Higher taxes needed to fund future State spending, ESRI warns

Higher rates of income tax, VAT and property tax may be needed to fund future government spending, the Economic and Social Research Institute (ESRI) has warned.

In a new report, the think-tank said future spending pressures combined with potential declines in corporation and motor tax receipts were likely to result in higher taxes in the years ahead.

While increasing tax should be avoided until the economy has recovered from the pandemic, it said increases in income tax, VAT or the local property tax could “raise significant sums of revenue”.

Increasing the standard and higher rates of income tax by 1 percentage point – from 20 per cent to 21 per cent and from 40 per cent to 41 per cent respectively – would raise almost €1 billion a year, mostly from the top third of income earners, it said.

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In its programme for government agreed last year, the Coalition pledged not to touch income tax or universal social charge rates, while Fine Gael has promised to reduce the income tax burden on middle-income earners.

Alternatively, raising the standard and reduced rates of VAT by 1 percentage point could generate an additional €690 million per year, the ESRI said.

An extra €275 million could also be raised by bringing recently-built properties into the scope of the local property tax (LPT) and using updated valuations for properties. The LPT currently applies only to homes built before 2013.

While this could lead to sharp increases in tax liabilities incurred by some property owners, the Government could simultaneously increase the income limits below which one can defer the liability, the ESRI said.

In its report, the institute also highlighted the potential for raising revenue by abolishing certain tax reliefs linked to pensions and capital gains tax, some of which, it said, had “questionable economic rationale” or were poorly targeted.

It also singled the Government’s help-to-buy scheme, which provides tax rebates for first-time home buyers to help them get a deposit, suggesting many claimants already had the required deposit and were using it to buy above-average-price homes. The ESRI also examined the possibility of a wealth tax but concluded that one which exempted property would raise little revenue unless levied at very high rates.

Corporation tax

The ESRI’s report said the pressure on public spending was made “more pressing” by the exchequer’s increasingly reliance on volatile corporation tax receipts, which are heavily concentrated among just a small number of firms.

The planned shift towards electric vehicles also put at risk more than €3 billion per year of taxes related to motoring.

Such substantial, permanent increases in spending cannot – even at ultra-low interest rates – be sustainably financed through higher deficits, it said, but instead require either reductions in spending or increases in government revenue. While there is no political appetite to cut existing levels of spending, “it seems likely that there will be some need for sizeable tax increases in the years ahead,” it said.

"An aging population, commitments to future spending increases, and potential declines in both corporation and motor tax receipts made the need for significant future tax rises likely even before the pandemic," ESRI economist Barra Roantree said. "Increases in broad-based taxes on incomes, consumption and property may therefore be needed in the years ahead," he said.