As a vote has been called in the Dáil, we will suspend proceedings until it is completed. We will then resume in public session.
Report of the Commission on Taxation and Welfare: Discussion (Resumed)
Sitting suspended at 5.42 p.m. and resumed at 6.03 p.m.
I welcome Professor Niamh Moloney, chair of the Commission on Taxation and Welfare, Mr. Philip Kermode, Dr. Barra Roantree and Ms Anne Vaughan, who are members of the commission, and Dr. Colm O’Reardon, secretary to the commission, and his colleagues from the secretariat, Ms Sinead Ryan, Mr. Colin O’Connor and Mr. Gary Hynds.
Before we begin I will explain some limitations to parliamentary privilege and the practices of the Houses as regards references witnesses make to other persons in their evidence. The evidence of witnesses physically present or who give evidence from within the parliamentary precincts is protected pursuant to both the Constitution and statute by absolute privilege. Witnesses are again reminded of the long-standing parliamentary practice that they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable, or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. Therefore, if their statements are potentially defamatory in relation to an identifiable person or entity they will be directed to discontinue their remarks. It is imperative that they comply with any such direction.
Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person or entity outside the Houses or an official either by name or in such a way as to make him, her or it, identifiable. I remind members of the constitutional requirement that they must be physically present within the confines of the place where Parliament has chosen to sit, namely, Leinster House, in order to participate in public meetings. I will not permit a member to participate where they are not adhering to this constitutional requirement. Therefore, any member who attempts to participate from outside the precincts will be asked to leave the meeting.
I invite Professor Moloney to make her opening statement.
Professor Niamh Moloney
I thank the committee for the invitation to appear here this evening to discuss the recommendations of the Commission on Taxation and Welfare. As the independent chair, my role was to facilitate the members of the commission, who brought a wide range of expertise to our work, in reaching our recommendations and I am delighted to be here with three of our members. Mr. Kermode was previously a director of the European Commission and whose responsibilities included customs policy, direct taxation and tax co-ordination. He also practised with PwC in Dublin. Dr. Roantree of the Economic and Social Research Institute, ESRI, focuses on tax, welfare and pensions. Ms Vaughan is a member of the Commission on Pensions and was previously deputy secretary in the Department of Social Protection. I am also joined by Dr. O’Reardon, who is secretary to the commission, and his colleagues, Ms Ryan and Mr. Hynds. My opening remarks will focus on the context of the commission’s work, our approach and our main recommendations.
Taxation and welfare policies are among the most potent instruments available to the State to influence the living standards of the country and its people. They have a major bearing on numerous aspects of economic and social policy. They represent the obligations that we owe to each other and the protections we provide for each other, often referred to as reciprocity. The commission was asked by Government to consider these two critical systems by addressing a wide-ranging terms of reference.
At the heart of our work was the core question asked by our terms of reference as to how best can the taxation and welfare systems support economic activity and promote increased employment and prosperity, while ensuring that there are sufficient resources available to meet the costs of the public services and supports in the medium and longer term. This is an important question and with it came several associated issues, further specified in our terms of reference. We sat for a year from June 2021, and during that time we met in plenary session 26 times, we held a major on-line public consultation on Your Vision, Our Future, and we engaged with many stakeholders. We delivered our report to the Minister for Finance on schedule in July 2022.
We all know that issues to do with taxation and the provision of public services are at the heart of democratic debate. This is particularly the case now, when inflation is at the highest level it has been for decades and when there is a debate about corporation tax receipts. The role of the commission, however, was to stand back from the immediate, and to take a strategic medium- to long-term view of these two critically important systems and how they can best be refined and reformed to ensure their future sustainability. As the title of our report, Foundations for the Future, makes clear, our recommendations look to the future and to the needs of Irish society over the next five to 15 years. It is important to say that in many ways the existing systems of taxation and welfare have performed well and have proven to be resilient, including over the Covid-19 pandemic. The issue is how well these systems can be expected to serve us in the future, in a fast-changing world.
Our fundamental view is that over the next five to 15 years the overall level of revenues raised from taxation and PRSI as a share of national income will have to rise materially. This reflects the age profile of our population. Providing the level of services that, as a society, we currently expect, will require significant additional funding. The need to raise additional revenues also reflects other significant fiscal risks that Ireland faces, including from the carbon transition and from our growing reliance on corporation tax as a source of funding.
While corporation tax receipts are currently very high, it would not be wise to place strategic reliance on this revenue to meet our future needs. Accordingly, the commission adopted a net revenue raising approach.
At the core of our work was consideration of the best, fairest and most environmentally positive way to raise additional revenue. In raising revenue, how do we ensure social cohesion and intergenerational equity? How can the taxation system help us in addressing the defining challenge of carbon reduction? How do we ensure that we maintain a supportive environment for enterprise, innovation and investment in Ireland? How do we ensure that the Irish taxation and welfare systems include and support everyone?
In reviewing the taxation and welfare systems in this way, our task was explicitly strategic. We did not conduct a line-by-line review of every aspect of the taxation and welfare systems, but looked at both systems and their interaction in light of our terms of reference, in an holistic fashion, and with a medium to long-term perspective. This approach required judgment about which issues were the most relevant. It also required the application of a set of framing principles. We adopted five such principles - sustainability, reciprocity, adequacy, equity and efficiency.
Our report proposes a series of measures to expand the tax base and to shift the balance of taxation to ensure that a greater share of taxation is drawn from more efficient taxes, thereby securing the sustainability and fairness of the taxation system. It also proposes progressive reforms to our social welfare system to support employment and address child poverty. Together, these measures are intended to form a balanced package of reform proposals.
Our major reforms include: overall, shifting the balance of taxation away from taxes on labour and towards taxes on wealth and consumption and strengthening the PRSI system; increasing the taxation yield from capital taxes; introducing a site value tax on all land not subject to the local property tax and increasing the yield from the local property tax; as the yields from fossil fuels decline, replacing these revenues with new charges, including road-usage charges; continuing to maintain a supportive environment for enterprise, including through incentives for early stage innovative businesses; and enhancing the welfare system by reforms focused on supporting employment, addressing child poverty including through a second level of child income support for low-income households and removing cliff-edge effects to support people to be in work.
It is not expected, or realistic, that our recommendations, while interconnected, be implemented all at once. They are made in the expectation that detailed planning and distributional impact analysis will be required, and that reforms are phased in over time. We have also sought to avoid being overly prescriptive and to set out clear principles and directions of travel.
I thank commission members. Since our first meeting in June 2021, their commitment to act in the national interest was unwavering. I also thank the outstanding secretariat, led by Dr. O’Reardon. I thank the committee members for inviting me and commission members this evening and for considering the commission’s report, with key stakeholders, in their meetings this year. The report seeks to support dialogue and debate on the future of our taxation and welfare systems. I hope our advice is of value to members in addressing the complex issues raised by the longer term sustainability challenges our taxation and welfare systems are facing. We look forward to the engagement this evening.
Gabhaim buíochas le Professor Moloney. I will now call members in the usual sequence, namely,Fianna Fáil, Fine Gael, Sinn Féin, Green Party, Labour and the Rural Independent Group. They will have ten minutes each. As no one from Fianna Fáil or Fine Gael is present, I call Deputy Doherty of Sinn Féin.
I thank Professor Moloney for chairing the commission and for appearing before the Committee on Budgetary Oversight. I thank all her colleagues on the commission who assisted her in the task. It is important that we register our appreciation of the commission's work. While I am sure people will disagree with certain aspects of the report and like other things, it is a valuable resource for policymakers and I thank the commission for it. In that spirit, I distance myself and my party colleagues from the comments of the Taoiseach. The work was carried out to an excellent standard and has given us considerable food for thought.
The report refers to shifting the balance of taxation away from labour and towards the taxation of wealth. I think that is a good summary of the proposals. It recommends that capital gains tax principal private residence relief should be restricted over time. That would be a very radical departure. How would the commission envisage private residence relief being restricted?
Professor Niamh Moloney
I thank the Deputy for his question, which goes to the heart of the report. Our terms of reference asked us to stand back, be strategic and look at the risks to sustainability the country is facing. As I mentioned, there is a clear structural change coming to Irish society and the economy in the context of an ageing demographic in particular. To raise revenue in the most efficient way, in other words to avoid economic cost, it is important to look across the tax system. I will make a brief comment in answer to the Deputy's question and then ask my colleague Dr. Roantree to come in.
Regarding capital taxes and the principal private residence relief, as explained in the report, we are currently raising about 6% from taxes on wealth generally as compared with 66% on taxes on labour and that balance needs to shift. We are not prescriptive about the extent, but as a matter of principle the direction of travel needs to move more towards assets and wealth. If we look at the distribution of wealth and assets in the country, over 50% of wealth is held through homes and about 70% in property. Private residences form a large part of the capital base of the country.
The report is very conscious of phasing how taxes are designed. With respect to the principal private residence, our report refers to the potential for a particular tax rate, caps and thresholds. The report does not suggest removing that particular relief; there are good reasons for having it. However, in this as in other capital taxes, we are setting a direction of travel to flex as much as possible the capital base while being absolutely cognisant of why some of these reliefs are in place. This is a large relief and we frame our report in terms of potentially having a separate rate, cap or threshold, but with the details to be worked out. This is the direction of travel. I will now hand over to Dr. Roantree to answer this.
Dr. Barra Roantree
I will build a bit on what our chairwoman has said. This is one of those recommendations that needs to be read in conjunction with others. In this case that relates to the recommendation about elimination of forgiveness of capital gains tax, CGT, on death. These two need to be done together because if we were to remove or restrict the CGT relief on principal private residences, it would then create a desire for people to hold onto property until they pass away. That is really where that bit comes in. We need to think carefully about how this would be done.
Part of the way that it can be done is to do it in a way that minimises distortions through people holding onto their homes longer than they might. If the forgiveness of CGT on death is not addressed, people would end up holding on to their properties for longer than they might and not downsizing, thereby creating issues in the housing market. This is a particularly complicated one but it is doable. We might not want to get into all the finer details, but the Mirrlees review done by the Institute for Fiscal Studies goes through various ways that this could be done in a way that avoids creating those kinds of issues in the housing dynamic.
We are clear that it is not an uncomplicated policy change and needs to be carefully thought out, with regarding to other bits of the system, particularly capital gains tax relief at death, but there is a way to do it to avoid gunking up the housing market by either making people want to hold on to houses or flip houses they might otherwise not.
To move on to the issue of taxation on retirement savings in chapter 8, the commission recommended removing the annual earnings cap on tax relief provided to pension contributions. I am sure the witnesses are all aware of the Revenue statistics. Recommendation 8.6 is about better statistics and data. The Revenue statistics we rely on tell a story about the regressive take-up of this tax relief on pension contributions across the income distribution. The latest figures we have are from 2020, which I am sure the witnesses are aware of. They demonstrated that the cost of the tax relief on employee pension contributions stood at €1.2 billion, nearly €700 of which, €693 million, went to those earning incomes in excess of €100,000. The sum of €700 million is a staggering fact and statistic, meaning 60% of this tax relief goes to people already on gross incomes of about €100,000. It is the top 5% of income distribution. Did the commission not have any concerns about the extremely regressive nature and take-up in these pensions? When we in the political sphere talk about the importance of people saving for the future, which is crucial, including people who earn €100,000 and more, we are actually talking about middle-income earners who do not get this relief in any big way. It is highly concentrated, with 60% going to the top 5%. There appears to be an absence of recommendations on that, if I may say so. I wish to ask the witnesses their view on that.
Professor Niamh Moloney
I thank the Deputy for his question. I will make a few comments and hand on to my colleague, Mr. Kermode. With respect to the chapter on pensions, the framing of the report is that there is an important role for the State to support a sort of foundational level of pension savings and, as the Deputy said, to create incentives for savings. It must be done in an efficient and equitable way. The framing the report sets up for this issue is the critical principle of exempt-exempt-taxed. There are exemptions and you save in but at the point of draw-down, the tax is activated. That theme runs across this report. For example, one of our first recommendations is that it perhaps is not biting in the most efficient way with the tax-free lump sum you draw down at the end from your pension and is currently very high. We recommend a meaningful reduction in that area. We also recommend that the standard fund threshold be reviewed to check that it is working correctly. The report frames this in terms of incentives to save for pensions but there are also big costs coming this way as well on auto-enrolment, for example. The fiscal sustainability of the State must be factored into how we think about pensions. I will now hand over to Mr. Kermode.
Mr. Philip Kermode
Professor Moloney has put her finger very much on the main element that concerned us at the beginning, which was ensuring that the system per se kept to what was intended by the so-called EET, that is, "exempt-exempt-taxed" and that at the end of the system, there would be appropriate taxation of pension payments as they are made out. Regarding the Deputy's point, it is important to look at the lifetime effect of these provisions, particularly some of the recommendations made by the commission. For example, on the periodic benchmarking of the standard fund threshold, which limits or increases the amount that can be gained from the pension scheme, supported by tax relief. We tried in that case to get to a so-called appropriate and fair level of retirement. It was for this reason we felt the standard fund should be periodically benchmarked.
But not reduced?
Mr. Philip Kermode
We were also concerned by the need for the review of data. We were not particularly happy with the data made available or that we could see. We felt, going forward, we need to have more accurate data. We are also concerned, which I think comes up in general, that there should be adequate pension arrangements and we should, to the extent we can, encourage people to avoid situations arriving down the road in which social pensions will have to pick up an awful lot more of the heavy weight. I hate to repeat but referring to what Dr. Roantree said, it is quite complex to see how the different pieces interact with each other. This made us particularly careful about these provisions. Perhaps Dr. Roantree wishes to comment.
Dr. Barra Roantree
It comes back to what previous members of the commission have said; in thinking about the pension system, it is important to take that lifetime perspective and if one wanted to restrict the generosity of the system to those who are better off, it is perhaps better to think about that as over the entire lifetime. From that point of view, a lower annual limit penalises people who may have a lot of income at a certain point in time. An extreme example is footballers or professional sports stars. We make allowances in other places in the tax system for sports stars or even in agriculture, to allow for some income smoothing. The direction of the commission was that you could decide you want to make the system more or less generous, but that is better done by examining things like the standard fund threshold, the lifetime limit of what you can save in a pension, tax-free. We homed in on the tax-free lump sum; there is a lot of discussion about marginal rate relief and changes to that, but the system is most generous - without a very good policy rationale or basis - in the tax-free lump sum. What we want from a pension system is for people to save for retirement and have a stream into retirement, but the tax-free lump sum does not really do that. It encourages people to take it in one big sum. It is particularly generous to certain forms of pensions - those on direct benefit pensions get a multiple of their salary. Regarding the Deputy's point, it is important to think about the regressivity or progressivity of the system, taken over a lifetime, rather than focusing on annual.
I understand the recommendations around annual contributions and age limits. Reading recommendation 8.5, which is about the standard fund threshold, it discusses benchmarking and uses the word "appropriate". That is vague. What is an appropriate retirement pension? It does not suggest it is appropriate now or you could read it as it needs to be increased. Therefore, the regressive nature, in which the top 5% get 60% of the benefit of this tax relief, or €700 million, is not tackled in the report. While the tax-free pension lump sum, which has been mentioned several times, is generous at €200,000, the next €300,000 is taxed at 20%. The principle of exempt-exempt-taxed is out the window. You get tax relief at 40% as you contribute and if you structure your lump sum in a way that you draw down €500,000, you pay nothing on the first €200,000 and 20% on the remaining €300,000. Who can do that? It is not people on middle incomes, it is people at the very top who are able to put a lot of money in. They get a benefit at the end of the day. It is not exempt-exempt-taxed.
My other question concerns the help-to-buy scheme. The commission recommended that the scheme be allowed to expire at the end of 2022, which has not happened. There have been other reports that called for the help-to-buy scheme to be ended. There was a priority question yesterday to the Minister for Finance and it was very clear that he is committed to the help-to-buy scheme. The Taoiseach is very clear he is committed to the indefinite maintenance of the help-to-buy scheme. Will the witnesses outline their reasons for this recommendation, if we are to believe so many people would be worse off if it was not in place?
Professor Niamh Moloney
Our terms of reference specifically asked us to look at the interaction between tax and welfare and the housing system. I will go back a little to the framing principle of the report, which was that when we look at housing and property, the most efficient, stable and equitable way of approaching this is through predictable and steady recurrent taxes in this area. That is because it is very difficult to design targeted tax relief and expenditures in this area. We discuss this a little in the report. Specifically with help-to-buy, it is a tax expenditure measure which is intervening in the housing market. Our view was that it is best for tax not to be used in that way in the housing market; that it can have distortions, bring volatility into the market and it is on the demand side and is feeding demand into the housing market. Clearly, housing is a hugely complex issue and, as the report shows, there are different levers the Government can use in this area but the view of the commission was that the tax lever is really about predictable, stable, recurrent taxation that minimises volatility in the housing market. For that reason, we saw help-to-buy as more of a demand-side measure which, given where we are now, had come it its natural end. Our focus is on how the tax system generally can work effectively in the property market.
How do you wean people off the help-to-buy? The commission recommended that it come to an end in 2022. It was supposed to have been ended many times and if this Government is re-elected I am sure it will be continued again. The problem is the market expects it, so it is factored into prices and so on. When you do something like this it distorts the market but when you turn the tap off, what kind of effect will it have? Has the commission looked at that?
Professor Niamh Moloney
I thank the Deputy for the question. I will bring in my colleague Dr. Roantree on that in a moment. The Deputy makes a very interesting point on the tax system and tax expenditures generally. Once they are in place, there is a complex political economy around them. In our chapter on tax expenditures or reliefs of various kinds, we talk about the importance of the ex-ante modelling for them, having a clear market failure, checking in on them periodically, having sunset clauses because they can become embedded and then they can become quite challenging in terms of ensuring the coherence and stability of the tax system. Part of our job with this report was to stand back and make these more challenging calls. We were an expert group so we were standing back from this and we were acutely aware of the debates and the challenging political context around it but that was our job.
Dr. Barra Roantree
Just to add a little bit, the Deputy is entirely right. One of the reasons we are so strong in saying this is an area in housing where tax reliefs should be avoided is because when they are introduced they can become very distortionary very quickly and then it becomes hard to bring them out. These things become harder to take out the longer they go on. I do not think it is impossible. It might be that one might not increase the thresholds for a while before turning it off but we are absolutely cognisant that once these things are in they are very hard to get rid of, politically and also because developers and even house buyers can become reliant on them. It is not an easy thing to do but it demonstrates why with this, and we also make the point about reduced rates of VAT, that it is better to stay away from them in the first place. There is a transition issue in coming away from it but then again, taking the longer view at which our report is aimed, hopefully we will not introduce it in the first place in future. We can try to withdraw ourselves but we completely acknowledge that this is one of the areas where it can be particularly messy and tricky.
Everyone is very welcome. Like Deputy Doherty and unlike some others, I am hugely supportive and appreciative of the work that the Commission on Taxation and Welfare has done. I am also hugely appreciative of the range of very informed recommendations and propositions contained in the final report, which will hugely valuable to us as policymakers as we try to address some of the very clear challenges that some legislators appear to underappreciate or underestimate in terms of the scale.
When it was undertaking its work, the commission did not have the benefit of the recent stability programme update report that indicated enormous corporation tax windfall receipts over the next three to four years. Had the commission the benefit of that information, would it have altered its work in any way or the nature of its recommendations?
Professor Niamh Moloney
Our job was to answer a very big question. We were specifically asked to take a medium- to long-term perspective. We were specifically asked to look at how to ensure that economic growth continues and support prosperity and employment looking into the future. That is challenging. We stepped back and looked at where the systemic risks were in the system. Clearly, and the report goes through this, we are in a position now where there are very strong corporate tax receipts but our lens is looking out five, ten and 15 years, and when you look at it that way, we are looking at structural change. We are looking at structural, permanent change to Irish society. It is mapping onto what I completely recognise is a very particular corporation tax context right now and trying to map that onto five, ten and 15 years out. When we look at the demographics they are very striking. The thing is about the demographics, these are certainties so we know that by 2050 we will have two people working for every one over 65 years whereas now we have four people working for every one over 65 years. That is a real structural change to how we need to spend the State’s money and how we need to raise revenue. It is looking ahead of the next two or three years into the future and making those permanent structural changes to the tax system so it can cope with that. That is why our recommendations are around structure; it is around the base and whether we can pull on all the levers we will need to pull on into the future while of course recognising that right now we are in a very particular fiscal position. On the corporation tax position specifically, the almost systemic nature of it where now one in five euro comes from corporation tax and I think we are up to 57% of the corporation tax base is coming from ten companies, you can see how very quickly that could cause difficulties.
Another vote has been called in the Dáil so we will have to suspend again. We will continue with Deputy Nash on our return.
Sitting suspended at 6.38 p.m. and resumed at 6.53 p.m.
We are back in public session and will continue with Deputy Nash.
I am glad Professor Moloney agrees that we need to shift the balance of taxation away from taxes on labour to taxes on capital and wealth. There is no shortage of people in these Houses and across society who believe, for example, that we should exclude or excise local property taxes from our taxation system but my analysis would be that we cannot have a taxation system that is fair and equitable if we do not tax both property and land. Does Professor Moloney have a view on that? Can we have a fair and equitable taxation system without property taxes?
Professor Niamh Moloney
I thank the Deputy for his question. Property tax is a hugely important part of the tax base. When we were framing our work, we looked at the fact that we need to raise revenue and then at how we can do this in the fairest, most equitable and most economically efficient way. Land is a key part of the capital base and the local property tax, LPT, is a very effective and efficient tax. It is a tax that works. It is clear, recurrent, predictable and it does not bring distortions into the property market. We believe it is a tax that can be flexed more. There should be a greater yield from LPT, whether that is by looking at the rates that apply or at the bands and how they work. Property tax is a very efficient form of tax. There is a finite supply of property in the country so how we tax it is not going to generate distortions in the same way that higher rates of tax on labour can, for example, by creating disincentives to work. Corporation tax also has predicted complexities here but property tax is an efficient form of tax. It can also lead to the efficient use of land.
The other part of our recommendations around land was the site value tax. Land, whether it is residential or land that is outside the residential area and not subject to the LPT, is a key part of the base on which we put taxation. One of our key recommendations is the introduction of a site value tax that would apply to all land in the country other than that which is subject to the LPT. This is a stable, recurrent and predictable way of bringing in revenue, it promotes the efficient use of land and it is progressive. In the context of trying to stabilise the tax base, land-based taxes, including the LPT on the one hand and a site value tax on the other, are two of the critical levers we point to in our report as a way of both stabilising and expanding the tax base.
Does Professor Moloney agree with my proposition that we cannot have a sustainable, fair and equitable taxation system if we decide to dispense with residential property taxes?
Professor Niamh Moloney
Yes, I think that is right. I will ask my colleagues to come in with their view on it but property taxes are progressive in terms of how they operate. If I may, I will turn to my colleagues in case any of them wish to comment.
Dr. Barra Roantree
To add to that, if we are going to shift the balance from income towards wealth, it is very hard to do it fairly without including property and land, given the distribution and, more importantly, the composition of wealth in this country. We know that for the vast majority of households, the majority of their wealth is in-----
Land.
Dr. Barra Roantree
Exactly, so if we were to exclude them, it is very difficult to see how we could do it in a fair way. I would also add that if we try to tax wealth while excluding property and land, what we will do is bias the system towards that even further. We know that we already have a system which is biased towards the holding of property and land and that is one of the things that contributes to, and exacerbates, the cyclical nature of the housing market. If we were to introduce a wealth tax that excludes property, we would end up in a situation where we would be encouraging people even more to invest in property, land and houses. That could go against our other objectives, particularly in terms of what we are trying to achieve through our housing policy.
That reliance on land and property further embeds some very unfair and inequitable tax reliefs that are available and perpetuates that situation. I will make one final point as I am aware that Deputy Moynihan may wish to make a contribution.
We have had many debates at this and other committees of this House in relation to tax expenditures and the way in which we approach them in this country. Many of the tax expenditures that are now embedded into the system may have had some utility at some point in the past but many have outlived their usefulness, if they ever had any in the first place. At the risk of asking our guests to be descriptive, is there one particular tax relief or tax expenditure that they believe is particularly egregious? If so, how and why should it be removed from the system?
Professor Niamh Moloney
I will start by answering the Deputy's question but my colleagues, Mr. Kermode and Dr. Roantree, might also wish to respond. The Deputy makes a really important point about tax expenditures. We looked at this in two respects across the report. We have a specific chapter on tax expenditures and we highlight the absolute importance of data. Tax expenditures are put in place for a reason, as the Deputy said. It is critically important that we understand not just that they are used, because the fact they are used does not necessarily mean they are achieving the objective that was set, but also how they are used. We need data on that. We also need sunset clauses so that there is a compulsory review of tax expenditures.
It is critically important to put these in place. Equally, before the fact, a deep market failure analysis should be done. Tax expenditures narrow the base and the more they are there, the more they are going to destabilise the base from which our revenues are drawn.
Turning to the question about the particular kinds of tax expenditures, one of the issues we found across our report was that we would have liked to have had more data. We would have liked more data, for example, on CGT and capital acquisitions tax, CAT, and how they work, as well as more data on the principal private property tax and on the pensions provision. Our terms of reference asked us to specifically examine the process around tax expenditures. We did a stand-back, system-based review, rather than looking at particular tax expenditures. Our recommendations, therefore, really go to the process and the system. At various points where there is relevance to the tax head in question, we look at how the base could be stabilised and broadened by considering specific reliefs and how they operate. One principle that probably cuts across the report, and we mention this point in one or two places, is that unlimited tax expenditures are problematic. We call this out. Perhaps Mr. Kermode would like to comment.
Mr. Philip Kermode
One of the most important things to add to what Professor Moloney has said is the need to define what it is thought a tax expenditure is and what the benchmark systems actually are. This helps not only in defining what the tax expenditure is, but also in having a transparent view of what a system is doing or trying to do. Many tax expenditures overcomplicate systems. Some such systems, indeed, may be justified in this regard, and I am thinking especially of climate issues and the need to push for decarbonisation. In that context, we can see cases where such an approach would be justified. As Dr. Roantree said earlier, though, with some issues, once they are put in place, they can be fiendishly difficult to remove. One of the ways of having easier removal is through having undertaken a fully justified tax expenditure analysis at the beginning and then linking this to reviews. For me, this is one of the important parts of the process.
Professor Niamh Moloney
One of the things we found helpful when considering our report and we very much appreciated was the work this committee did on tax expenditures. It was helpful to us when we were thinking about these issues, so I just want to note this point.
I thank Professor Moloney. I call Deputy Aindrias Moynihan.
I will comment briefly on one point. I wish to flesh out the point made about property and land. While we have seen the property tax rolled out and more recently the zoned ground maps being finalised, I am pretty sure the farming community would be alarmed at the idea of further land being included and reasonably so. It is possible to have the side of a mountain worth very little but with a large acreage. I would like to tease out a little further how the witnesses would see this proposal operating in this context. It must surely be expected that there would be resistance to it.
Professor Niamh Moloney
I thank the Deputy for the question. When we considered the site value tax, our thinking about this measure was, and here we are really looking to the LPT, that the most effective taxes are those that have the widest possible scope in principle. In principle, therefore, everything is being brought into the scope of the tax. We were acutely conscious as a commission of the particular issues raised in the context of agricultural land. One of the great advantages of a site value tax is that it creates incentives to develop and to build on property. Of course, there is a distinct difference in this regard when it comes to agricultural land.
The thinking of the commission, therefore, was that everything would come within the scope of consideration in this context, but then at the design and construction phase the differential position of agricultural land would be taken into account in respect of how the system is designed. Aside from any particular structural design features specific to agricultural land, given in particular its function and there being limitations on what can be built on it, and so on, as the Deputy said, I refer as well to phase-ins, deferrals and transition periods. It was a principle-based analysis that was undertaken and it was important in that context that all land would be brought into the scope of the measure, other than that subject to the LPT. There is, however, a very specific context for agricultural land and that must be part of the planning and design in this regard. Perhaps Dr. Roantree might like to comment on this point.
Dr. Barra Roantree
I will comment on two aspects. The Deputy mentioned the example of a site on the side of a mountain that is not worth very much. In this regard, it is important to say that the value of such land will likely be very low. Even thinking about a site value tax that does not make any distinction between agriculture and non-agricultural land, by virtue, as the Deputy said, of there being a not particularly valuable site, it is going to be a very low amount in the first instance. Equally, we were very conscious, as the Deputy also mentioned, of the issues around agriculture. This is why there is specific mention in our recommendations that an allowance should be made for agricultural land and that it should be treated different from other land. It is worth bearing in mind, therefore, that the site itself, such as the example mentioned by the Deputy, would not attract a high rate of LPT, even before we think about any kind of relief. We also recommend that an allowance and distinction should be made for agricultural land.
We are also very cognisant of the Deputy's first point in respect of there being all these new taxes. We are saying that we need to move from a situation where we have the LPT, commercial rates, the zoned residential land tax and the uplift tax and to think about how all these measures link together. Our overarching approach was that we have the LPT and it works and, if anything, we should be trying to raise more revenue from that. Essentially, then, everything not covered by that tax should be taken within the site value tax. If it was desired, it would be possible to add in bits around the zoned residential land tax, because that fits into this context neatly. Commercial rates should be replaced by what we are talking about and, from that perspective, what we are describing would be a more coherent system of taxes on working land.
I completely hear what the Deputy is saying in respect of being worried about this being another tax that is going to come along. It is important in this regard to look at how the set of taxes we apply to land work together and interact. I say this because once we start getting into having a local property tax on residential land, commercial rates on commercial land and then something else on zoned land, we start to get potentially weird incentives popping up. On the zoned residential land tax, for instance, in the context of introducing a derogation for agricultural land, we saw over the weekend a discussion in the newspapers of a site in north Dublin that is very much in the central area. If a zoned residential land tax were to be introduced but it was stated it would not be applied to agricultural land, suddenly strong incentives would be created to ensure any bit of zoned land had some kind of agricultural activity on it. Again, this is about thinking about how these things interact and being careful around this aspect. I very much think we were conscious of putting these things together and looking at how they interact, rather than having them just being layered one on top of the other.
Okay. I thank Dr. Roantree. Regarding the idea of farmland being drawn in through this proposal, I would expect there would be stiff resistance to it. Much of the talk is around the model of the local property tax, and one of the features of this measure was that it was raised through Revenue. The local authorities in each county got most of their funding back. Regarding places like Dublin, Cork and other locations, has consideration been given to a kind of model to redistribute these funds again? I say this because of the context of larger counties such as Cork and Mayo. Even in Dublin, I think Dún Laoghaire-Rathdown would be collecting as much property tax revenue now as all of Connacht. I wonder if the commission looked at this aspect.
Professor Niamh Moloney
No, we did not look in this direction. This was because we had such a large question to answer and a wide brief. Our terms of reference homed us in on looking at how the tax measure systems interact. On housing, we were to look specifically at a site value tax and whether this was something worth pursuing.
The organisation of revenue streams and what belongs where was outside our brief, so we did not go into those questions.
I thank Professor Moloney.
I will start with social insurance. The commission recommended that the PRSI rate paid on self-employed income should be aligned with the higher rate of employer's PRSI, which is 11.05%. Was that unanimous among commission members?
Professor Niamh Moloney
I am delighted that we had extremely strong consensus across the group. We had 116 recommendations and there was very strong agreement on those. There are two letters that set out particular points on which colleagues had their reservations. The letters go through what colleagues wanted to raise in that regard.
Could Professor Moloney provide the commission's assessment of the current level of employer's PRSI in a wider European context and how it should change in the years ahead?
Professor Niamh Moloney
If I may, I will invite my colleague, Ms Vaughan, to go through some of the relevant points. The framework we had around our examination of PRSI was that the personal income tax base was generally progressive and raising a great deal of tax, and we recommended that it not be eroded any further. We felt that there was capacity for PRSI to be expanded, particularly given the sustainability challenges the Social Insurance Fund would be facing. We examined distortions and inequities. For example, we went through the earlier point about employers, employees and how that works. I will turn to my colleague, who may have some additional comments to make.
Ms Anne Vaughan
The basis of social insurance is solidarity and providing for people when a contingency arises. It is a tripartite arrangement – employers, workers and the State pay into it. It is not always easy to make comparisons with different countries. By and large, though, it would be acknowledged that our employer's rate is low by international standards.
An important point that the commission drew out was the differences in rates, particularly between class A contributions for workers and class S contributions for the self-employed. As I am sure the Chair is aware, there is a large difference, which causes distortions in the market in terms of how people organise their work arrangements. We believe this should be equalised from a labour incentive point of view and from the point of view of the value of social insurance. For example, the social welfare contributory pension, which is approximately €13,000 per annum, is a very valuable payment. Committee members asked about tax arrangements for occupational pensions, but the largest pension element that most people will receive in retirement will be their social welfare pension. Buying it in the open market would be prohibitively expensive for most people. It is in this context that employers, employees and the State make contributions.
Our recommendations were to ensure the sustainability of the fund. We discussed timings, but there were certainly funding issues in the medium to long term. Our proposals go to those.
When discussing social protection, the other piece is the adequacy of the payments. It is fine having an entitlement, but it has to be an entitlement to an adequate payment. If I may, I will highlight our recommendation on benchmarking the adequacy of social welfare payments using a variety of tools and data. We were not prescriptive, but we discussed what is there at the moment and that the previous benchmarking exercise was more than 20 years ago. It is probably something that should be done, not to tie the hands of any Government, but to inform Government decision making in this space.
The Joint Committee on the Implementation of the Good Friday Agreement is considering the constitutional future, including economics, taxation and welfare. Three weeks ago, Dr. Tom Boland and Dr. Ciara Fitzpatrick appeared before that committee. They made the point that we never really sat down and looked at the values that underpinned our tax and welfare system and suggested that there is an opportunity to do so now rather than tweaking bits of what we have inherited. What are the witnesses' thoughts on this suggestion? If there were to be a referendum on constitutional change in five to 15 years' time, what collaboration or contact does the commission have with its counterparts in the North with a view to considering what a future taxation and welfare system would look like?
Professor Niamh Moloney
I thank the Chair for her question on why we do what we do. These are very important systems and the first three chapters of our report discuss how they are fundamental. We all have touch points with tax and welfare. As a commission, we were conscious at the start of doing in microcosm exactly what the Chair described, namely, asking why we are here, what these systems are trying to do and how we can ensure we get to a good place. We had serious discussions on this and devised five principles that shaped how we examined the systems. One was sustainability; not just fiscal sustainability, but also everything that goes with that – the environment, and how we engage with one another and with society, etc.
On Ms Vaughan's point on reciprocity , these systems are for us and about us and there are different ways in which we interact with them. Regarding her point about contribution and adequacy, we all contribute to the extent we can, but what does that mean? That is why it is critical to have these discussions around how much we can contribute. Linked to this question is the idea that everyone who can work should work, helped by a system that supports that. Our report discusses tapered in-work assistant payments.
Our examination of adequacy, sustainability and reciprocity was important. I believe we are the fourth tax commission in the history of the State, but we have been the first to interact with welfare. To have the adequacy principle running through our report was critical in helping us to think about our recommendations.
Equity was another important consideration – intergenerational equity, equity between tax spaces, and equity in how taxes bite and how they work. Our final principle was efficiency. As with some of the discussions we were having on land, this principle was about ensuring that taxes fall in a way that does not disincentivise work and make a corporation's taxes difficult.
I should stop talking and instead bring in my colleagues, who may wish to contribute on this discussion.
Dr. Barra Roantree
For my sins, I spent a few years working on tax and welfare policy in London.
Dr. Roantree is the right person, so.
Dr. Barra Roantree
One of the matters that I was struck by, and which came up in some of the commission's discussions, was how many parts of our system were so outdated that they did not look too dissimilar to a legacy of what we inherited with a few tweaks along the way. Even the names of some payments look similar to what they were called in Britain 20 or 30 years ago. What the Chair said about examining the system and what it is we wanted to achieve drove much of what we did.
In a way, with regard to thinking about the future, the systems are not so terribly different structurally, because of their shared origin. There are many differences, particularly in terms of the rates, generosity and how the two parts on this island look; however, the directions we set out – we do not really go into this in the report – would make it easier in time to bring the systems together. Particularly regarding what we set out concerning a two-tier child payment, the structure of the payments in Ireland today looks very different from that of the payments in Britain and Northern Ireland. What we have set out would bring them a little closer together. I may be getting a little off-piste regarding the commission's recommendations and am drawing a little more on my reading and examination of the systems over time.
Professor Niamh Moloney
I wish to follow up on Dr. Roantree's comments. Since we had such a wide brief, the terms of reference kept us very much on message or helped us to manage our mandate for the year. The question we are referring to was not in the terms of reference. The report is designed to be an enduring document and therefore contains a lot of data, including from international sources, the EU, the UK, the OECD and the Commission. The report is therefore a very big resource when it comes to looking into the future. It does not just consider Ireland and its needs but also draws lessons from many other jurisdictions.
Therefore, it could form the basis of a whole other piece of work that really needs to be done from an all-island perspective. One of the main questions people have concerns what our tax and welfare systems will look like. This might be a job for everyone to do in the future.
My next question, on social welfare rates, is related more to the upcoming budget than the commission's specific recommendations. The Government relied heavily on one-off and therefore transitory social welfare lump payments in response to the events of the past two years and the high inflation. This will result in significant real-term cuts in social welfare rates in the years ahead. How do the delegates assess the situation? Do they agree it will need to be addressed in the upcoming budget?
Professor Niamh Moloney
If I may, I will make a few comments and then pass over to my colleague Ms Vaughan.
With respect to social protection generally, interacting with the welfare system was really important to our report. When we examined issues concerning how the tax system interacts with the welfare system and how it promotes employment and supports the most vulnerable, we had a couple of key principles. One of them concerned appropriate benchmarking as regards the adequacy of payments. Another concerned supporting those in work, and yet another concerned child poverty in particular. We examined data on child poverty and saw work was to be done. One of our key recommendations in this regard was that child benefit should not be taxed. It is not, of course, but we stated that. We called it out as a key principle that means something for how our tax and welfare systems are structured. Second, we recommended a second tier of child benefit, linked to low-income households. Those were the animating principles related to how we approached social protection issues. Of course, rates and yields are very much a question for the Government of the day.
Ms Anne Vaughan
I am not sure I have too much more to add to what Professor Moloney has said. The commission was considering things in the more medium to long term and in a steady-state way, to some extent. There will always be different shocks. Covid was the main one we saw but we saw others in earlier years. There will always have to be responses in the short term to shocks. However, we were standing back and we saw benchmarking as important. Benchmarking has two aspects, one of which concerns adequacy, that is, adequacy for whom, for what and for how long. It is a very complex question with no right answer but you have to note what stakeholders and the research state. Even in respect of research, I am sure Dr. Roantree and I would differ in our approach and on the data we would use. We reference that the adequacy aspect was originally addressed in 1986, when the Commission on Social Welfare had a stab at it. If you set something as a target, a Government can move towards it if it wishes, but if you reach that target you have to determine how to stay there and index it.
On the Deputy's point on inflation, indexing can entail some version that entails prices, earnings, double locks, triple locks and going backwards and forwards to determine whether, over time, one's payment is keeping pace with something. The something – colleagues of Dr. Roantree would have designed this in the ESRI – might relate to poverty targets, relative poverty and the consistent poverty rate, which is regarded as 60% of the median income. I am referring to people who are excluded from particular average ways of life. Again, there is much data to come at this. It is not a science in that everybody does not arrive at the same answer, but everyone arrives at an area of agreement, and that is what the benchmarking would be about. Over time, benchmarking will pick up the shocks. That is where we were. As Dr. Moloney said a few times, we were able to stand back to a certain extent. A Government does not have that capacity; it is in the process and has to do something. Payments have to be adequate, however, and have to be adequate relative to the rest of us.
Gaps in the data were mentioned. What data were missing? Where should they come from? Who needs to gather them right now for us to make calculations in the future?
Professor Niamh Moloney
If I may, I will bring in my colleague Dr. Roantree on this one. A point of principle, which comes through in our report, concerns the need for systems, whether they relate to tax expenditure or a new tax – for example, the site value tax that we propose – the ex ante consultation, the data on which it is based, the criteria against which it is reviewed and the sunset clauses. Those systems are critical. We called out data with respect to tax expenditure, in particular. Some measures in this regard go back a long way and there are no data on them. You cannot just click your fingers to have what you desire appear; it requires an investment in systems for the Civil Service. The data have to be provided in a way that is low cost, managed and efficient. We noted particular issues concerning tax expenditure.
Dr. Barra Roantree
As the committee has done, we very much highlighted tax expenditure as an area where there is a dearth of information. We do not know the most expensive tax expenditure because we do not have very good costings, if we have any at all, for some of the tax measures one might think are very significant, such as capital gains tax, principal private residence relief or forgiveness on debt. This is one area in particular that we called out.
Our final chapter recommends the provision of greater access to suitably anonymised administrative data to support public research. It also recommends programmes of support for researchers using the data in universities, research institutes and elsewhere. Ireland has really fallen behind in this area. In many countries, particularly the Nordic countries, there is much greater use of administrative data by researchers in government, universities, think tanks and research centres. We are getting to grips with this here only very slowly, and there is a lot we can learn from that. There are ways of doing this that adequately protect people's privacy and ensure the records used are anonymised. This is an area in which we have set out that a lot more can be done in a decade or two decades when the next Commission on Taxation and Welfare comes into being, if there is one. I hope it will be in a much better place than we were just by virtue of the facilitation of researchers, in particular, to analyse the issues and data and bring insights from that into the policy debate.
It is the Department of Finance that should be tasked with that. Have there been any moves made on it since the commission identified that within its report?
Dr. Colm O'Reardon
It is for all Departments. Revenue does collect a huge amount of information. That is always an ongoing challenge. Data is expensive and you have to prioritise the data you want to collect. I might pass back to Ms Vaughan, who has particular expertise in the area of data and statistics. Ms Vaughan would be better placed than I am to comment on that. It falls to all Departments to think about what data is collected to prioritise the collection of data. There is a system within Government for that prioritisation and for having a strategic approach.
The other point I would make is the one Dr. Roantree made that if you set up a commission on taxation and welfare you cannot suddenly generate the data and it has to be there. Evidence is data in the hands of people who know how to analyse it and, therefore, you need to support research programmes. We in the Department have a research programme which we support with the ESRI where we support the analysis of data as well.
Building up evidence over time is really important. We, as a commission secretariat, would not be in a position to instantaneously summon up evidence in the course of a 13-month exercise. We rely on the past ten or 15 years of work done by people in the ESRI and by academics in the area. We obviously look at that evidence and interrogate it, but you have to support public-interest research on an ongoing basis. There is research that Departments look for because they want answers to particular questions but you also have to support research that the researcher wants to do. We need an infrastructure and an ecosystem of research. However, I am cutting across others who are far more knowledgeable than I in this area.
They are looking at you, Ms Vaughan.
Ms Anne Vaughan
I thank Dr. O'Reardon, and thank the Chair.
Obviously, I agree with my fellow commission members. The reason they have referred to me is that, with another hat on, I chair the National Statistics Board which provides strategic guidance to the Central Statistics Office. It is totally outside the commission work here but the references we made certainly are of interest to the Central Statistics Office, CSO. I suppose I would say this but the CSO has made tremendous strides in the national data infrastructure which is basically joining up, as Dr. Roantree has said, on an anonymised basis, administrative data using the public service number and the Eircode. There is a lot happening in that space. Researchers will always want more, but there has been good progress and there is more to be made in allowing access on, obviously, particular protocols, etc. Certainly, the statistics office and the CSO will be looking at what the recommendations are here but, in principle, will facilitate this. One only has to look at the outputs from the CSO to see what is being produced and, in Covid times, what was produced quickly. Absolutely, we are open to that.
That is good. We got your communication here inviting submissions to the CSO. Something we put in for both committees at my suggestion was around trying to get better congruence North and South so that we can do the comparatives there.
Ms Anne Vaughan
The CSO would work very closely with the Northern Ireland Statistics and Research Agency, NISRA, its equivalent in Northern Ireland.
We look forward to progress in that area. Those are probably all my questions for now.
Is there anything anyone would like to add before we conclude?
Professor Niamh Moloney
If I may take the opportunity to thank the Chair and the committee, we are conscious the committee has had a number of sessions on the report. We really appreciate that.
We see our report as an enduring document. It is a stand-back, strategic review. These are the biggest questions we have. These are our touch points as a nation - tax and welfare.
The committee has brought in a series of stakeholders. We very much value that. Our report was designed to advise members. There are challenging and difficult choices. We sought to provide the committee with the best possible advice over the medium to long term.
I thank the Chair and the committee on behalf of all of the commission here for the invitation and for taking the time to look at our report over the past year.
I thank you all for your work.
The select committee adjourned at 7.35 p.m. until 5.30 p.m. on Wednesday, 24 May 2023.