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Thursday, 13th August 2020
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Tax and the programme for government Back  
One advantage of not having an absolute Dáil majority is that you need not, because you cannot, deliver on all your election manifesto promises. So let€s see how the two manifestos of the coalition parties translate into a programme for government in the taxation area.
Notwithstanding that €it€s the economy, stupid!€ was probably the philosophy that guided many voters in the last Election, and notwithstanding that taxation is central to the economy, the taxation elements of the programme for government are remarkably brief and unambitious.

The programme
For the record, the following is what is stated in the programme under the heading of Taxation:
€Over the next five years our priorities with regard to personal taxation will be:
€ To achieve a position where all those on the national minimum wage are removed from the tax net, and
€ To ensure that 80 per cent of all earners pay tax only at the standard rate.
€ To use the potential of the tax credit system to effectively target changes and to pursue further improvements in the income tax regime if economic resources permit.
€ We will complete the reduction of the standard rate of corporation tax to 12.5 per cent in 2003.
€ We will increase Capital Gains Tax exemption limits.
€ We will examine the tax treatment of share options.
€ We will keep down taxes on work in order to ensure the competitiveness of the Irish economy and to maintain full employment.
€ We will vigorously pursue actions to ensure that everyone is tax compliant.€
It is interesting to compare the taxation programme with the election manifestos of the two coalition partners.

The Manifestos
The Progressive Democrats included amongst their taxation proposals €Increase the annual CGT exemption to e10,000 over five years€. At present the annual exemption stands at e1,270 per person. This has been translated into a government commitment to €Increase capital gains tax exemption limits.€ The e10,000 target has been dropped.
The Progressive Democrats proposed in their election manifesto to treat employee share options under the capital gains tax system, which would involve an effective tax charge of 20 per cent on profits arising from the exercise of such options. That in fact is the historic method of taxing employee share options and the one which most closely follows their true economic nature. At present however many such share options are within the income tax regime. In the programme for government that proposal has translated to €We will examine the tax treatment of share options.€ That sounds suspiciously like nothing.
The Progressive Democrats programme proposed the retention of the ceiling on employee PRSI contributions. Neither the Progressive Democrats nor Fianna Fail have proposed re-introducing the ceiling on employer contributions. The closest commitment to any of this to appear in the programme for government is the statement that €We will keep down taxes on work in order to ensure the competitiveness of the Irish economy and to maintain full employment.€
The Progressive Democrats proposed to legislate so that the 12.5 per cent corporation tax rate on trading income would be fixed until at least 2025. When the 12.5 per cent rate was first mooted this also had been the intention but the legislation did not give effect to it. The Fianna Fail manifesto, in the same area, merely undertook to introduce the 12.5 per cent rate in 2003, something which had already been legislated for anyway. The programme for government has made no commitment to retain the rate until 2025.
It is puzzling as to why the coalition partners should have found some difficulty in including the Progressive Democrat proposal in the programme for government. On the face of it, it merely accords with what is understood to be a policy of all major parties, ie to maintain a 12.5 per cent corporation tax rate fairly indefinitely.
Hopefully the failure to include the commitment in the programme for government does not mean that the coalition are hedging their bets against having to increase the rate even within the five year period of their government!
The Progressive Democrats manifesto included a commitment to €No increases in direct taxation.€ Fianna Fail had no similar specific commitment and the programme for government has made no such commitment.

Use of the Reserve Funds
The Progressive Democrats manifesto ruled out the use of the national pension reserve fund as a means of financing government spending programmes. Fianna Fail€s manifesto more cautiously ruled out the use of the funds €for current use.€ The programme for government merely has a commitment to €Maintain the national pension reserve fund and the payment of 1 per cent of GNP per annum into the fund.€
Given suggestions that emerged in the election campaign that the pension reserve fund should be used for infrastructural development, it is interesting to note that the programme for government does not explicitly rule out such expenditure. The reference to ruling out €current use€ in the Fianna Fail manifesto could be a reference to no more than not using it for day to day spending of a revenue nature.
Both Fianna Fail and the Progressive Democrats in their manifestos proposed to encourage public private partnerships. Fianna Fail had also proposed the establishment of a National Development Finance Agency to borrow, or guarantee loans, for infrastructural development. That proposal has made it into the programme for government and states €We will establish under the auspices of the NTMA a National Development Finance Agency to finance major public projects and to evaluate financing options for our PPP projects. This vehicle may finance both commercial and non-commercial type projects.€
The programme for government not only proposes to add to the existing national pension reserve fund the aforementioned National Development Finance Agency, but also proposes a special National Transformation Fund, also to be managed by the NTMA. This latter fund will receive the proceeds of the sale of some State assets (privatisation?) and any surplus Central Bank reserve funds. The National Transformation Fund will be used to finance infrastructural developments. During the last government, the proceeds of privatisations tended to be put into the national pension reserve fund, where they were not then available for infrastructural investment.

What does it all mean?
There are two ways you can interpret a comparison of the election manifestos and the coalition programme for government. One is to treat the explicit promises in the election manifestos as an interpretation of the more coy targets set in the programme for government. The alternative way of looking at the matter is that, where the explicit proposals in the manifestos have not been adopted in explicit form in the programme for government, they have effectively been rejected and that the vague words used in areas of the programme (eg will examine the tax treatment of share options) merely conceal the rejection of the corresponding manifesto promise. Time will tell.
Apart from the principal items outlined above taken from the taxation section of the programme for government, there are other taxation references in the document. Under the heading of Eco-Taxes there is a non-binding reference to extending the plastic bag levy to other forms of non re-usable packaging (beer cans?, bottles?, paper bags?). There is also a more specific promise to rebalance the VRT and motor tax regimes to favour vehicles with lower carbon dioxide emissions. Such a rebalancing can of course be achieved simply by increasing the tax on some models! There is also a promise to improve the tax incentives for investment in renewable energy. There are already important tax incentives in the area of wind-farms.
A promise to implement €A full package of reforms€ based on the Report of the Commission on the Private Rented Sector leaves ambiguous whether that will include the key taxation recommendation of that Commission ie an actively managed rental portfolio to be treated in the same manner as a trade for the purposes of all taxation.
It is difficult to avoid a suspicion that the brevity of the references to taxation in the programme for government and the uncertain nature of such references as exist reflect real concern as to the condition of the public finances. Notably, there is no commitment not to increase VAT and no commitment not to extend the range of products and services on which it is charged. Neither is there any specific commitment not to increase the standard rate or higher rate of income tax. The closest they come to this is to say €We will keep down taxes on work.€ Is income tax a tax on work or is PRSI regarded as the only tax on work? Again, time will tell.

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