Tax Expenditures

11/10/2005

Tax Expenditures

Tim Callan, John Walsh, Kieran Coleman (ESRI)
Embargo: 00:01 Tuesday 11 October 2005

Official studies have shown that some top earners pay little or no tax because of their extensive use of certain tax relief schemes. Does this mean that a "minimum tax" is needed, to ensure that everyone pays some minimum level of tax? Or is this an indication that "tax expenditures" - special breaks in the tax system which are, in effect, a hidden form of government expenditure - need to be more carefully controlled? A new study suggests that a new approach to such tax expenditures is needed in Ireland.

• First, proposals for new reliefs should have to pass all the tests currently posed for expenditure proposals, and then an additional one: why use a tax expenditure rather than a direct expenditure? The transparency of direct expenditures should mean that they are usually favoured over tax breaks.
• Second, a more systematic and regular review of the costs and benefits of tax expenditures is needed. Best international practice, as identified by the World Bank, includes regular annual reports on the costs and benefits of tax expenditures.
• Third, the objective of obtaining some minimum payment from high income taxpayers does not require the introduction of a US-style minimum tax. The same objective can be achieved with less impact on ordinary taxpayers by imposing restrictions on the reliefs
• Fourth, there are still a number of tax reliefs which are allowed at the taxpayerýs marginal rate. Analysis shows that the aggregate benefit from mortgage interest relief, which is allowed only at the standard rate of tax, is concentrated on better-off taxpayers. Reliefs allowable at the top rate (such as pension contributions) are further skewed towards high income earners. A reexamination of such reliefs to see if there may be more efficient ways of achieving their objectives is also warranted.