Broad-based tax increases may be needed to fund future public spending

Increases in taxes on income, consumption and property may be needed to fund future public spending, according to new research published today by the ESRI. 

Future spending pressures combined with potential declines in corporation and motor tax receipts mean that significant future tax increases are likely to be needed in the years ahead. While these should be avoided until the economy has recovered from the pandemic, the research shows that increases to income tax, VAT or the Local Property Tax could raise significant sums of revenue.

For example:

• Increasing the standard and higher rates of income tax by 1 percentage point - from 20 per cent to 21 per cent and from 40 percent to 41 per cent respectively - would raise almost €1 billion per year, mostly from the highest-income third of households.
• Raising the standard and reduced rates of VAT by 1 percentage point would raise €690 million per year, mostly from the highest-income half of households.
• Charging the Local Property Tax on up to date (instead of historic) valuations as well as on owner-occupied properties built since 2013 (currently exempt) would raise €275 million per year, mostly from those who have seen substantial capital gains in recent years.

While a recurrent tax on wealth could raise substantial additional revenue, it would need to exempt few households or sources of wealth to do so. For example, given property makes up around 90 per cent of household wealth, a tax which exempted property would raise little unless levied at very high rates. There is more scope for raising taxes on transfers of wealth, with far fewer than half of deaths leading to an inheritance subject to Capital Acquisitions Tax (CAT).

The report also highlights the potential for raising revenue by restricting or abolishing tax reliefs, some of which have questionable economic rationale or are poorly targeted at achieving their stated aims. For example, Revenue estimate that €134 million was spent exempting pension lump-sums of up to €200,000 from tax in 2014. This is poorly targeted – mainly benefiting higher-earners – and encourages the withdrawal of large lump-sums on retirement, something hard to reconcile with the government’s goal of encouraging individuals to ensure a regular stream of income in retirement.

Dr. Barra Roantree, an economist at the ESRI and an author of the report, said:

“An aging population, commitments to future spending increases, and potential declines in both corporation and motor tax receipts made the need for significant future tax rises likely even before the pandemic. Increases in broad-based taxes on incomes, consumption and property may therefore be needed in the years ahead.”

Dr. Theano Kakoulidou, a post-doctoral fellow at the ESRI and another author of the report, said:

“Our research highlights the large number of anomalies that are present in the current tax system. Restricting reliefs or exemptions and equalising the tax treatment of income from different sources could raise revenue while addressing these anomalies.”