Speech
Irish Tax Institute Seminar: Report of the Commission on Taxation and Welfare - 'The practical implications’
By: Minister for Finance;
Published on
Last updated on
By: Minister for Finance;
Published on
Last updated on
Check against delivery
Good morning everyone,
I would like to begin by thanking the Irish Tax Institute President, Colm Browne and all the other speakers and participants who are attending this morning’s seminar on the Report of the Commission on Taxation and Welfare and I want to thank Colm for inviting me to speak at this event.
In Washington DC, the Internal Revenue Service Building has an inscription above the main entrance which reads, "Taxes are what we pay for a civilized society."
It is this sentiment of a civilised society and a need to carefully plan for the future that led this government to establish the Commission on Taxation and Welfare in 2021.
At the outset, Ireland has one of the most progressive taxation and welfare systems among advanced economies. Those who earn or have the most, pay the most. We also have a tax system that is transparent and competitive for business, promoting employment and prosperity. While we look to adjusting our taxation and welfare systems over the medium and long term, we must not forget that we are starting from a good position.
The Commission on Taxation and Welfare was tasked with a wide ranging and challenging Terms of Reference which enabled them to consider how best the taxation and welfare systems can support economic activity and promote increased employment and prosperity, while also ensuring that there are sufficient resources available to meet the costs of public services.
The Commission delivered their report, “Foundations for the Future”, to Government in September last year. In it, the Commission considered how the overall balance of taxation might shift in order to fund vital public services in a sustainable manner over the longer-term.
At its heart, the report has made a range of recommendations aimed at improving the sustainability of the taxation and welfare systems in order to support public services that people rely on over the medium and long term.
While the report presents a balanced package of reform proposals aimed at addressing some of the medium to long term challenges facing the State, many of the recommendations are clearly difficult to achieve and, as is acknowledged in the report, come at a demanding time economically.
The priority of this government, in the last number of years, has been firmly focused on helping businesses and households through both the pandemic and more recently, the cost of living pressures arising out of the war in Ukraine.
Notwithstanding this challenging backdrop, this government has taken action to implement key parts of this important Report and will continue to consider these proposals further over the coming years.
Events like this one today enable us to consider the recommendations in detail and to tease out the various consequences of different courses of action.
They provide a useful platform to explore how the Commission recommendations might be implemented in practice and in a manner that best supports long term fiscal sustainability.
While the Irish economy has been transformed over the past three decades, this success cannot be taken for granted. It is important to promote investment and growth in indigenous enterprise, while also attracting Foreign Direct Investment.
While our current models of taxation and welfare have served us well in the past, constraints exist around how the burden of taxation might reasonably fall over the longer term particularly in light of emerging challenges.
Similarly, we will have to work hard to continue the social progress that we have made over the past number of years, and that will depend on the provision of adequate social welfare payments, high levels of labour force participation, and a progressive and fair system of taxation.
This Commission was the first to be tasked with looking at both the tax and welfare systems together for that very reason.
We have all seen over the course of the pandemic how crucial both the tax and welfare systems have been in supporting families and businesses that have been so badly affected by the public health measures that had to be taken.
Through its important work, the Commission has brought into focus the substantial fiscal risks that are facing the State over the medium term. Ireland’s demographic profile is aging, we have a high level of public debt, and we need to fund the climate transition.
Commission members were clear in their view that due to these risks, the total amount of taxation required to fund public services will need increase in the years ahead and new sources of additional taxation will need to be considered.
As well as these identifiable risks on the horizon, it seems that major unknown economic shocks are becoming increasingly regular.
Over the last decade-and-a-half, the Irish economy has been hit by the impacts of the global financial crisis, the COVID-19 pandemic and now, the Russian invasion of Ukraine.
This underscores the importance of building sufficient fiscal buffers in order to use budgetary policy in a pro-active, counter-cyclical manner to react to future economic shocks and stabilise the public finances in light of future challenges.
The return of a budget surplus last year following the mobilisation of substantial resources to support households and firms during the pandemic, was very welcome. However, this does not tell the full story.
Indeed, there is strong evidence to suggest that the headline fiscal position flatters the underlying situation. For example, there is considerable uncertainty around how much of the recent level shift in corporate tax receipts is permanent. To this point, analysis by my department suggests that over €10 billion of last year’s corporation tax receipts may be windfall in nature and potentially at risk.
This places an ever greater emphasis on the need to build fiscal buffers and on the future of the National Reserve Fund and safeguard the sustainability of the taxation system.
Therefore, there are important choices that will need to be made and that we as a society must consider carefully, and it will foster real debate around how we reform our taxation and welfare systems over the longer term to adapt to this rapidly changing environment. These are not easy choices; however this longer term focus is key.
As is recognised in the report, it is not expected or realistic to think that all the Commission recommendations would be implemented all at once. Rather, the Commission is clear that the recommendations are made in the expectation that detailed planning, cross departmental collaboration and coordination, and distributional impact analysis will be required as necessary changes are phased in over time.
The government has already started work on a number of key aspects of the Commission’s report. As signalled in Budget 2023, the government is committed to a review of the personal tax system.
As the largest annual source of revenue for the Exchequer, income taxes make a significant contribution to our public finances. Equally, the personal tax system has an important role in supporting a competitive economy.
The review will take account of the recent report from the Commission on Taxation and Welfare and consider a range of personal taxation issues.
I recently launched a public consultation and I invite interested stakeholders to provide their views on the personal tax system. As always, I welcome all feedback in relation to those proposals.
The Commission also published a number of recommendations on the taxation of investment products and on Real Estate Investment Trusts (REIT), Irish Real Estate Funds (IREF) and section 110 companies. That is why we intend to commence a review of these areas.
These are important issues and it is timely for Government to review the effectiveness of existing approaches to these regimes and the taxation of different types of investment products more generally.
I know these are issues that are of interest to attendees here this morning, officials in my department are currently finalising the parameters for these reviews, and stakeholder consultations will be a feature of the reviews, as they progress.
The Commission also made a number of clear recommendations in the area of tax expenditures.
My department is currently working on updating the Guidelines for Tax Expenditure Evaluation, with particular focus on the recommendations set out in chapter 16 of the Commission’s report. The updated guidelines will feed into the analysis undertaken in the annual report on tax expenditures which is typically published with the Budget papers every year.
I know that some of the discussions later this morning will focus specifically on the area of capital taxes and the recommendations made by the Commission across both CGT and CAT. Many of the recommendations made would require significant changes to existing approaches and will require careful consideration.
The impacts on business and investment of the Commission’s recommendations must be fully taken into consideration before any changes are made. We must ensure that Ireland remains a competitive location for investment in our SMEs.
It is important to consider the context in which the Commission made those recommendations.
In considering the balance of tax across earned income, consumption and wealth, the Commission concluded that the yield across Capital Gains Tax, Capital Acquisitions Tax and taxes on land and property, should increase and that reforms to these taxes should take place before consideration is given to introducing a tax on net wealth.
While my department will consider the Commission’s recommendations in the context of the continuous monitoring of these reliefs, I do not intend to bring forward substantial changes as proposed by the Commission.
While my position on these issues are clear, they are important debates to be had and future decisions will need to be taken around how sufficient tax revenue can be raised in fair and equitable way in the longer term and in a manner that has the least distortive impact on the economy.
I would like to finish up this morning by reiterating a point I made at the Institute’s annual dinner recently.
Here in Ireland we have significant number of tax measures to encourage investment in our economy and in particular our indigenous SMEs. Schemes such as the EIIS, KEEP, the R&D tax credit and CGT Entrepreneurial Relief are all very important measures in this respect.
The Commission had a very detailed and valuable chapter on Promoting Enterprise and many of these measures are touched upon.
It is critical that we have a strong, viable and creative indigenous enterprise sector. We know that multinationals play a huge role both in terms of employment and tax receipts. But we cannot be complacent and we cannot assume that this will continue. It is for that reason that we need to constantly assess our tax system to ensure that it is competitive both for multinationals and more importantly in my view indigenous SMEs.
I want to again assure you that I am committed to taking a fresh look at all the enterprise tax measures on the table.
As Minister for Finance, I want to ensure that we are unlocking their full potential by encouraging more investment and growth and I would very much welcome all your feedback on these matters that are critical to our economic competitiveness.
Those of us in Government will have many complex choices and decisions to make in the years ahead. It is essential that those decisions protect the Irish economy and society as a whole.
I am grateful to the Commission on Taxation and Welfare for providing us with a rich report that will undoubtedly inform many key decisions across both the tax and welfare systems for years to come.
Events like today and further analysis and insight from you, tax practitioners, on the practical implications of those recommendations will help to enrich and enhance that work and make a key contribution towards making those future hard decisions. I wish you well with that work and I am confident that we are more than capable of rising to the challenges ahead.
Thank you.