|
|
Saturday, 27th April 2024 |
| The new Commission on Taxation, a poisoned chalice for outgoing Chairman? |
Back |
| PJ HENEHAN casts a cold eye over the terms of reference for the new Commission on Taxation, and concludes that Frank Daly, the Commission’s chairman, will need to summon all his skills to navigate a course that avoids endless debates arising from potential inherent conflicts in the terms of reference, and, like the last Commission, result in multiple volumes and thousands of pages produced over multiple years. |
Can the new Commission on Taxation solve economic gloom and preserve living standards ? This seems to be the task that has been set for them based on the scope and content of the terms of reference and instructions from Finance Minister Brian Cowen.
The current economic woes are well documented at this stage. The only difference between the hawks and the doves is how deep and how long the recession will last. In the writer’s view there will be an opportunity over the coming 3-5 years to rectify some of the fiscal mistakes of the past. Whether this will be done or not will depend to a certain extent on the personal impact of Mr Cowen as Taoiseach. He is in the unique position of knowing what needs to be done, having the authority and hopefully the leadership to do it. The question is whether appointment of the new Commission on Taxation will be enough, or is something much more radical and fundamental required in the current economic climate ?  | | PJ Henehan |
You may ask what the point is here? It is simply this - we have never collected so much money in taxes from our high net worth individuals and businesses or indeed the hard pressed PAYE sufferers (so from that perspective additional revenue is not needed) however, a lot of what is collected is wasted through:
• Poor decision making,
• Poor management,
• Lack of vision,
• Apparent total lack of responsibility and accountability for the forgoing.
It must be emphasised that the Commission is not going to resolve or even address these problems.
It must also be stated that Revenue are not to blame in this respect. They are doing their job (some might say too well) and for the most part the system approved by our politicians on a yearly basis is administered fairly. That is not to say however that the tax system is actually fair as designed.
Significant improvements in tax collection have been made over the years, first with the introduction of PAYE and some years later a move from the prior year basis of assessment to current year basis for self-employed individuals and directors. The introduction of the self assessment system and the calendar year basis of assessment were also major milestones and most recently the ROS system (revenue on line service) was successfully introduced. We now have a tax administration system whereby the vast majority of individuals file their tax returns on line and as a result the Revenue, as an organisation and tax collection agency runs extremely efficiently and is up among the best in the world. This is admirable and credit is due to all involved, in particular the outgoing Chairman of the Revenue and incoming Chairman of the Commission on Taxation Frank Daly, as well as the new Chairman of the Revenue Commissioners Josephine Feehily (who would have been responsible for systems and administration matters as a Commissioner.)
However this success also begs a question; why has this not been replicated in other areas of government – health, education, transport etc where there are equally highly qualified and competent civil servants. Revenue officials would never say but they would probably (if they had time to think about it) be extremely perplexed if not saddened and frustrated that so much of what is collected by the efficient tax system is apparently swallowed by the general bureaucracy with little to show for it in terms of systemic or infrastructural improvement. Maybe there is a new day job here for Bertie!
So what should be done in fiscal terms in the current economic climate? As readers may have seen exchequer returns are down in the first quarter of 2008 due to a combination of the property slump (lower gains and fewer transactions = less Stamp Duty, VAT and Capital Gains tax) and a slow down in consumer spending (lower spending = lower VAT receipts and lower profits for business = lower corporation tax). But can or should we raise existing taxes or find new ways to levy taxes in the current climate?. That is the dilemma. For the record these decisions are made by policy makers and politicians not revenue officials. Revenue obviously do have an input on advising on and drafting any new tax legislation. In the writer’s view raising taxes would be a retrograde step and give the wrong message to tax payers, investors, businesses and the international market place.
The Minister seems to have put significant onus on his new Commission on Taxation to resolve the dilemma for him. The terms of reference for the new Commission are very broad and are too detailed for this article but can be summarised as follows:
• Consider how the tax system can be used to support economic activity, increase employment and prosperity and at the same time meet the cost of public services and government expenditure.
• Consider how the tax system can encourage long term saving (pension provision).
• Examine the balance between taxes on income, capital and spending.
• Review all tax expenditures and assess the economic and social benefits delivered and recommend discontinuance of those unjustifiable on cost benefit grounds.
• Examine options for financing local government.
• Investigate measures to protect and enhance the environment including the introduction of a carbon tax.
In the press release announcing the Commission on the 14th February the Minister invited the Commission to conduct their work in the context of commitments on taxation and economic competitiveness in the Programme for Government and with a view to maintaining an equitable instance of taxation and a strong economy. Specifically the Commission were charged with:
• Keeping the overall tax burden low while increasing fairness and enhancing the rewards of work.
• Ensuring that the regulatory framework remains flexible, proportionate, and up to date.
• Lower carbon emissions using revenue neutral fiscal measures including a carbon levy and finally,
• Ensuring that the 12.5% rate of corporation tax will remain.
The Commission is asked specially to commence work on the carbon tax “immediately” as this “requires a completely new tax charge and structure”.
Finally the Commission is “requested” to report on the results of its examination and to make whatever recommendations it sees fit by no later than 30th September 2009.
If you have managed, to struggle through this far you would be forgiven if your first thought is, ‘if they achieve all that we should be able to sell the DVD and make it into a best seller’. On a more serious note while the writer has tremendous respect for the abilities of the Chairman of the Commission, he has, in the writer’s view, been given an enormous task and some might even say a poisoned chalice. Even before they get started there appears to be months of work at least in trying to develop a program to resolve the conflicts that the Commission is faced with in the terms of reference, and the instructions from Government.
The Commission itself has invited submissions from all interested parties and has gone so far as to publish detailed guidelines regarding the preparation and structure of submissions on its website (the Commission’s website is www.commissionontaxation.ie) No doubt there will be hundreds if not thousands of such submissions. The terms of reference, the complexity and detail required to address the topics will give rise to lengthy tomes being submitted in sufficient volume and detail to keep members of the Commission busy for a long time.
The Government have managed to convey a few clear messages in the terms of reference and the specific instructions above. The clearest being that there will be a carbon tax whether we like it or not! From the Minister’s perspective there appears to be no alternative to this but we should look to what others have done before we jump into this boat. The significant increase in the price of petrol for example over the last year or so has had little impact on consumption and therefore carbon emissions. On the other hand particular progress made on reducing carbon emissions by Germany and Japan was the focus of an article in a special environment edition of Time Magazine recently (Vol.171, No17/2008). These should carry significant weight in the deliberations on this issue.
Another clear message is that the Minister feels tax rates are already “low” and therefore we shouldn’t expect further tax cuts. It is also clear that the Minister expects that overall recommendations by the Commission must be revenue neutral. The Minister has instructed the Commission that the 12.5 p.c. corporation tax rate is sacrosanct and is not to be touched. While this is good news the Commission should have been given the latitude to advise on whether the rate needs to be lowered to, say, 10 p.c.
Using the tax system to encourage long term savings while laudable, may prove more difficult to achieve than might first appear to the casual observer. Furthermore, asking the Commission to consider options for financing local Government seems to be merely a distraction from the main event and should have been left to a body focused entirely on this subject. Another error would appear to be asking the Commission (which is a taxation Commission) to ensure that the “regulatory framework remains flexible, proportionate and up to date” - the Financial Regulator may have something to say about that!
The remainder of the “wish list” is where most danger for the members of the Commission lurks. It would be very easy for them to get drawn into endless debates, on the inherent conflicts set for them in the somewhat vague terms of reference. For example how can the Commission consider the first term of reference on how the tax system can meet the cost of the public services and other government outlays in the medium and longer term unless they know what those are? A bigger question is whether if they actually ask the Government would the Government tell them, for example, if they were intending in the medium term to significantly downsize the public service.
This begs a whole serious of other questions:
• Should the Commission ask Government to clarify their intentions with regard to future policy?
• Can they just make assumptions?
• Should they put forward their own views as to what the policy should be?
• What assumptions should they in fact make?
The request to review “all tax expenditures” and assess the benefits is another very tall order. This request is also somewhat unclear i.e. the definition of “tax expenditure” in this context needs to be clarified otherwise the Commission will again be forced to make assumptions which may or may not be what Mr. Cowen had in mind.
Numerous other points could be made but to go on might give the impression that the purpose of this article is to dismantle the terms of reference of the new Commission on Taxation. This is not the writer’s intention; rather it is to point out that they have a very difficult task set for them and that unrealistic expectations may have been created by the terms of reference. A major positive is that Frank Daly is a practical man with a detailed knowledge of how the tax system works on the ground, so he should be able to guide the Commission into avoiding many of the potential pitfalls in the terms of reference. Some aspects he may well chose to ignore in the interest of getting the job done. The Commission is free although not specifically stated in its terms of reference to look outside Ireland for good and bad examples and behaviours to help formulate its recommendations.
One recommendation that the writer would earnestly make is that the report should not (as the last one did) go into five volumes and thousands of pages. A short report to include specific recommendations and a brief explanation on why the particular recommendation is being made would be much appreciated by all. |
PJ Henehan is a tax partner in the financial services group of Ernst & Young and Co Author of the recently published “Global Tax Risk Management”. The views expressed in this article are the writer’s own.
|
| Article appeared in the June 2008 issue.
|
|
|
