The Central Bank’s latest quarterly financial accounts report that Irish households are wealthier than they were during the boom. Broadly, this arises as house prices have gone up and debt has been paid down. However, most households will not be feeling the benefit of this wealth increase as in the 10 years since the crash, few individual taxpayers have seen an improvement on the very heavy tax burden they continue to bear.
There is a need to consider the impact the tax regime for individuals is having on our entrepreneurial culture, on international competiveness, incentivising people back into the workplace and on the housing market.
You have to ask the question why is Ireland the poster child once again in terms of its financial recovery. I believe the reason is because Ireland is driven by a deep-rooted entrepreneurial spirit. This is evident in the number of wonderful Irish business success stories we read about every day. Although how does our tax system reward our entrepreneurs? If you are self-employed you pay 3% more on your earned income than a person employed and earning the same amount. If you are fortunate enough having taken the risk of starting the business and creating employment and you successfully sell the business you are paying significant amounts in CGT as the current entrepreneur relief is inadequate. The Tax Strategy Group (“TSG”), a government “think tank” which makes recommendations for consideration as part of the budgetary process, has called for improvements to the relief. This has to be a priority in this Budget. In the Brexit era we need to encourage new businesses to start up and stay in Ireland. So the Government should start with two simple things – improve entrepreneurial relief and align the USC for self-employed income with the employed income rate.
From an international competitiveness point of view, whilst our top income tax rate is 40% - USC is the main factor driving up our marginal rates to 52% for all income over €70,000 and 55% for non-PAYE income over €100,000. These headline numbers have to be seen as a negative from an international competitiveness point of view. You have to remember that USC was brought in as a “blunt instrument” during the crash to “shore up” our finances. It is time to re-examine its presence in the tax system – it has been promised but it is taking too long. In the meantime, the TSG recommended reducing the USC’s highest rate of 8% on income over €70,000 plus and we would agree. However not forgetting also to align the self-employment income rate with the employment rate.
On income tax generally, it would be a positive move if the standard income tax rate band was increased thereby raising the entry point to the higher rate band – that would benefit all and may make us feel a little “wealthier”.
Any measures which have the effect of both reducing the tax burden and bringing the marginal rates closer to 50% or even below can only be seen as positive in terms of our competitive position globally and to assist people in re-joining the workforce.
Given the ongoing crisis in the private rental sector there may be scope for some measure to stimulate that sector and to increase the housing stock available for long-term letting. There has been a lot of discussion recently in relation to the negative impact of short-term lettings on the long-term rental stock. Whether there would be any targeted measures introduced in this regard, or simply a positive measure for landlords remains to be seen. It would however be helpful to fully restore the interest deductibility on loans taken out to purchase, improve or repair rented residential property. Currently the deduction is restricted to 85% and will be fully deductible by 2021. A further incentive may be to allow for a deduction of the ‘LPT’ (Local Property Tax) paid by landlords in respect of rented property, or the provision of a more favorable tax regime where landlords commit to longer term leases.
In the area of gift and inheritance tax, given the increasing values of property prices, and the significant curtailment of reliefs and exemptions (e.g. the dwelling house exemption is now almost obsolete) an increase in the tax-free thresholds should be forthcoming, in line with the measures included in the programme for government. Any increases are likely to be to the class ‘A’ threshold on gifts/inheritances between and parent and child. The programme for Government references restoration of this threshold to €500,000. While a restoration to this level would not be expected in a single Budget, some movement should occur as the current threshold of €310,000 is a long way off the Government objective.
The rate of capital gains tax remains high at 33%. It would be encouraging to see a reduction in the rate of CGT in this Budget. If you cast your mind back to the 1998 Budget when the CGT rate was halved form 40% to 20% - the move was seen as one of the most controversial of its time. However, it was designed to promote economic growth by encouraging people to dispose of assets which could be used more productively. The net effect was that the Government coffers benefited from the huge increase in revenue. Does the Government of today need to make a similar bold move? A reduction of the CGT rate should trigger an increase in the level of disposals with the costs of such a reduction somewhat offset by the increase in the number of such disposals. With so much wealth currently tied up in investments, any measure to assist/ encourage the release of such funds, which may be made available for investment in other areas of the economy would be welcome.
Significant reforms to the income tax regime are required. While the reforms by way of the merger of PRSI and USC have been announced, the pace of reform is slow. The ongoing high levels of personal taxation and the complexity of the system are certainly in need of attention - an indication of the likely timescale for change would be welcome. Ongoing high rates of CAT and CGT continue to affect the level of transfer of wealth, thus resulting in a significant amount of wealth being unavailable for investment into the wider economy and new business ventures
While no major changes are anticipated in the area of personal taxation, we would expect to see some adjustments to income tax/USC, as well as adjustments to the tax-free thresholds for gift/inheritance tax. An increase in the entry point to the higher rate of income tax would be one measure that might be expected, albeit the size of the increase may not be significant. Some measures for the private rental sector should be forthcoming, but at a minimum, we would expect the interest deduction on borrowings to be accelerated. A reduction in the CGT rate could have a positive impact. However, we will more likely see a measured reduction rather than a significant one.
Finally, as a Brexit proofing measure the stamp duty rate on shares could be reduced to 0.5% in line with the UK rate.