I thank the Vice Chairman and the committee for the invitation to meet with them and make a presentation this morning. As mentioned, I am an economist and assistant professor of social policy at the school of social policy, social work and social justice, University College Dublin. I was also a member of the 2008 to 2009 Commission on Taxation and, within the commission, chaired the subgroup on 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 taxation systems to encourage and support certain activities among individuals and corporates via tax expenditure.
I also welcome the decision of the select committee to return once again to the topic of tax expenditure. The committee's report on the topic from 2019 was most welcome and reflected the relevance of giving this area increased attention as part of the annual budgetary oversight process.
It may be useful to put the scale of tax expenditure in some context. Budget 2021 outlined an expectation that the State will collect €77.6 billion in tax and social insurance contributions this year.
Data from the Revenue Commissioners for 2018 show approximately 85 discretionary tax expenditure measures costing a total of €15.8 billion in revenue forgone. These are measures which are not structural to the taxation system but which have been put in place to incentivise certain activities or as a means of pursuing certain policy objectives. Many of these are well targeted and worthwhile, although for the most part we assume this rather than have any hard evidence to support it, while others have a less robust basis for defending their cost and effectiveness. Overall and put simply, for every €5 collected in taxation and social insurance, the State currently decides not to collect an additional €1 forgone through the provision of various tax breaks and reliefs.
The information available to this committee, and to Irish society in general, regarding tax expenditure measures has increased dramatically over the last decade or so. When the Commission on Taxation commenced its work in 2008, there was limited information on the annual costs. This situation has been transformed following the work of that 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 European level for all countries to report on the nature and scale of the tax resources they decide not to collect each year via tax expenditure.
While this increase in information is welcome, there remains a deficit in parliamentary scrutiny of tax expenditure measures concerning new proposals and existing provisions. I encourage the committee to consider these measures as equivalent to direct expenditure by Departments or Government agencies and to approach them in that way. In particular, I recommend and encourage the committee to select a theme each year and to review the merits of each existing tax expenditure measure under that scheme. Approaching the long list of tax expenditures in that way will make them more accessible and the exploration more intuitive. I also recommend that the committee review the case made in the budget and finance Bills, and in associated documentation, for the introduction of each new tax expenditure measure. The Commission on Taxation and the Department of Finance have each provided a useful set of criteria to assess the appropriateness of new measures and it would be worthwhile for a committee such as this to consider if the measures as proposed and designed adhere to these criteria. Overall, if we treated tax expenditure more like new and recurring departmental expenditure it would represent a more comprehensive assessment of the State's decisions regarding taxation collection and resource allocation.
While my main message to the committee is concerns the merit of establishing recurring and structured assessments of tax expenditure as part of the process of budgetary oversight, I am conscious of the discussions the committee has had in recent months and the forthcoming post-pandemic fiscal context. The pandemic has reminded us of the often hidden role that welfare states, such as ours, play in providing a safety net for all members of society. No doubt, that experience will frame much of the policy response in the years to come and points to at least a greater recognition of the role of the State and, most likely, a more enhanced role for the State. Coupled with the impact of higher public debt, higher than anticipated debt-financing costs and the long-overdue reform of the international corporate taxation system, it seems inevitable that the State will have to raise more taxation on a recurring basis once the pandemic has subsided. In the absence of large-scale reductions in public services and redistributive supports, an increase in total taxation and social insurance contributions is a matter of how and not if.
Within the context of broadening the tax base and ensuring a progressive overall taxation system, reforms to tax expenditure have an important role to play in the period ahead. The following is a shortlist of five such reforms which I encourage the committee to consider in the context of budgets in the years to come. These measures are a mixture of those seeking to enhance fairness and those likely to generate significant additional taxation income; some do both. The first of these measures is to broaden the high-income individuals’ restriction to cover all tax relief measures. Currently, this measure, which ensures a minimum income taxation contribution from higher earners, those on more than €125,000 per annum, applies to specified reliefs rather than all tax reliefs.
As a consequence, some tax expenditure measures, such as relief on pension savings, are excluded from the restriction. It makes sense to have a minimum income taxation contribution. There was none prior to when this measure first emerged in 2006-2007, but it should cover the use of all tax relief measures. The committee should note that the minimum rates are low, when benchmarked against the rates paid by others down the earnings distribution. Currently, the minimum rate gradually rises from 20% at €125,000 to 30% at €250,000 and to 40% at €400,000 and above. A 20% rate is equivalent to the tax level faced by a single PAYE worker earning €39,000.
A second proposal or suggestion is to phase out tax credits for those earning more than €100,000 per annum. The provision of tax credits to workers, the self-employed, and families is an important part of the tax system. These measures are in strict terms tax expenditures, although I did not include them in my calculation of discretionary tax expenditures, which were mentioned earlier. While these measures serve important objectives in terms of work incentivisation and income support for many earners, particularly those on lower income, they have less relevance to those on the highest incomes in our society. Revenue data from 2016 showed that approximately 85,000 earners with incomes above €100,000 per annum are less than 3% of all earners in the State. Phasing out the personal tax credits from these earners would have almost no disincentive effect and would generate approximately €70 million per annum in additional income taxation.
A third area is the reform of tax reliefs associated with pension savings. The largest area of personal tax expenditure relates to pensions. Overall, pension reliefs amount to €2.7 billion per annum in revenue forgone. Reform to this area sits in the context of other proposed reforms to pension savings supports, including the introduction of auto-enrolment, which may carry significant additional costs in State subsidies and tax expenditure. Within the area of pension savings, three tax expenditure measures are worth reforming. The first of those is limiting all pension contributions to tax relief at a single rate of income taxation. Currently, this is offered at the marginal rate. This means that the State supports the savings of higher income earners more than those on lower incomes. Depending on whether the adjustment was to a standard rate for all or to a hybrid rate, say 31%, the annual savings would be between €200 million and €400 million per annum.
A second aspect in the context of pensions relates to restricting the tax-free lump-sum payments to an equivalent to two thirds of average earnings. At present, the first €200,000 of pension savings, or up to 25% of the total, can be drawn down tax free. This is an abnormally high level in international contexts. Many countries do not facilitate any tax-free drawdown. The benefit is much greater to those with the highest incomes and the largest pensions savings. While there is a case to abolish the tax-free lump sum in its entirety, the provision of a smaller tax-free lump sum to all retiring workers has some merits. A value set at two thirds of average earnings would correspond to approximately €30,000. The Revenue Commissioners have not provided a costing of this tax expenditure since 2014. It then cost €134 million.
The third aspect regarding pensions relates to reducing the standard fund threshold, SFT, to €1 million. The SFT is a limit or ceiling on the total capital value of pension benefits that an individual can draw from tax-relieved pension arrangements. It is currently set at €2 million and has been since 2014. It was €5 million when it was introduced in 2005. It reached a peak of €5.4 million in 2010. Prior to 2005, there were no tax-supported pension savings limits. In effect, the threshold represents the point at which the State will step aside from using tax reliefs to support pension savings. Judged from that perspective, it is difficult to justify why the State should continue to subsidise savings beyond a threshold of, say, €1 million. It is not that individuals should be impeded from saving resources at more than this level. Rather, it is that the State has done its job in supporting savings, when they reach this point. There are better uses for the State’s resources beyond that.
The fourth area of tax expenditure I wanted to bring to the attention of the committee is to abolish the special assignee relief programme, SARP. It provides a tax break to high earners, those working for international companies who relocate to Ireland and have earnings of more than €75,000 per annum. According to Revenue data, individuals earning above €75,000 are in the top 6% of earners in the State. The scheme provides for full income tax relief on 30% of income over the €75,000 threshold subject to an upper limit of €1 million per annum. The scheme also allows tax-free employer-provided benefit-in-kind of €5,000 per child per annum in school fees and one trip home per year for the individual and his or her family. In 2018, the scheme cost €42.4 million and was availed of by 1,481 individuals at an average benefit of €28,629. Based on the Revenue Commissioners' numbers this suggests the average recipient has an income of €313,000. That would put them in the top 0.5% of the earnings distribution. While there are economic benefits to schemes such as this, one could make similar arguments for many other jobs and roles, do earners at this level of income need a tax reduction? On the grounds of fairness, the scheme is hard to justify. Simply, there are better uses for these resources.
The fifth area is on standard rating of other tax reliefs. There is a general point of principle where government supports are provided through the taxation system, they should be worth the same to all income tax payers irrespective of whether they are fortunate enough to have a high income. As well as the aforementioned tax relief on pension contributions, a number of other tax expenditures are granted at the marginal rate, that is, that they are worth 40% to some and 20% to others. A recent reply to a parliamentary question identified that making this reform for those tax expenditures costing more than €5 million per annum would yield €147.7 million in additional taxation revenue each year. Again, on the grounds of fairness, such a reform seems appropriate.
I thank the committee for the opportunity to engage this morning. I strongly encourage it to adopt a recurring and systematic approach to the oversight of these budgetary choices. Tax expenditures are a hidden but important part of the decisions we make on the allocation of state resources.