The Justice Commission believes the core objective on taxation policy should be to collect sufficient taxes to ensure full participation in society for all through a fair tax system in which those who have more pay more, while those who have less pay less. CORI's view is that the tax system incorporates a sizeable number of tax expenditures, primarily in the form of tax reliefs, and in November 2004 the Revenue Commissioners estimated that the annual cost of tax reliefs was €8.4 billion, a value that is equal to 22% of the total tax collected each year in Ireland. Revenue also indicated that it was unable to provide complete information on 44 individual tax relief schemes and that it had no figures for the number of claimants and the size of claims made under 33 schemes. In the case of a further 11 schemes, there is no information available on the number of taxpayers availing of them.
Copies of this presentation have been circulated and rather than go through the details of the tables, we will refer to them. Table 1 presents information on some of the major tax expenditures, the overall cost of providing these per annum and the average cost per recipient. The distribution of these tax expenditures is primarily in the direction of the better off elements of Irish society. The National Economic and Social Council recently examined the income distribution of households which gained as a result of tax relief on employees' occupational pensions during 1998. Its findings, outlined in Table 2, show that the bottom 20% of households received 0% while the top 20% of households received 56.8% of the total relief available. More interesting is that the top 40% of households received almost 89% of the value of this scheme. This is a serious issue of distribution.
One worthwhile policy approach that could address the inequity highlighted in this instance would be to introduce a cap on the maximum amount that any individual can have in his or her pension fund. An annual contribution limit plus an additional overall pension fund limit of approximately €1.5 million would provide more than adequate provision for an individual in his or her retirement. Introducing this policy would follow similar schemes adopted in countries such as the United Kingdom.
The suggestion that it is the better off who gain from the provision of tax incentive schemes is underscored by reports compiled by Revenue Commissioners, and published in 2002 and 2005, which looked at the top 400 earners. Table 3 reproduces the effective tax rates they actually pay and shows that many of Ireland's highest earning individuals successfully use tax planning schemes and loopholes to reduce their tax liabilities. These studies found that property tax reliefs, such as those provided for hotels and car parks, were the most effective in reducing the tax rates of higher earners. When we compare the figures, we see that over time the number of top earners benefiting from very low tax levels has reduced slightly from 18.25% to 14.5%. While that is welcome, we need to make substantial progress on this. More recent figures indicate that in 2001, 41 individuals earning more than €500,000 used various tax relief schemes to reduce their income tax liability to zero. This included 11 individuals who earned more than €1 million. A further 242 individuals who earned more than €100,000 in that year also paid no tax. Our question is whether this is fair. Are these individuals paying their way in society or are they exploiting loopholes in the tax system? We believe there is something profoundly unfair with a tax system where some millionaires pay no tax while employees on the minimum wage must pay it.
The CORI Justice Commission believes that many of these reliefs serve a minimal purpose. We have argued for some time that these reliefs should be reviewed through an assessment of the economic and social benefits they provide. Only where the benefits surpass the costs should the reliefs be retained. Furthermore, we believe that any proposed reliefs should be subject to detailed assessment before they are introduced. It should also be a requirement that the Revenue Commissioners collect data on the size and distribution of these reliefs. Such information is critical to any assessment of the role they play. We have drawn up proposals to make this happen.
We propose that new procedures be adopted by the Department of Finance when proposing the introduction of new expenditure. These procedures should involve a detailed internal evaluation of the costs and benefits of each new scheme as the lifetime costs of most of these schemes will run into many millions and expenditure of this scale deserves detailed evaluation. In that context, we note the recent announcement by the Department of Finance in its new guidelines for the appraisal and management of capital expenditure proposals in the public sector that "programmes with an annual value in excess of €50 million and of five years or more duration to be subject to prior and mid-term evaluation at the beginning and mid point of each five year cycle or as may be agreed with the Department of Finance". Our view is that if such detailed analysis is merited for the expenditure of sums in excess of €50 million, then a similar procedure is appropriate for tax expenditure programmes whose lifetime values tend to significantly exceed this figure.
We also suggest that each new or renewed tax expenditure should also be poverty proofed to establish the impact that its introduction will have on the income distribution, the level of median income and poverty rates. We also suggest that new procedures be adopted in the Revenue Commissioners such that it will be able to collect and provide accurate data on the scale and distribution of all tax expenditures. Many of the existing tax expenditures, in particular those giving relief in respect of construction costs, offer levels of relief that seem to have been chosen arbitrarily. In the case of section 23 relief, we are unclear as to how the various relief levels offered were established and justified by the Department of Finance. Furthermore, it remains unclear why the same development could not have been achieved as a result of offering a considerably lower level of relief, one that was provided at a lesser cost to the Exchequer. In future, the percentage level at which reliefs are offered must be clearly justified. In our view, discretionary tax expenditures are an inappropriate means of achieving policy objectives. In general these expenditures are neither efficient nor fair. Accordingly, we believe that the Government should move to ensure that relief on all discretionary tax expenditures, where available, should be only at the standard rate.
The inequity in the distribution of pension contribution reliefs is a matter of concern. One obvious approach to address this is to introduce a cap on the maximum amount of money an individual can have in his or her pension fund. An annual contribution limit, plus an additional overall pension fund limit of €1.5 million, would provide more than adequate provision for an individual in his or her retirement. Introducing this policy would follow similar schemes adopted in countries such as the UK.
The average benefit from artists' relief equals €28,461 from all of those who are entitled to it. In reality, the distribution of this relief is such that a number of individuals are gaining large tax free incomes while others are benefiting at a much lower level. We propose that a cap on this relief should be set at €20,000 per annum, which is two thirds the average industrial wage, and that artists would pay no tax on the first €20,000 they earn and that thereafter they should pay tax on additional income. That is quite generous, given that people pay tax under the PAYE system.
In the forthcoming budget, the Minister for Finance should introduce a new law limiting the number of tax reliefs of which any individual may avail in each year. We suggest that it would be appropriate to limit it to five so that an individual should not benefit from more than five different tax reliefs. We also think the Minister for Finance should introduce a new law limiting the value of tax reliefs of which any one individual may avail in each year. An indexed linked limit of €250,000 per annum would seem more than generous.