Tax hikes needed at all levels ‘to pay for pandemic expenses’ – ESRI
Tax increases at all levels will be needed to finance the rise in public spending, mainly due to the Covid-19 crisis.
According to the Institute for Economic and Social Research (ESRI), increases in income, consumption and property taxes may be the best way to generate income.
He said the government should consider raising income taxes, increasing value added tax (VAT) and charging more for property tax.
The ESRI report also looked at the taxation of lump sum pensions and a wealth tax.
He said future spending pressures, combined with potential declines in corporate and motor vehicle tax revenues, would mean significant future tax increases are likely to be needed in the years to come.
The report is likely to be highly controversial as the government has downplayed the prospect of tax hikes, especially on income, to cover the massive increase in spending related to the pandemic.
The Covid-19 crisis saw state spending drop from € 87.2 billion in 2019 to € 106 billion last year. It is expected to reach 109 billion euros this year, an increase of 25% compared to 2019.
Billions of euros have been spent on PUP payments for those who have been forced to work due to lockdowns and on wage subsidies and on financial support for businesses that have been affected by the restrictions.
Paying back the borrowed money to ease the financial burden of the pandemic will mean unpopular tax hikes will have to be considered, said ESRI economist and report co-author Barra Roantree.
Lowering the lower income tax rate from 20% to 21% and the upper rate from 40% to 41% could increase by almost € 1 billion per year, according to the report.
Raising income tax rates would mean that a person with € 45,000 would end up paying € 450 more per year.
A person with € 75,000 would pay an additional € 750 per year, assuming the thresholds remain the same, calculated for the Irish freelance by Marian Ryan from Taxback.com.
ESRI said an increase in the standard VAT rate of one percentage point from its current 23% should also be taken into account, which would increase Treasury yields by € 690 million per year. .
He specified that if the property tax was based on up-to-date values of homes and not on those of 2013, € 275 million could be raised.
Also included in this figure is the application of the tax on owner-occupied properties built since 2013, which are currently exempt.
ESRI economists said landowners had recorded substantial capital gains in recent years.
A wealth tax could generate considerable additional income, but households would need to be exempt from it, ESRI said, and a tax exempting property would rise little unless levied at very high rates.
Dr Roantree said there were more possibilities to increase taxes on wealth transfers.
The report found that far less than half of deaths lead to an inheritance subject to Acquisition Capital Tax (CAT).
He suggested increasing the (CAT) rate from 33% to 34% while reducing the tax exemption thresholds.
Another area suggested for increasing revenue is the removal of tax breaks, as there is a “questionable economic rationale” for many of them.
The abolition of the exemption from taxation of flat-rate pension amounts could bring in € 134 million.
“This is poorly targeted – mainly benefiting high earners – and encourages the withdrawal of large lump sums at retirement, which is difficult to reconcile with the government’s objective of encouraging individuals to ensure a steady stream of income at home. retirement, ”Dr Roantree and co-author Dr Theano Kakoulidou wrote.
No time frame has been recommended for implementing the hikes, but we probably need to raise more taxes over the next 10 years, Dr Roantree said.
An aging population, commitments to future spending increases, and potential declines in corporate and motor vehicle tax revenues made the need for significant future tax hikes likely, even before the pandemic.
“Increases in general taxes on income, consumption and property may therefore be needed in the years to come,” said Dr Roantree.
The report is likely to prove to be a drag for consumers, just as the country gradually moves away from the latest lockdown.
It comes as a separate KBC Bank study showed openness optimism has driven consumer sentiment to a two-year high.
The Consumer Confidence Index revealed an improvement in employment prospects reflecting expectations of a widespread return to work.
Consumers’ views on their household finances have also strengthened with the resumption of purchasing plans.
KBC economist Austin Hughes said the results suggest a healthy rather than “hot” rebound in our spending.