I thank the committee for the invitation to make a presentation on this topic. I am an economist based at the school of social policy, social work and social justice at University College Dublin. I was also a member of the 2008-2009 Commission on Taxation, and within the commission I chaired the subgroup which examined tax expenditure. As a researcher, I am also part of an international research group focused on the links between taxation and social policy and within that, I focus on the often hidden role of the state in using the taxation system to encourage and support certain activities among individuals and corporates via tax expenditure.
I warmly welcome the committee’s decision to give attention to the issue of tax expenditure. Public policy analysis and discussions are often very limited when it comes to taxation issues, a focus which undermines the comprehensiveness and relevance of those considerations. In particular, they can be overly focused on income taxation and as such ignore the other channels via which individuals, households and companies contribute to the State, most particularly via indirect taxes. Similarly, they can often focus on the taxes and social insurance payments collected and ignore those which the State explicitly decides not to collect via tax expenditure. Given that, it would be useful for the committee to consider the taxation side of the budget to be approximately €80 billion to €85 billion a year, comprising the taxes collected and taxes not collected due to the provision of various tax expenditures. While we have good projections, within the most recent budgetary documentation from October 2018, of the expected tax to be collected, which will be approximately €70.77 billion this year, we have less insight into the overall cost of the taxation that will not be collected as a result of the provision of tax expenditure. However, given past history and the annual estimates from the Revenue Commissioners, this is likely to be in the order of €10 billion to €15 billion per annum.
Overall, given the importance of that revenue to support the running of the State, and the redistribution of resources, it is remarkable how little attention the policy-making system gives to the nature and stability of the overall taxation system. Within that, as tax expenditure represents a large part of the system, the current focus of the committee is most welcome. I sincerely hope that such a focus will become a recurring part of its work in the years and decades ahead.
Contributions to the committee from the Department of Finance and the Revenue Commissioners and the recent report on tax expenditures from the Parliamentary Budget Office, mentioned by the Acting Chairman, have highlighted that there is some disagreement regarding what to count and what is and what is not a tax expenditure. This was an issue the Commission on Taxation grappled with when it was established in 2008, and we resolved it by proposing the adoption of the OECD taxation definition, which was the first recommendation of the commission on the topic of tax expenditure.
That definition states that a tax expenditure is "a transfer of public resources that is achieved by reducing tax obligations with respect to a benchmark tax, rather than by direct expenditure". There are many measures in the taxation system which technically reduce tax liabilities but are functional as part of the basic operation of the system. For example, inter-company transfers, transfers of maintenance payments between former spouses and methods to facilitate the interaction of individuals and companies with other taxation systems in other states. These are technically tax relieving measures but they are in effect administrative measures which allow the tax system to function effectively. Aside from these, where measures are adopted or provided to allow individuals and-or companies to reduce the tax bills below that which they would otherwise pay, this is a tax expenditure. Therefore, simply put, a tax expenditure is a measure adopted as part of a budget or finance Bill which reduces the amount of tax that would be collected from individuals and firms with the intention of supporting certain activities, encouraging certain actions and or assisting certain needs.
In all cases such measures are discretionary. In other words it is up to policy makers to decide if these are worthwhile measures, both to introduce and to retain, as they have recurring annual costs. Almost everybody would welcome a reduction in their total taxation contribution, but such discretionary reductions come at a cost to the overall tax take and shift the cost of supporting public services and redistributive policies onto those who do not benefit from these tax breaks. It is important to ask if the provision of such tax relieving measures is in the broader interest of all taxpayers and of society in general. It will always be in the benefit of the recipient, but that is not the question that those of us interested in, or involved with, public policy should be asking.
On the costs and scale of tax expenditure, there are a number of ways of assessing the cost of a tax expenditure. The most intuitive is to estimate the immediate reduction in revenue to the State associated with the introduction of the measure, known as the revenue forgone method. This is generally estimated by comparing the revenue expected under the current structure versus the revenue expected when the tax expenditure is in place. In general, this assumes no change in the behaviour of individuals or firms and as such can give an exaggerated estimate of the cost of an expenditure. However, it remains the most straightforward and most common international way of estimating tax expenditure costs. One could spend a long time exploring the minutiae of possible behavioural change and possible long-term benefits and-or costs of a particular tax expenditure measure, but I would suggest sticking with the established revenue forgone method and noting that the costs it provides may somewhat exaggerate the final cost.
The information available to this select committee, and to Irish society in general, regarding tax expenditure measures has increased dramatically over the last decade. When the Commission on Taxation commenced its work there was limited information on the annual costs but this has transformed following the work of the commission, revisions to the scale of information on tax expenditures published by the Revenue Commissioners, annual reports from the Department of Finance and requirements at a European level that all countries report on the nature and scale of the tax resources they decide not to collect each year via tax expenditure. As such, there is a new opportunity for committees such as this to engage with what was heretofore an inaccessible area of budgetary policy and resource allocation.
The most recent list of tax expenditures from the Revenue Commissioners lists a total of 120 tax-relieving measures. Of these, I would classify approximately 106 measures as discretionary and the total cost of these measures in revenue forgone is €21.4 billion per annum. In many cases these measures are generally regarded as worthwhile and many do not need review, such as tax credits for individuals, couples, PAYE and self-employed workers. Others are discretionary but have long-standing policy support, such as tax relief on child benefit payments, nursing home expenses and rent-a-room income, while others are discretionary and can be argued for and against, such as mortgage interest relief, and income tax reduction measures for high income foreign executives.
I would encourage the select committee to engage as follows with this issue. It should request that the Department of Finance finalise a list of tax expenditure measures which are not part of the baseline, that is, the technical functioning of the tax system, and that it provides a report with the cost of these measures, in revenue forgone terms, to the select committee each year. It should request that the Revenue Commissioners publish their annual tax expenditure cost data in a format that aligns with the list established by the Department of Finance. This is likely to require the Revenue Commissioners to classify the tax-relieving measures they report upon into groups, including discretionary tax expenditures, benchmark tax-relieving measures, tax credits and allowances. Third, and given the scale of resources involved, the select committee should review this list and the changes to its costs on an annual basis. Even if all the discretionary tax expenditure measures are worthwhile, it is of merit for a committee like this, on behalf of the Oireachtas, to have oversight of the nature and distribution of these resources.
The select committee should engage each year with the Department of Finance following the publication of the various reviews of tax expenditure as part of the material which accompanies the annual budget. Likewise, the committee should engage with other researchers who have examined tax expenditure issues. For example, over the past two years Professor Gerry Hughes and I have undertaken a detailed examination of the costs, distribution and policy options around the large amount of recurring annual tax expenditure granted to support private pension savings.
The committee should select a theme each year and review the merits of each of the tax expenditure measures currently in existence under that scheme. Approaching the list of items in this way will make them more accessible and the exploration more intuitive. The Commission on Taxation adopted the following categories to its assessment, and I suggest the committee should take a similar approach: children, housing, health, philanthropy, enterprise including farming, employment, savings and investments, and others. In addition to this list, I would add capital allowances as an area deserving of particular focus given the resources involved.
The committee should also review the case made in the budget and Finance Bills, and in associated documentation, for the introduction of each new tax expenditure. Both the Commission on Taxation and the Department of Finance have provided a useful set of criteria to assess the appropriateness of new measures and it would be appropriate for a committee such as this to consider if the measures as proposed and designed adhere to these criteria.
The decision of the select committee to focus on this issue is most welcome. As mentioned by the Commission on Taxation, the OECD and others, resources allocated to tax expenditure are equivalent to resources allocated to direct expenditure. Given that, there is a long overdue need for detailed Oireachtas oversight of these decisions. Indeed, it was a recommendation of the Commission on Taxation and I hope the committee embraces the opportunity to provide greater insight and democratic oversight of this area of public policy.