Further recommendations are included in our submission but for the sake of brevity I will just outline five or six.
Tax reliefs are inequitable so they should be used sparingly. Such reliefs violate many of the canons of taxation, particularly the principle of equity, which states that people should pay tax in proportion to their ability to pay. Tax reliefs provide high income individuals with opportunities to reduce their effective taxable income substantially. This is at odds with the principles of both vertical and horizontal equity and leads to reduced progressivity in the tax system. Furthermore, the difficulty in targeting tax reliefs effectively means they may be used for a purpose different from that originally intended, as has been noted in several tax strategy group papers. There are also efficiency concerns. The existence of tax reliefs can be held to promote an inefficient allocation of economic resources. It is on these grounds that tax reliefs which are economically unjustified should be abolished.
We believe in continuing base-broadening measures. The decision in 1998 to introduce a ceiling on capital allowances that can be offset against non-rental income was welcome. If tax reliefs are evaluated as economically justifiable — for example, those relating to child care facilities — measures that broaden the tax base or those that can be termed "anti-avoidance" should be built into the design of the expenditure scheme. Where a given scheme is considered to have some economic justification but where there are concerns that the level of free-riders under the scheme is currently high, the Department of Finance should consider the option of introducing further caps or ceilings on the maximum exemptions and reliefs permissible under the stated scheme. Clearly, ceilings will need to be chosen carefully so that there remains some incentive for the prospective investor to participate in the scheme.
We believe that minimum effective tax rates for high earners should be considered. Combat Poverty recommends that the value of tax reliefs for higher earners be curtailed. This could be achieved by standard rating all discretionary tax reliefs and setting a minimum effective tax rate for earners above a certain income threshold. Such a minimum tax could apply to those on high incomes and would ensure that everyone pays a reasonable amount of tax. In addition, such a scheme would not interfere with tax incentive schemes provided a carefully chosen minimum income tax rate is selected. An alternative to the minimum tax rate might be to consider measures similar to those introduced by the Minister in the 1998 budget, which were based on cumulative permissible limits.
A key point is that tax reliefs should be subjected to economic evaluation prior to introduction. Given the difficulties that exist in removing a tax relief once in place, it is crucial that tax expenditures receive a thorough and far-reaching examination, matching those which face Exchequer expenditure proposals. Combat Poverty argues that only those tax expenditures that are fully quantifiable, both in terms of numbers of beneficiaries and forgone costs, should be considered for continuation or introduction. Such schemes must be evaluated using formal economic evaluation techniques, such as social cost benefit analysis, and the decision to continue with a given scheme must be based on objective evidence based evaluations. Transparency and continuous monitoring of the schemes are critical to efficient outcomes.
As Dr. Tim Callan put it in his paper yesterday at the ESRI budget perspectives conference, "There is a need for a more systematic, regular review of tax reliefs than has taken place heretofore. Reviews of this type form part of international "best practice" on tax expenditures." Cost benefit analysis assesses both the positive and negative economic and social impacts of reliefs before introducing such schemes. While data on identified costs may be difficult to obtain or quantify, policy makers should err on the side of caution when considering the introduction of relief schemes in the absence of rigorous evaluations of same. An information deficit should not be used as justification for not conducting an evaluation.
Tax reliefs should result in social gain and the poverty impact of tax expenditures should be considered in evaluations. This includes an assessment of a scheme's contribution towards the achievement of national anti-poverty strategy targets, addressing inequalities, particularly among vulnerable groups, as well as helping to prevent people falling into poverty and ameliorating the effects of poverty and deprivation. A more socially desirable outcome would enhance the attractiveness and feasibility of certain tax-incentive schemes. Consideration should be given to restructuring schemes that demonstrate economic benefits but are currently lacking in strong social gain.
Tax reliefs should become part of a strategic and planned approach. Ad hoc or unplanned relief schemes should be avoided as a rule. If possible, reliefs should be linked to some form of formal planning, for example, spatial planning, where there is a demonstrated need or benefit. In the case of the urban renewal scheme, for example, local authorities were obliged to prepare integrated area plans in order to proceed with the scheme. This was a positive move and helped to ensure that an excess of poorly planned projects was avoided because of the urban planning exercise.
Tax reliefs play a considerable part in reducing the fairness of the taxation system, which is the main mechanism to ensure a more equal society. Ireland now has the economic capacity to achieve such a goal. Combat Poverty argues that all proposed or existing tax reliefs must be subjected to rigorous economic evaluation. Only those tax expenditures that demonstrate a clear net gain to the economy and wider society should be continued.
Combat Poverty urges policy makers to ensure that the social dividend of the Celtic tiger boom period is not diluted by such reliefs for high earners. Instead, efforts must continue to widen the tax base, lower the tax burden and make work pay, particularly for low income working households.
