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Your Take on Tax
Various Forms of Taxation
“The only difference between death and taxes is that death doesn’t get worse every time
Congress meets” – Will Rogers
The issue of taxation can be highly contentious. However, as tax is a certainty for individuals
and businesses, the main issue arising is in determining what makes a ‘good’ tax system. This
is the spark that ignites heated debates with various viewpoints. While discussing the
different taxes in Ireland, this essay will also highlight certain principles in the hope of
discovering what is important in a good tax system.
Personal income tax involves the government essentially coercing its citizens into funding its
expenditure by taking a share of the money they earn. The most objective principle of a good
tax system is simplicity, which ensures that the taxes are easy to understand. It allows people
to know what their earnings will be after tax and can plan accordingly. Ireland has three rates
of income tax – PRSI, USC and PAYE – which is not a very simple system. This is especially
true in comparison to places such as Hong Kong, which has a blanket rate of 15%.
Nevertheless, in Ireland everyone in regular employment must pay personal income tax.
While PAYE is the main income tax in Ireland, PRSI and USC are additional taxes on
income. The former relates to contributions into the national Social Insurance Fund which
supports pensions and welfare payments. The latter is a supplementary tax on income which
replaced both the income and health levy since 2011, to plug the hole in public revenues left
by vanishing stamp duties.
A good tax system should be equitable and so vertical equity is often at the forefront of
national discourse. This means that those with higher incomes should pay a proportionately
higher rate of income tax. A tax system that implements this is said to be progressive. A
report by the OECD found that Ireland had the most progressive income taxation system in
the EU and so it takes a larger percentage from high-income earners than it does from lowincome individuals. This system is structured by using tax bands whereby all income up to
the threshold of €33,800 is taxed at the rate of 20%, while income in excess of that is subject
to a rate of 40%.
Capital Acquisitions Tax is applied on gifts and inheritances. However there is a tax-free
threshold which is determined by your relationship with the testator/donor. Nevertheless there
are various reliefs available to individuals. One such relief under threat in the recent budget is
the exemption for dwelling houses which aims to protect individuals living in a house they
don’t own but are likely to inherit. This exemption is aimed at preventing a situation where
the family home has to be sold to fund the CAT. Notwithstanding, there are certain taxes
levied on residential property. For example, since The Finance Act 2013 an annual selfassessed Local Property Tax was introduced which charges all residential properties based on
their market value.
Capital Gains Tax is levied on profits made on the disposal of an asset. A disposal refers to
the transfer of ownership of the asset through exchange, gift or otherwise, such as the sale of
shares in a company. Individuals receive an annual exemption on the first €1,270 of capital
gains, while additional gains are taxed at 33%.
In considering this we must outline two important concepts. Tax incidence refers to the
division of the burden of a tax i.e. who actually pays for the tax in the form of a decrease in
economic welfare. The legal incidence is the market factor on whom the tax is imposed on by
law. The key point is that taxes can be shifted; taxes affect directly the prices of goods, which
affect quantities because of behavioural responses, which affect indirectly the price of other
goods. The statutory burden of a tax may not describe who really bears the tax. For example
many liberals favour this capital income tax because capital income is concentrated at the
high end of the income distribution. Taxing capital means taxing disproportionately the rich.
However, this argument neglects implicitly the general equilibrium price effects: if people
save less because of capital taxes, capital stock may go down driving also the wages down
and hurting workers. That is to say the capital tax might be shifted partly on workers.
Up until now we have been discussing what is known as direct taxation, where taxes are
levied directly on income or profits. However, not all taxes conform to this method; indirect
taxation is levied on the manufacture or sale of goods and services.
For example an excise duty is an indirect tax levied on goods in an attempt to deter their
consumption. In fact, Budget 2017 introduced a 50 cent increase on a packet of 20 cigarettes
with a pro-rata increase on other tobacco products.
VAT is a tax which is levied on consumer spending. However there are several different rates
which apply. Today, a rate of 23% is charged on many consumer goods whereas only 9% is
charged on the hospitality industry. Nonetheless many goods are exempt for obvious social
reasons such as children’s clothing.
Companies in Ireland are also burdened with VAT. This is paid on the value added at each
stage of production. Another tax that companies pay is a corporation tax, which is levied on
the profits earned by businesses. Ireland shares the lowest corporation tax in the EU with
Cyprus at a rate of 12.5%. However in 2017 the Hungarian government has pledged to
undercut this and offer a rate of 9%. Ireland’s low corporate tax helped to entice many
multinational companies such as Intel to locate their headquarters in Ireland.
Import duties are taxes which are levied on the import of goods. However, Ireland is a
member of the EU and one of the primary aims of such a union is to promote intracommunity trade without barriers. Therefore, in general, the EU works without borders and
without customs or import duties on its members. Nevertheless it operates as a single unit
with regard to imports outside of the European community and often applies a common rate.
This makes the imports artificially expensive and reduces their competitiveness.
Tax that benefits the economy
Excise duty is an indirect tax charged on the sale of a particular good. It is usually placed on
goods that are perceived as harmful to the consumer or society, such as alcoholic beverages,
tobacco products and mineral oils (for example petrol, diesel and kerosene). We believe that
there are two main aims behind this form of taxation. First and foremost, basic economic
theory states that as a good gets more expensive the consumer will demand less of it. In this
case, excise duties contribute to a significant proportion of the overall cost of a good.
Therefore, as excise duties increase the good becomes more expensive. How much less is
demanded depends on the price elasticity of the product in question. Addictive products such
as cigarettes tend to be inelastic as people are willing to pay more to satisfy the addiction, but
empirically an increase in price does cause consumption to decrease, even if not in proportion
to the price increase. This goes some way to achieving what is the overall aim of the measure
– to discourage consumption by requiring people to pay more for the harmful product. This
duty acts somewhat of a deterrent for college students in particular. For the most part, youths
cannot afford significant amounts of discretionary expenditure. Therefore, this means that
excise duties alcohol and cigarettes for example, can reduce the amount of these products
youths consume.
Secondly, products such as cigarettes and alcohol can cause social harm in society. It is
estimated that smoking kills 5,962 people annually. The estimated annual costs to healthcare
are €506 million. We believe that governments place excise duty on products with the aim of
eliminating this social harm. In order for the government to afford this level of public health
expenditure it needs to impose heavy duties in order to offset the expense. It is clear that the
Irish government is not afraid to continue to increase the duties on these products. In Budget
2017 the excise duty on a packet of 20 cigarettes was increased by 50 cent (including VAT)
with a pro-rata increase on other tobacco products. While we recognise that the source of the
excise duty revenue is predominately negative, in that it comes from either socially damaging
consumption tendencies, such as alcohol and tobacco, or environmentally damaging
consumption such as the utilisation of hydrocarbons, the duty goes to offset the negative
consequences of the activity.
In conclusion, the revenue raised from the duty funds social projects, which benefit society,
healthcare and education. The revenue, which contributes to healthcare, serves to directly
offset the damage caused by harmful consumption habits. Significantly, the contribution to
education can be a powerful tool in ensuring that the next generation of consumers are
dissuaded from making poor consumption choices regarding similar products.
Tax Relief Which Reduce Tax Burden
Deviating from the ordinary creates an extraordinary level of prosperity. Innovation is a key
requirement for businesses to maintain competitiveness and sustain themselves. Government
R&D tax credit incentivises businesses to take this innovative leap while also giving the
government the ability to channel research in a direction that complements key aspects of the
Irish economy.
This credit allows companies to offset 25% of their R&D expenses against their corporate tax
requirements. No small amount for companies seeking to gain a competitive edge in the
increasingly globalised world. The constant need to innovate can be seen in the
pharmaceutical industry. This industry is particularly important for Ireland as it accounts for
approximately 16% of Ireland's exports. Innovation and research, generated by R&D
incentives, can help diversify the scope and increase the volume of Ireland's pharmaceutical
exports. The additional value of these exports will aid the government's balance of payments.
This can then be used to offer more tax credits to innovative businesses or upgrade social
services.
Irish educational institutions also feel the implications for this tax credit. This is due to the
fact that it incentivises the outsourcing of research to universities.
Ultimately structuring the tax system in a way that rewards R&D will result in both social
and economic improvement.
Why a Career in Tax is Desirable
From reading about the work of Chartered Tax Advisors we understand that much of it
involves advising multinational companies on international business and tax matters so that
they can carry on their business in the most efficient way. A career in tax would undoubtedly
be intellectually challenging due to the dynamic business environment and because tax
regulation is not only complex, but it is constantly evolving. This combination would ensure
that every day is a new challenge which would provide us with opportunities to continuously
learn and develop.
Tax is such an important factor in all major business and economic decision-making. We
believe it would be interesting to work in a career that has such a profound impact on the
economy. Furthermore, from speaking to people who work in tax we understand that it is a
very fulfilling career with lots of opportunities to work in different sectors/industries.
Another exciting part of working in tax would be that it offers true global mobility. Many tax
advisors have the chance to work with prestigious clients in top international financial
centres. In fact, we are both curious and fascinated by the business environment and are
particularly interested in learning about business methods and procedures in different
cultures. This is one of the reasons we are seeking internship opportunities abroad in
countries such as Singapore. The opportunities to work in other major cities would
complement our global ambitions.