenue Commissioners by the self employed. The final figure is also net of certain other payments such as mortgage interest and private medical insurance subsidies (TRS) paid directly to lenders and insurers. Income tax has consistently fallen below forecasts and previous year figures as can be seen from the tables available here (thanks again to Seamus Coffey). The reasons for the consistent weakness in Income tax are all around us unemployment, pay cuts and lack of real economic activity. It is a pity that a more detailed analysis is not publicly provided.
Value Added Tax is running slightly over forecast, but nearly €500M below last year. Indeed the figure is back below the 2004 figure. The VAT yield has benefited from Budget changes introduced in an effort to stem the flow North and also the weakening of the Euro against sterling in the interim.
Certain right wing economists have suggested that there is room to increase VAT rates, particularly in light of the UK’s intention to increase their standard rate from 17.5% to 20%. I would caution strongly against such action and indeed would argue that there is a strong case for targeted reductions in VAT to encourage local demand and even to encourage the traffic to move in the opposite direction. The Euro has strengthened by over 7% against sterling since the end of June and may grow stronger over the next few months. There are already stories appearing in the media commenting on the traffic North. It is likely that many NI retailers have already factored in the UK VAT increase and increasing VAT with a strengthening currency would be tantamount to shooting ourselves in both feet.
Excise Duties include vehicle-based taxes (VRT) & taxes on alcohol & tobacco. They show little movement from 2009 or forecasts. The decline in rates of duty charged has kept up the yield, stemming the flow northwards. However the weakness of sterling and the ongoing smuggling problems in relation to cigarettes is likely to keep the pressure on yield. The Government may have no option but to cut duties on alcohol and tobacco to protect the yield. A modest cut in the taxes on cigarettes with more restrictive sales legislation may cut consumption but increase tax yield. Smuggling is estimated to be providing approx. 30% of tobacco products consumed.
The benefit of the reduction in VRT is far more problematic. It is interesting to note that around 33%of the increase in new car sales was made up by a decline in used imports.
The minor taxes sources all remain weak. Capital Acquisitions Tax surely provides opportunities for targeted tax increases, which would be relatively painless. A further reduction in thresholds and also the trimming of the over generous business/agricultural relief available could yield several hundred million euro. It would also go some way to broadening the tax base.