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Tuesday, 16th April 2024
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Reading the entrails Back  
The Exchequer returns for the first quarter of the year have been published. Some commentators saw in the rate of increase of tax receipts, evidence of a slow-down in the economy. How useful are tax figures as a measure of the economy?
Do the tax figures suggest we are in recession? The answer is that they probably couldn’t, even if we were. Tax figures are not necessarily a good guide to current activity in the economy. The various taxes have quite different payment dates or credit terms. PAYE and VAT have to be paid over to the State in the month following the month in which they arise. They are therefore quite up to date as indicators of recent levels of activity in their respective areas. Corporation tax on the other hand is payable six months after the end of an accounting period, which is usually a period of a full year. It is not a good current indicator of current economic activity, but may be an indicator of economic activity at a time up to 12 months into the past.

The big earners

The two big elements of the government’s tax take are Income Tax and Value Added Tax.

Income tax is the name given mainly to both the tax payments of individual self-employed persons, and to PAYE receipts in respect of the earnings of employees. PAYE receipts tend to roll in regularly, month by month over the year. The main bulk of tax payments by the self-employed occur on 1 November in each year, with a smaller payment on 30 April of each year.

The figures now published cover the period 1 January 2001 to 31 March 2001. They show an approximately 10 per cent increase in the figure for income tax compared to the same quarter in 2000. It would be fair to assume that that income tax figure is almost entirely PAYE and would contain a relatively small proportion of self employed tax payments.

The comparison being made is with the same quarter of last year. Since last year both the top rate of income tax and the standard rate of income tax have fallen. The standard rate band has increased, and allowances have been slightly increased. If there were no other changes in the situation other than these changes to the tax code, you would expect the tax receipts to fall. A growth of 10 per cent points to a combination of wage rises, and increases in numbers at work. It would not be surprising if PAYE receipts grow at a slower pace than they have in past years, as expansion of the labour force slows down on reaching full employment. There is certainly no evidence of a recession here.

The figure for VAT is up 12 per cent compared to the same quarter last year. These figures are not greatly influenced by changes in rates. They are a good indicator of high street activity in the past three months, compared to the same situation a year ago. Again they are an indicator of buoyant domestic demand.

Corporation tax

Corporation tax is up by approximately 13.5 per cent. Given that corporation tax is largely paid six months after the end of an accounting period, the payments in the quarter just past largely reflect 30 September year ends. The most popular year-end choice for companies tends to be 31 December, so these figures relate to a minority situation. The figures have been affected by a fall in corporation tax rates outside the sector entitled to the 10 per cent corporation tax rate. The fall in rates is in the order of 4 per cent.

In the long run there is every reason to hope that our reduction of the standard corporation tax rate to 12.5 per cent will be self-compensating and possibly even lead to an increase in corporation tax receipts. In the short term, the process of reduction will not have a great impact on attracting in new business (it will come in mostly at the existing incentive rate of 10 per cent). In the year 2000 the standard rate of 24 per cent was still too high to be attractive for mobile investment not entitled to the 10 per cent rate. The cut in the standard CT rate therefore involves some short-term loss in tax revenue before its main impact, in attracting in new business and incentivising existing business, is felt.

In short, the corporation tax figures just published are not a good indicator of current economic activity. Corporation tax receipts would not normally reflect the occurrence of a recession until up to 12 months, and possibly two years after that recession had a grip on an economy.

Smaller taxes

Stamp duties have increased by a massive 29.5 per cent in the last quarter, compared with the same quarter in the year 2000. Stamp duties would principally reflect capital duty on the formation of companies, or the increase in the capital of companies, and stamp duty on property transactions including house sales.

A breakdown between capital duty and house sales is not available but it is likely that the figure is composed largely of house or land sales, and, in so far as house sales are concerned, mainly second hand house sales. The stamp duty in the last quarter will be based largely on ‘closings’ of property deals in that quarter, and in the month of December.

The second-hand house market in particular is seasonal. The quarter to 31 March would normally be the market’s slackest period. People don’t like buying houses in the dark. The buoyancy of the revenue in this ‘dark period’ of the year is therefore impressive, even if only in comparison with a similar ‘dark period’ of last year. It suggests that the second-hand house market had not run out of steam, at least until quite recently.

Capital acquisitions tax is actually very slightly down! It fell from ?37,127,000 to ?36,810,000 in the quarter. Mr McCreevy’s major cut in inheritance tax rates kicked in December 1999. However there can be significant delays in the payment of inheritance tax in particular. In fact interest on overdue inheritance tax payments amounts to a significant part of the total take from capital acquisitions tax. When that is taken into account it can be seen that the ‘take’ in the first quarter of the year 2000 could to some extent reflect the 40 per cent CAT rate applying before 1 December 1999. It is unlikely that any significant amount of receipts in the corresponding quarter of 2001 would relate back to that period when rates were higher. Therefore to some extent we may be seeing the impact of the lowering of the inheritance tax rate.

Capital gains tax has risen by 28 per cent in the quarter. While this may sound like evidence of buoyant activity, it must be borne in mind that the principal payment date for capital gains tax is 1 November in each year. Receipts from this tax at other periods in the year might be thought of as ‘casual receipts’ by those who did not make their payments on time, or who were settling outstanding appeal cases etc. It may be going too far to say that the figures (other than in November in each year) are meaningless, but they certainly are not a clear indicator of anything in particular.

Customs duties have increased from ?43,600,000 to ?45,000,000. This is a very modest increase. Customs duties are payable currently and therefore are an indicator of current activity. In a general way customs duties can reflect the extent of capital investment in the economy i.e. the importation of major items of plant and equipment. The relative slackness of customs duties in the quarter, compared to a year ago, may indicate a slowing down in major new industrial projects.

Spending
Tax receipts are a blunt indicator of economic activity. At best they are an indicator of economic activity at varying periods into the past. A cynic might say it is more important to focus on the level of government expenditure since it may be a better guide to the level of economic activity in the future. Traditionally it has had a more serious impact on government finances, and the economy generally, than anything done in respect of taxation.

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