Comment: Our tax system is far from simple, and some features of it, notably VAT, are among the most complex in the world. Some complications arise from the never-ending race between business taxpayers and the Revenue Commissioners, but most exist because the legislators have chosen to design our taxes that way.
The most pervasive source of complexity is a desire to use taxes to reward behaviour we approve of, which sounds benign enough until we realise two things.
First, discriminatory tax concessions are often inequitable (or contribute much less to equity than we think), fail to produce the economic or social benefits we seek, may actually generate undesirable effects, or may be a straight waste of revenue since the desired behaviour would have happened anyway.
Second, complexity can have substantial costs, both to compliant taxpayers and to the tax collectors who have to police the fine distinctions.
Let us look at a mere handful of examples. A simple income tax would treat equally all receipts which increase a taxpayer's ability to spend or save, regardless of the source or form of the receipt and regardless of what he/she does with the income.
Our income tax is far from simple by this criterion. A wage increase will often attract tax at 42 per cent, but bank interest pays (through DIRT) only 20 per cent, as do capital gains. Contributions to pension schemes are tax free.
These features give more benefit the richer you are since interest receipts, capital gains and pension contributions all rise as total income rises.
Why do we have these concessions? Private pension schemes benefit those who are not satisfied with the level of the PRSI pension, which means the richer. Why are taxpayers as a whole expected to subsidise such people? Probably most who want this supplement to their PRSI pension would contribute anyway and there is no evidence that total savings are increased as a result.
In any case, why would we want total savings to increase? When the rate on capital gains was reduced from 40 to 20 per cent, it was claimed that this would encourage investment but there was no evidence at all that investment was inhibited by the higher tax rate, which was already lower than that applying to most wage increases.
We have had all sorts of schemes offering favourable tax treatment to investments in town centres, seaside bungalows, private clinics, car parks and other things. Such investments offer no benefit to society other than to the investor and if they would not be undertaken in the absence of a tax break, we would be better off without them.
Now, how about VAT? A simple tax would zero-rate only exports, would exempt almost nothing, and would apply a single rate to everything else.
Lots of countries have a VAT like this, which makes collection simple, but our tax is quite different. Over 120 countries have a VAT, but we and the British are the only ones who zero-rate almost all food, plus children's clothing.
The typical supermarket would have to work with at least three separate rates. Some of the distinctions are just comical: digestive biscuits pay one rate but chocolate digestives pay another; circuses and fairgrounds pay different rates; and so on. The complexity is claimed to contribute to equity, but it does much less than most think.
If we had a simple tax like that just described, with a rate of 14 per cent giving the same revenue as at present, the very slight effects on equity could be offset by tiny changes in income tax or social welfare benefits.
We wrap the green flag round us when the EU suggests that we tax children's shoes, but in fact rich households spend more of their budgets on this item than do the poor, and for everyone, rich or poor, the impact of taxation would be trivial.
Why does any of this matter? Concessions lose revenue: either the favoured activity would have taken place anyway, or the concession diverts resources away from activities that would pay full tax. So, the rest of us have to pay higher taxes as a result.
In most cases, society at large gains nothing from this discrimination and some discriminatory features have obviously undesirable effects (mortgage interest relief and the absence of rates certainly contribute to high house prices).
Complexity makes taxes easier to evade, invites consultants to devise avoidance schemes and greatly increases the cost of collection.
With all the weeping and gnashing of teeth over the DIRT scandal, few noticed that it would not have happened if non-resident accounts were treated the same as resident accounts, which is what many countries with DIRT-type taxes do.
Finally, complexity is inequitable in itself since those who can afford professional advice are in a better position to take advantage of that complexity than those who cannot.
We would lose little and gain a great deal if we simplified our taxes, removing the myriad distinctions and special concessions that pervade the existing system.
John Bristow is Emeritus Fellow and Associate Professor of Economics, Trinity College. His book Taxation in Ireland: an Economist's Perspective was published this week by the Institute of Public Administration.
