An Saoi: You can read the Government's gloss on 2011's awful tax figures here (Slides 5-7). The tax yield has indeed risen but only after
• the reclassification of the Health Levy as a tax within the USC
• substantial cuts in various tax credits
• the introduction of various new levies
After the massive changes introduced the figures still were €873M short of target. We are told that €261M in Corporation Tax arrived “late” and the Dept. of Finance have decided to “adjust” the figures accordingly. Now late payment of tax is regularly occurs, but this is the first time any Government has decided to make such adjustment. I understand the reason for the late payment was a delay in transferring the tax due from a UK account, because of course the multi-national involved does not trust the Irish banking system. While it may account for its sales in Ireland it sure as hell will ensure that its cash is not here!
Let us look at the main figures, starting with Value Added Tax. Yield is down €489M from target or 4.8% & €360M short of the 2010 figure. The VAT yield weakened throughout the year, reflecting insipid consumer activity, which will it is forecast continue into 2012. The number of credit cards and their use continues to plummet, suggesting even those who can afford to spend do are not listening to Michael Noonan's plea that they spend, rather they believe "Ireland is facing 10 years of austerity" , as Dr. Richard Tol so succinctly put it as he flees the island.
The withdrawal of income involved in the Budget changes will lead to a drop in the VAT yield, which the Government has implicitly taken into account in its tax projections for 2012 by accepting that the VAT rate increase will yield far less than would be expected. The actual affects of the Budget changes were not broken down in the Budget documents.
The degree of non payment or late payment is also not detailed though the Revenue Commissioners are promising to specifically target collection as part of its Comprehensive Expenditure Review. However the graph below shows the level of change in VAT in just five years. Click on graphics to enlarge.
Income Tax came in €327M below target for 2011, but is of course not properly comparable with previous years because of the USC. The real challenge is 2012 particularly since the yield from Income Tax actually weakened in December against the Minister's estimate at Budget time, just four weeks ago. Budget papers expected the 2012 yield to increase by €1,202M (8.7%) over the 2011 outturn and looks well nigh impossible. This surely will be clear by the end of March or April, leaving a mini-Budget inevitable.
The position of the two capital taxes, Capital Acquisitions Tax & Capital Gains Tax from 2006 to 2012 is mapped on the chart below (CGT LHS & CAT RHS). Both taxes performed reasonably well in 2011, CGT considerably exceeding its target as many people took advantage of the existing rate, before the Budget increase to 30%. The various changes introduced by the late Brian Lenihan to CAT ensured that the outturn was only marginally below the expected yield. Further changes introduced in the 2012 Budget are expected to increase the yield further. Irish CAT relief, in particular the provisions on agricultural and business transfers are extremely generous. There are huge options to increase the yield from this source without damaging economic activity.
The lack of access to cash to fund purchases whether it is property or business assets leaves the position of CGT particularly problematic.
“Stamp Duties” are now mainly made up of various levies on pensions, insurance policies etc. The historcial sources of property and financial documents are now but a small part of the yield. A breakdown of the various sources up to 2009 is available from the Revenue Commissioners here and in a written answer provided to a well-known cloth cap you can see the 2010 property figures yield. There is little or no logic to many of these ad hoc taxes, other than to fill some financial hole quickly and their efficacy needs to be reviewed urgently. In the meantime they yielded €1,391M in 2011.
Excise Duties also covers a wide range of different fees and flat rate charges and taxes on services and goods, details of which are available from this chapter of the Revenue Commissioners Annual Statistical Report and came in bang on target as the forecasting is not done by the Dept. Of Finance! The yield is the same as in 2010 and the expected increase in 2012 is just €125M, an increase of under 3% and 2012 should come in on target.
Finally Corporation Tax. This is not so much a tax any more as a voluntary contribution from multi-nationals. The yield from this source is still impressive at €3,520M in 2011, if only just over half €6,683M paid in 2006.Unfortunately much of the tax paid in the glory years of 2006 & 2007 has been repaid since as huge losses incurred in the financial service and property industries have been offset against earlier profits. The 2011 figure was €500M short on target. However they claim to have €261M already in the bank, which should help to make reaching the target of €3,770M a little easier.
Conclusion: 2011 was a bad tax year. An economy on short-time with little access to cash was always going to be that way. The issue now is 2012. It is impossible to see the Government reaching the intended target for 2012 without some form of increased economic activity. This may be clear very quickly, as early as March or April.
A further year of economic stagnation lies ahead and Economist Meg of Roubini Global Economics thinks we are in serious trouble and I agree. However we got ourselves into this problem and it is up to ourselves to dig ourselves out of it.
The additional taxes required to bring the figure up to €36,250M as required by the Government would need to be carefully selected if they are not to seriously reduce existing taxes. Blunt tools such as a VAT rate increase, raising duties on tobacco products & alcohol are unlikely to raise additional taxes as they are likely to lead to lower consumption where they cannot be avoided or increased traffic North or smuggling.
Expediting the withdrawal of the property tax breaks which played a major part in getting us into our current difficulties could yield in excess of €1,000M. These would include a “use it or lose it” amendment, ending all of these capital allowance schemes with effect 31st December 2011 and allowing no further carry forward of unused capital allowances or losses created by them after that date. Also the deductibility of interest against all rental income should be ended with effect from 31st December 2011. The withdrawal of tax expenditures would be the most effective way of collecting the money and have the least effect on private consumption.
Enforcement of existing legislation and the collection of taxes as they fall due is also crucial. The Revenue will be particularly badly hit over the next few months by retirements because of the organisation's age structure. Additional Revenue staff not just replacements for those leaving are required to ensure compliance. Sadly this will not be happening. Indeed, one Commissioner is leaving.
A little bit of joined up thinking is required, but it is as seriously lacking in our current Government as in the one that it replaced. God help us.