John FitzGerald: It’s time to listen to the taxation commission

Ignoring the challenges of serving a growing and ageing population won’t make them go away

Prof Niamh Moloney speaking at launch of the Report of the Commission on Taxation and Welfare at Dublin City University in September. Photograph: PA
Prof Niamh Moloney speaking at launch of the Report of the Commission on Taxation and Welfare at Dublin City University in September. Photograph: PA

The Republic pays about 39 per cent of its national income in tax for our public services and welfare system, slightly lower than the EU average of 41 per cent. That average masks a range where Scandinavian countries tend to pay more for better services, while newer EU member states typically pay significantly less. The United Kingdom, with a tax take of about 36 per cent of national income, has a similar level to countries such as Poland and Slovakia.

Because a significant share of the State’s tax revenue comes from big corporation tax returns from a handful of firms, for ordinary citizens the tax burden feels lighter here than in our neighbouring EU countries and closer to the UK’s. However, we can’t rely on the tax bonanza from these companies continuing indefinitely. In future, we may need to replace any lost revenue with alternative taxes on consumers and domestic businesses.

Because the structure of the economy changes over time and the funding needs of the government also change, the tax system itself must evolve

Ireland’s population is growing rapidly, with a sharply rising share of older people. That means the tax take is going to have to rise to provide the additional public services we will need as the size and age structure of the population changes. It has been estimated by the Department of Finance that public spending will need to rise by about 3.3 per cent of national income by the end of the decade – an extra €7 billion – for extra age-related spending. We will need additional tax revenue to pay for pensions, health and social care for a rapidly growing elderly population. Keeping the pension age unchanged just makes that harder.

We will also need to spend a bigger share of national income to tackle climate change successfully. While the continued rise in carbon taxes will provide some of the needed money, other taxes will also need to rise to help pay for the necessary investment.

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In addition, moving to a universal free health service under Sláintecare, a project agreed by all political parties, will also mean paying more tax. Any other improvements in public services also need to be funded.

The Commission on Taxation and Welfare, which reported in September, was set up to look at the strategic challenges for our tax and welfare system, and of financing our public services over the medium term, given what is coming down the line.

While there was some initial pushback against one or two of the commission’s recommendations, the consistent and meticulous approach adopted means that the recommendations should continue to guide policy well into the 2030s. A series of gradual changes can enable the State to meet the coming financial challenges in a fiscally sustainable way.

This report builds on the work of earlier Commissions on Taxation in 1984 and 2009, and of the 1986 Commission on Social Welfare. This commission points to evidence that poorer people do worse under universal basic income schemes or the UK’s universal credit and argues against fundamental redesign of the welfare system.

The challenges of serving a growing and ageing population won’t go away if we ignore them

Because the structure of the economy changes over time and the funding needs of the government also change, the tax system itself must evolve. As previous commissions have done, this one recommends the broadest possible tax base, for example that pensioners and the self-employed would be charged PRSI in a manner consistent with the rest of the population.

A broader tax base reduces the risk that higher rates of tax could discourage employment or output. The commission recommends that the balance of taxation must shift away from taxes on labour and towards taxes on capital, wealth, and consumption. In particular, they say the revenue from local property tax, which is low by international standards, should be significantly increased, with no discretion for local authorities to reduce the rate. In the context of a housing crisis, it seems particularly appropriate that home and property owners should shoulder a bigger share of the cost of services for those who do not have their own home.

The commission’s chapter on the climate agenda endorses the steady increase in carbon taxes to reflect the environmental cost of emissions. As we move towards a mainly electric car fleet, tax revenues from petrol and diesel will shrink. To maintain revenue and provide appropriate incentives, the commission advises a range of other charges on road users, including congestion charges, duties on parking, and an equalisation of the excise on petrol and diesel.

The challenges of serving a growing and ageing population won’t go away if we ignore them. This important report spells out what kind of measures are needed to deal with what’s coming down the tracks in a fiscally sustainable way.