Friday, December 4, 2009

Tax Breaks and the Budget

Tax breaks and the budget.

Break a leg is the customary term of encouragement given to actors. As Brian Linehan senior counsel gets ready to deliver his third budget in 15 months we'll all be hoping this master actor gets it right this time

What he comes out with is hard anyone's guess but its likely to be a lot of old hat with maybe, just maybe, one or two good ideas in the middle. If he is looking for advice he should take a look at the Sinn Fein pre-budget proposal
One of the areas that documents recommends focus on is tax breaks as part of the party's argument for a functioning tax system.

Some of the proposals were:

- Abolish mortgage interest relief for landlords – Raises €285 million

- Abolish all remaining property-based tax reliefs (on property development, not principal home mortgage interest relief) - Raises €43 million

The pre-budget submission argued that standardising all discretionary tax reliefs could raise €1.1 billion.

TASC, the economic think tank arguing for a more nuanced approach to the Irish economy have now added some futher details to this discussion with a new report on tax breaks /or tax expenditures as they are officially called.

TASC says that tax breaks will cost the southern state about €7.4 billion in 2009. The level of tax breaks in Ireland is exceptionally high. They amounted to € 10.7 billion in 2005 (which are the latest complete figures for the cost of tax breaks in a single year). The OECD Economic Surveys: Ireland reports that tax expenditure on personal income tax in 2005 amounted to €7.2 billion, plus an additional €3.5 billion in tax breaks on corporation tax. This totals €10.7 billion in tax breaks on personal income tax and corporation tax alone (OECD 2009a, pp. 60-62; OECD 2009b).

Big money indeed. But tax breaks are not necessarily bad its just when you use them unwisely they can cause the wrong type of outcome. Like increased inequality of wealth distribution or else stoking the fires of a property boom.But of course they also help people with breaks existing for disabled people or as aids to help businesses and keep people in jobs etc. The southern state is out of kilter with the rest of Europe. If tax breaks on personal income tax and corporation tax were reduced to EU average levels, they would only cost €2.2 billion in 2009, a drop of €5.2 billion. On Progressive-Economy Nat o'Connor notes tax expenditure on personal income tax in Ireland cost three times as much as the average of 22 other EU countries.

TASC has argued that The Government is effectively spending money every time it decides to create or extend a tax break. All these tax breaks should be included in every annual Budget and the govt. would have to justify on an annual basis whether to keep or to scrap or add new tax breaks. Every single break would have a "sunset clause" and their evaluation as a success or not should not include any investments or jobs created that would happen anyhow as noted by the Irish times.

There are a couple of stumbling blocks for Brian taking these ideas up. Specifically the need to justify tax breaks each year, and they need to analyse their specific benefits over and above any investment or jobs that would be created anyhow. These points would require accountability, honesty and the implementation of basic controls. Basic controls that you would have in any business not to mind a state.

But the pre-budget proposal is right not to call for a huge clamp down on tax breaks. Too drastic an action would impact on low and middle earners who cant afford it and would probably harm small businesses trying to keep running and keep people in jobs.

But there seems to be plenty of room to tighten up the system and to help improve govt. revenue.

When it comes to reforming the tax breaks system and demanding accountability on why they exist and a demonstration that they are part of an appropriate economic strategy for the state then There Is No Alternative (TINA).

The Tasc report is here and the site is discussing it at

1 comment:

  1. The preferred childcare provision incentive during the Celtic Tiger years was tax breaks for creches. Just the all knowing market respond and solve the childcare issue rather than the govt. just developing a child care network across the state. INstead haphazard, hope it works out, fire a tax break off and cross the fingers.