Paul Sweeney: There has been much progress in getting rid of the most wasteful and destructive tax breaks, but many remain.
Indeed a radical approach to tax breaks must be taken by government because they are a fierce waste of money. The many references to “Value for Money” by the public service is empty and really should be used unless this issue is seriously addressed.
The issue is that many tax breaks suddenly arise, which were never planned, which cost a fortune and do nothing for the economy or society.
A study of tax expenditures or tax breaks by TASC argues that there are also a great deal of tax breaks many of which do serve useful purposes. These include the single person child carer tax credit or the homecarer credit on this list called “Cost of Tax Expenditures” published by the Revenue. It can be seen that married or civil partners’ personal tax credits cost €2.6bn in 2014 and the blind persons’ credit cost €2million. On this list, which is far from comprehensive, business got €6,645m in tax expenditures, many of them worthy for example for encouraging investment, but some less so.
But as I state in this TASC report the total cost of all existing tax breaks is not known. In 2014, the Revenue estimated that they cost €22.95 billion. But this list omits some big tax expenditures such as S110 and new ones which have been or are being hatched as you read this.
A Section 110 company is an Irish resident special purpose vehicle (SPV) which owns or manages “qualifying assets”. PWC claim that “Section 110 is at the heart of Ireland’s structured finance regime and is widely used and internationally regarded.” In contrast, Stephen Donnelly TD holds that it may lead to one of the biggest avoidance of Irish taxes in the State's history – of up to €20bn over 10 years.
Key findings of the analysis include:
- • All tax payers enjoy some tax breaks – from zero VAT on food, to personal tax credits for earners.
- • Unlike the general tax breaks enjoyed by many, specialised tax breaks for wealthy individuals and corporations are often regressive, costly and ineffective.
- • Once tax breaks are introduced, they tend to spread and some remain in place long after they have served their original function.
- • Tax breaks tend to “diffuse” as lobbying makes them available to more and more so-called special cases.
The study identifies many tax expenditures, as well as a further 26 ‘undead’ tax reliefs – so called because while the particular tax exemption has been ended for new claimants, reliefs already granted still have some time to run. These zombie reliefs alone cost over a hundred million euros every year (€157m in 2014).
The first tax breaks for property were introduced from the mid-1990s, and were focused on certain objectives such as urban renewal. Then they spread like wildfire. They boosted investment, but they ultimately helped to wipe out virtual all property and construction related businesses. This led to the biggest state rescues (nationalisations) of both the banks and most property companies too. Many fine legitimate businesses might have survived without such over-generous tax breaks.
In essence, there has not been a “free market” in property in Ireland since the mid-1990s. It is still not fully emerging with so many property subsidies still in existence. Yet some groups are seeking more tax breaks for themselves. Yet in the past they got all they sought but were then wiped out.
There are few advocates of free, un-subsidised markets in Ireland. Virtually all business interests and their lobbyists appear to seek endless tax privileges.
In contrast, direct state cash aid is easier to manage if subsidies are to be granted, rather than tax breaks. But the cost of such direct subsidies would be open transparent and can be contained. Today, no one knows what the cost of most tax breaks are going to be and what economic impact – if any – they will have.
We do know one thing. The property tax breaks cost billions, were very regressive (going to wealthy investors) and did nothing for the economy. Correction: they did a lot of damage to the economy, contributed substantially to the collapse of all Irish banks, built ghost estates, drove huge public debt, big private debt and contributed to the 7 year recession.
Most of the property tax breaks had been terminated by Government, after (overdue) reviews - but it was already to late.
There is much to be learnt from elite’s recent mistakes on taxation. Politicians have yet to learn that every tax break costs money; often distorts competition; may achieve nothing and in some cases, may do damage.
Paul Sweeney is Chair of the TASC Economists’ network and wrote the report “The Problem with Tax Breaks.”