14th September 2022: The Irish SME Association (ISME) has expressed concern at the Commission on Taxation and Welfare report that has been issued today. ISME’s greatest concern about the Commission on Taxation and Welfare report is that its only or overriding brief is the acquisition of further revenue, while at the same time the Exchequer appears to be incapable of securing efficient and effective expenditure of State revenues.
According to ISME, the Department of Public Expenditure and Reform must become far more activist in securing value for money for citizens and must re-establish the “reform” element of its mandate.
The Commission was set up in June 2021, and its mission was to consider “how best the taxation and welfare systems can support economic activity and promote increased employment and prosperity, while ensuring that there are sufficient resources available to meet the costs of public services and supports in the medium and longer term.”
The Organisation for Economic Co-operation and Development (OECD) has noted the decline in Ireland’s level of self-employment. It has estimated Ireland has up to 115,000 ‘missing entrepreneurs’; 90% of whom are women; one third are 50+ years old; and one third are immigrants. Ireland has twice as many business creators as the EU average yet has declining self-employment. It does not appear that the Commission has considered any strategy to address this issue. While the Commission is nominally committed to the concept of “equity,” its proposal to increase Class S PRSI means that a self-employed worker earning the same amount of pay as a PAYE worker will take home less pay.
The Commission’s proposals to reform of the R&D Credit, the KEEP and EII schemes are welcome and long overdue, and should be actioned in Budget 2023.
We welcome the proposal to replace commercial rates with a site value tax; this has been an ISME policy position for many years.
We welcome the fact that the Commission calls for an end to the inequitable 3% USC surcharge on high-earning self-employed people. ISME calls for this levy to be extended to all workers earning over €100,000.
The Commission’s proposal to levy a small PRSI charge on all income is wise, and aligns with ISME’s policy to seeking a 2% rate of PRSI on weekly earnings up to €440 per week and a 6% PRSI rate on marginal earnings above €440 pw. The change would increase the take-home pay for all full-time workers earning less than €880 per week.
The Commission’s proposal to levy PRSI on share-based remuneration makes little sense when that form of remuneration is so little used in Ireland- but should be increased.
The current DIRT rate of 35% is very high. The Commission proposes to increase it to the marginal taxation rate plus USC, which would increase it to 51% for high-earning self-employed persons. This is nonsensical.
While the Commission states that “anomalies in the tax treatment of different retirement arrangements should be eliminated, as far as possible,” it makes no recommendations to tackle the discriminatory treatment of private sector pension savers, undermining its commitment to equity.
ISME supports the proposal to “ensure that adequate evaluation data on tax expenditures is collected,” but wishes to see the imputed value of public sector pension contributions included in this dataset. Given that the State’s Accrued Liability in respect of retirement benefits for current and former public service employees is estimated at €149.6bn (as at 31st December 2018), this is actually the single largest tax expenditure in Ireland.
The Commission’s proposals on VAT ignore the fact that our standard rate is already very high by international standards, and is a key component in Ireland consistently maintaining second place (behind Denmark) in maintaining the most expensive consumer prices in the EU.
While the Commission’s proposal to extend Entrepreneur Relief to angel investors, the restructuring of CGT to include “capital gains arising during a lifetime” is novel, but will also increase what are already high capital gains liabilities by international standards. Our 33% CGT rate is relatively high, and we believe an inverse relationship between rate and yield has been evident for some time.
Neil McDonnell added: “The proposal to impose a higher rate of PRSI on the self-employed would seem to run counter to any strategy to increase entrepreneurship in Ireland. It ignores the fact that self-employed and PAYE workers both pay 4% PRSI into the social fund.
We have seen that taxes strongly influence behaviour. The tax treatment of landlords has reduced the supply of rental accommodation in Ireland by 97% over the last 10 years. The cost of housing was the most serious social issue until energy prices started to rise, yet there are no proposals to encourage the provision of more rental accommodation at a time when it is running out.
Private medical insurance is subsidising and holding up what is already a poorly managed and badly performing health service. One has to wonder, therefore, at the wisdom of the proposal to end tax relief on health insurance.
Regarding inheritance taxes, Ireland’s inheritance, estate, and gift tax revenues were the seventh highest in the OECD study. Ireland’s chargeable rate of 33% is relatively high, and the tax threshold of €335,000 is relatively low by international standards. With the national average house price at €337,000[i], and parental property already providing the asset backing for tens of thousands of seniors in the Fair Deal scheme, it seems most unwise to increase our inheritance taxes in Ireland.
Given the paucity of business IPOs/listings in Ireland relative to our European peers, it is amazing that there is not a single reference to this in the 547 pages of the full report. This is a major source of potential wealth for Irish workers that is being ignored. Furthermore, there are no proposals to tackle the anomaly whereby distributions as part of management buy-outs in Ireland are subject to income tax rather than CGT. This ensures that disposals of domestic businesses are usually to third parties, mainly with foreign management.
Neil McDonnell, CEO of ISME said: “Taxation and social welfare policies are powerful levers in shaping strategy to make our country a better, more affordable, and more sustainable society to live in. Unfortunately, we must note our failure to discern such a strategy in this report from the Commission on Taxation and Welfare. The interests of businesses, large and small, and economic prosperity more broadly, have not been well served by this Commission. Its greater focus appears to be on more taxation for “the usual suspects,” without meaningful consideration of the wider economy or indeed its own mission statement. We therefore consider the Commission’s report an missed opportunity.”