A special savings scheme the Government plans to unveil on budget day could poke another hole in the Irish tax bucket that will benefit the wealthy at the expense of the State coffers, two economists will tell an Oireachtas committee today.
The personal investment account (PIA) regime, precise details of which are yet to be revealed, aims to incentivise Irish savers to move some of the €170 billion they hold on deposit into capital market investments.
Minister for Finance Simon Harris said in late March that the planned personal investment account regime will feature an annual flat-rate tax that is likely to be set in the budget later this year.
The Tánaiste said this flat rate of tax could potentially serve as the sole form of taxation on investments made through the new account.
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It is not yet clear whether investment gains, income or the entire fund over a certain threshold will be taxed under the scheme.
Based on the details that have emerged, however, the policy is likely to be regressive in nature, benefiting wealthier individuals and leaving people on the lowest incomes behind, the Oireachtas joint committee on finance will hear this afternoon.
If the Coalition adopts a model under which a zero or very low rate of tax is levied against investment income, the cost to the exchequer could represent “another hole in our tax base”, Enda Hargaden, assistant professor of economics at University College Dublin, will tell committee members.
In his opening statement, he is expected to say that tax expenditures of this sort already reduce the revenue the State collects “to the tune of €8 billion per year”, according to Department of Finance figures.
“The consensus among the economics profession, and of the Commission on Taxation and Welfare, is that the State should be reducing these holes in the bucket, not adding entirely new ones.”
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Hargaden will also say that the policy will be “regressive in the aggregate” because lower-income households will not be able to engage with the policy in a meaningful way.
Meanwhile, higher earners, “the sort of people who might have access to a pensions adviser, will take up this programme in very large numbers”.
Barra Roantree, assistant professor of economics at Trinity College Dublin, is expected to tell the committee that the Minister’s proposal to model the Irish scheme on the Swedish ISK system will mean the biggest gains accrue to high earners.
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The Swedish model is “understandably very popular” with beneficiaries, he will tell the committee, because they pay a sub-1 per cent tax rate on the value of their investments instead of income tax on dividends or capital gains tax on increases in the value of their account.
“In following this approach, the proposal would bestow the biggest tax break on investments with the highest returns, and would actually increase taxes on investments that yield a low or negative return,” Roantree will say in his opening statement.
“This is very difficult to justify in economic terms, given that high-return investments will generally be less responsive to taxation, and that there is good evidence showing that wealthy and high-ability investors are more likely to earn high returns.”
