Sunday 4 December 2011

More tax questions than answers

Sheila Killian: The 2012 Estimates published over the weekend make for interesting reading in the context of what has already been leaked from the budget. In particular, the tax forecasts raise two or three questions. With luck, answers will be provided when we get more details on the budget proposals next week.

The first thing to note is that for all taxes the take in 2012 is predicted to be at least as high, if not higher, than that in 2011. The msot striking prediction is on Income Tax. Despite Leo Varadkar's promise that there will be no tax change affecting people's incomes, the take is predicted to rise from 13.8 billion to ust over 15 billion. That's a 9% increase. If there's really no change to Income Tax, that could mean that what's being forecast here is some combination of nine per cent more people working and paying in tax in Ireland, or nine per cent pay increases across the board. Neither of these seems likely in 2012, especially in light of the predicted increase in Corporation Tax - presumably mirroring company profits in Ireland - of less than 2%. Perhaps the tax take will be increased by changes to the Universal Social Charge, the bands or a reduction in credits. Or perhaps the base is being broadened, or avoidance is to be tackled in a very significant way. Either way, it will be interesting to learn how this increase is revenue is to be achieved.

The take from Capital Acquisitions Tax is expected to rise by 6%, following a reform of the rules. Capital Gains Tax revenue is expected to stay static, despite a widely-flagged rate increase. This isn't surprising, given the scarcity of gains these days. Nonetheless, a higher rate will eventually bring in more revenue, and should also dampen the enthusiasm for tax schemes based around re-characterising income as gains. Customs, Excise and Stamp Duties are also predicted to remain fairly flat in 2012.

On VAT, despite the 2% increase to the top rate promised in the leaked documents, the overall take in 2012 is expected remain fairly steady at 9.76 billion, increasing by less than 1%. This makes a certain amount of sense - when prices rise, people wil buy less. Still, it begs a more fundamental question, why bother with a regressive and controversial change that is not expected to bring in much-needed revenue? I think we may return to this question, after the clarification of the budget speeches.

3 comments:

Michael Taft said...

Attempts to reach the revenue targets for 2012 will definitely come under pressure. All the more so, with the ESRI projecting that the domestic economy will return to recession next year, all the domestic-demand components still in decline, and employment falling again with a resulting rise in unemployment. With the Government conceding that real wages will next year its hard to see in all this, how tax increases aimed for the most part at spending will give the lift needed to reach deficit targets.

Indeed, its worth noting by how much the Government missed the deficit target this year. Budget 2011 projected a deficit of -9.4%. The new Government introduced a number of revenue-neutral measures in the Jobs Initiative. And now the While Paper projects a deficit of -10.1%. The budget missed its target by about €1 billion. Will we need still another year of missing targets before we realise that austerity isn't working?

Kevin Barrett said...

Hi Sheila,
The White Paper assumes no changes in tax rates or expenditure programmes, essentially the opening position the Minister faces. So if he does nothing on income tax rates, credit etc he expects to take in an extra €1.2bn. This represents the full year impact of the measures announced in the 2011 budget (changes to bands and credits and the introduction of the USC) plus some buoyancy in receipts. Similarly the extra €30m predicted in VAT is based on no change in rates and the carry over from the reduction implemented in June. The November exchequer returns were €337m below target for the month which would indicate the opening position the Minister outlines is very optimistic.

Sheila Killian said...

hi Kevin,

Thanks for that. It's an interesting one, though, that increase in Income Taxes with no corresponding increase in spending on VATable goods. Given the plans to decrease public sector numbers, and the corresponding loss of Income Tax from those employments, it's really difficult to see where the buoyancy will come from