Taxpayers willing to pay the price Sunday, June 14, 2009 By Jim Ryan One of the more surprising findings in our survey is the level of acceptance of the personal tax increases in the April budget.
While the recent election results indicate that the budget was deeply unpopular, our survey suggests that people are willing to pay higher taxes - provided the money is wisely spent. The best evidence of this is the relatively high acceptance of the need to raise taxes during the current crisis, with 54 per cent of respondents saying they accepted that the supplementary budge t tax increases were necessary to address the economic difficulties.
But it is clear that taxpayers expect this additional tax contribution to be put to good use.
The poll shows they expect it to be used to help resolve our economic difficulties, with 50 per cent saying they would like some of it to be used to fund new employment initiatives.
Another surprising finding of the survey relates to public perception of the burden of income tax in Ireland. In 2006, the last time the Irish Taxation Institute National Tax Survey was conducted, 53 per cent of respondents felt the personal tax burden in Ireland was high compared with the rest of Europe.
That figure has dropped to 50 per cent in the 2009 survey, even though we’ve seen significant increases in taxation in the two emergency budgets in October 2008 and April 2009.
In fact, the reality is quite different. Some 18 per cent of respondents to our 2009 poll correctly hold the view that our income tax burden is typically lower than the rest of Europe (again, surprisingly, an increase from the 11 per cent result in 2006). Prior to October 2008, the personal tax burden in Ireland was quite low in terms of the Organisation for Economic Cooperation Development (OECD) average.
While the tax burden has increased in the wake of the recent changes, the tax burden in Ireland is still below the OECD average. In fact, despite recent budget tax hikes, Ireland - along with New Zealand, Korea and Mexico - has one of the lowest tax burdens in the industrialised world, according to figures from the OECD.
Benefits, such as child benefit, appear to be the most generous in the OECD, whose figures show that an Irish couple with two children earning an average wage were paying the lowest tax rate in the world, because of the amount paid through child benefits. However, our consumption taxes, such as Vat and excise, were proved to be high by international standards.
Following the recent increases, our marginal tax rate is now quite high, and it is important that we monitor this key rate. The marginal rate refers to the amount of tax paid on every additional euro of income earned.
It is important to recognise the tipping point in the marginal rate of tax and levies for all taxpayers, beyond which the entrepreneur’s drive to earn further profits, or the employee’s drive to earn further income, will be eroded. Going beyond the tipping point could become a serious disincentive to economic activity, productivity and recovery.
Shifting the emphasis to the spending side of the equation is critically important to ensure our productivity is maintained and increased, and our international competitive position is improved. The survey shows a gap in understanding among taxpayers regarding the calculation of the various levies, the income levies and the health levy. The increased levies, along with the change in mortgage interest relief, were the two major policy changes announced in April - and there is still confusion among many taxpayers as to how these are calculated and applied.
The Irish Taxation Institute is of the view that, while the levies are an unfortunate but necessary short-term solution, they should not become a permanent feature of our system.
In correcting our public finances, we must return to low taxes on labour and a simple and well-understood personal tax system. While our survey shows that the majority of taxpayers understand the ‘bottom line’ impact of the budget changes on their take-home pay, they do not understand how this bottom line is calculated.
How could they be expected to? As it stands, we are currently dealing with a raft of income tax rates, income levies, health levies and PRSI. Some employers may shortly also be expected to administer a complex car park levy. The upshot of all this is a hugely confusing system of taxation, not only for taxpayers but also for the business community - which is expected to administer the system for firms and employees.
The complicated nature of the new levies is placing an unnecessary burden on businesses at a time when they need all the help and support they can get from the government.
It is also increasing the workload of the Revenue, which is most unhelpful at this point, since the more time Revenue has to spend on added complexity on the collection side of the house, the less time it has to devote to processing claims and refunds, and providing support to viable businesses struggling to pay their taxes on time. At all levels, taxpayers should rightfully expect the unwieldy system to be simplified, in the interests both of clarity and transparency - two elements that should be key to the way in which taxes are collected in any modern economy.
Our survey also shows that taxpayers are focused on what might be contained in the next budget, and are anticipating the possibility that even more will have to be done to address the deficit in the public finances.
Against that backdrop, it is interesting to note that over 60 per cent of respondents are bracing themselves for the introduction of a property tax, most likely in the next budget, although only 40 per cent would prefer to pay this tax rather than face higher income tax. Minister for Finance Brian Lenihan has already signalled that there is no room for further increases in personal taxation, and the Irish Taxation Institute agrees that it could be detrimental to impose such increases, on the basis of the tipping point in the marginal rate and the potential impact on external competitiveness.
In our small and extremely open economy, competitiveness is vital. Overtaxing the productive side of the economy could further stall its recovery.
Therefore, taxpayers are probably correct to assume that, in addition to cuts in public spending, a property tax is the much more likely option. If there is a need to increase taxes further then, from a competitive point of view, the introduction of a property tax would certainly be a less harmful, if not a very popular, option.
The Irish Taxation Institute’s position is that, if a property tax is to be introduced, it should have the following key features:
* It should be simple to understand and administer.
* It should be based on ability to pay.
* Anyone who bought their home in recent years, at the height of the property boom, is probably servicing a large mortgage and has already paid very high stamp duty rates. In the interest of fairness, some form of credit should be allowed to avoid overburdening these taxpayers.
* Any new property tax must be accompanied by a reduction in stamp duty rates on residential and commercial properties.
Again, we need to avoid penal double tax on the same asset.
* Any new property tax should be introduced on a phased basis and after appropriate consultation with relevant stakeholders to ensure its smooth implementation.
On the subject of pensions, the message from the survey is unequivocal. Do not remove the tax relief on pension contributions, as this will result in a cessation or reduction in contributions.
Over half of all employed adults would be likely to stop or reduce their personal pension contributions if tax relief on these payments were removed.
If this were to come to pass, it would place a huge additional burden on the state coffers in years to come. Now is not the time to remove assistance to taxpayers to fund their own pensions.
The very reason for giving tax relief on pensions is that the money is inaccessible for such a long period. We must maintain a strongly supportive regime that not only encourages people who are already paying into pension funds to continue making these payments, but also encourages many more taxpayers to do so.
The government has worked very hard to promote the need for people to invest in their future retirement plan. It needs to stay focused on this policy for the long term - to be diverted from this could be catastrophic to future generations, who would be left carrying the can.
Jim Ryan is president of the Irish Taxation Institute
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