The standard rate of income tax may still be 20 per cent, but it is moving to 30 per cent and maybe even 35 per cent as it was many years ago. Capital gains tax, gift tax and inheritance tax moved to 30 per cent in the Budget.
Even the domicile tax moved to 30 per cent for well-heeled Irish people who moved their tax base abroad. In spite of what the Government says, the rate of tax on income is increasing and will continue to do so. While the Government refuses to bring expenditure under control, we can only borrow or tax our way forward. National debt spiralled out of control in the last three years to pay back foreign banks that refuse to accept their losses.
The real standard rate of tax is already at 27 per cent and the top rate of tax at 48 per cent when the universal social charge (USC) is added. The income tax system is inefficient. It always has been, in spite of the fact that net receipts reached €47.5bn in 2007. In 2010, net receipts were less than €32bn and they are about €34bn for 2011. We are €13.5bn down in revenue from its peak in 2007.
Next year the Department of Social Protection alone is expected to spend over €20bn. When we had the money in 2007 it was only €15.3bn. Something has to give. The Government wants to keep the standard rate of tax for companies at 12.5 per cent. The rich will not be taxed in case they relocate. Capital transactions, which are few and far between, will give rise to losses that will generate no revenue. These budget initiatives will not increase tax revenue while consumer confidence is depressed. It was a giveaway Budget for speculators who have the money to invest. Who else would risk it?
If the Government sticks to its policy it will have no option but to increase income tax and VAT again. Corporation tax may be treated as sacrosanct, but the EU sees it as discriminatory. The Government has not done enough to secure it for the future. Its refusal to consider any change may be foolhardy. Discriminatory or not, we need it to support employment. But while the EU demands fiscal restraint, it will not tolerate Ireland's claims to special treatment. It will only be retained if the Government gets the money elsewhere. It won't be easy and that is why we see new taxes.
Corporation tax peaked in 2006 at nearly €6.7bn. This year and next it is likely to be little more than half of that (€3.7bn). Meanwhile income tax is higher than it ever was due to austerity measures directed at a shrinking workforce. It yielded €14.17bn at its peak in 2005. In 2011 it will be about €13.8bn and €15bn is budgeted for 2012. The last Government created a time bomb and the current one can't defuse it.
The standard rate has already moved to 30 per cent for capital taxes and income tax is not far off when the seven per cent USC is taken into account (27 per cent combined rate). That suggests another three per cent may be in store. The USC was a desperate measure by a desperate government in a time of crisis. It applies to gross income and eliminates uncertainty in yield that arises when special incentives apply. Further cuts in tax relief for pensions and existing property-based incentives may have been postponed, but not abandoned.
The only income tax incentive that has real government support is mortgage interest relief. It should be renamed moral hazard tax as it is highly discriminatory, it is expensive to provide and it rewards those who don't need it as much as it does the needy.
While mortgage interest relief is sacrosanct, nothing else is. Tax relief for health expenses was already cut to the standard rate (20 per cent) in 2009. As public spending on healthcare comes under increasing pressure, tax relief may come under the knife. If the USC was treated as part of normal income tax, the standard rate would be 27 per cent and the leakage to tax relief would be higher. It's no longer a matter of will the relief be taken away. The question is when.
Tax relief for private health insurance is given at source, which disguises the real cost. Fewer people can afford to pay even with tax relief. Sooner or later the Government will realise this and it will cut tax relief too. Greedy insurers may have recognised this already, as they increase their charges. Doctors and hospital consultants continue to hold the balance of power.
Doctors occupy an elite class. Based on EU policy, their services are already exempt from VAT. So they are excluded from the two per cent increase that others must absorb. That's a 23 per cent tax that they avoid altogether. While there are compelling reasons to treat healthcare as exempt, there are cases where it may be appropriate to charge. The important question is who benefits. Should it be the patient, or the medical practitioner? The income tax system could help restore fairness and equity if this is missing. As governments seek certainty, tax simplification may result in less discrimination and a convergence of tax.
Stamp duty will generate €1.4bn in 2011 and again in 2012. But that is only because it includes nearly €500m a year from the levy on private pension funds. Stamp duty peaked at €3.6bn in 2006. There is a shortfall of over €2bn that must be made up. The new €100 tax on homes will yield €160m. The Government wants at least 10 times that and the charge will rise. As transactions rise again it is likely stamp duty will too.
Local authorities that place an enormous burden on the Sate must be funded if they are not rationalised. The plan before the election was to apply a charge when property was sold. Its rate and method of calculation is still unknown. Hopefully it will go no further, but if it is shelved, the money must come from somewhere else. Councils have become overly dependent on business rates. There may be no option but the reintroduction of rates on residential property.
Meanwhile, we have the temporary household charge, the threatened property tax, and, almost certainly, a water tax to come.
While motor tax was cut for a short time, it is rising again. The lack of consumer demand has seen the tax yield from VAT and VRT dwindle. Even the increase in the VAT rate won't cover what we lost. The VAT yield peaked in 2005 at €15.6bn. In 2012 it won't reach €10bn. While the Government's jobs initiative cut the reduced rate from 13.5 per cent to nine per cent for some services, the rest continue to be taxed at 13.5 per cent.
We can have two reduced VAT rates under EU law, but there is nothing stopping the Government from increasing the rate for services charged at 13.5 per cent.
We are not collecting enough tax to bridge the gap between revenue and expenditure. Desperate measures will ensue. A tax system that could rely on self-assessment in the good times is now useless. Better financial profiling would help avoid welfare fraud and tax evasion. Tax hikes are inevitable as the recession deepens and spending is out of control.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning.