OECD Recommends Irish Income Tax, VAT Reform
The Organisation for Economic Cooperation and Development (OECD) has recommended that Ireland lower its high effective marginal income tax rates, abolish the reduced value-added tax (VAT) rate for the tourism industry, and phase in a planned Local Property Tax (LPT) hike.
The recommendations are made in the OECD’s latest Economic Survey of Ireland, released on September 15. Launching the report, OECD Secretary-General Angel Gurría said: “The economy is powering ahead. At 5.2 percent, Irish GDP was the fastest growing in the OECD in 2014. This year we expect growth of around five percent again – which would likely see Ireland remain the fastest growing economy in the OECD two years running!”
“This strong growth is making a big difference in people’s lives, allowing the social scars of the crisis to slowly heal. Having peaked at over 15 percent, unemployment has fallen below 10 percent, still above the OECD average (6.8 percent) but below euro area average (10.9 percent). Ireland is creating more than 1,000 jobs a week, most of them full time, and average earnings are picking up. Net emigration has fallen to a third of its 2012 peak as the labor market improves.”
“These successes owe much to the government’s steadfast commitment to reform. The banking system has been restructured and recapitalized, the fiscal deficit significantly reduced, government debt put on a declining path, public administration efficiency increased and public employment services revamped. Ireland is on the right path!”
In its report, the OECD said that the Irish Government could reduce effective marginal income tax rates at the lower end of the income distribution scale. This could be accomplished “in a broadly fiscally neutral way by introducing a third income tax band, lowering the bottom rates of the Universal Social Charge and reducing large tax credits.”
It also suggested that the Government consider scrapping the Special Assignee Relief Programme, a tax relief designed to assist multinational companies in attracting employees to Ireland. In its place, the Government could introduce deductions for expenses incurred in a relocation to Ireland, such as travel costs between the place of residence abroad and Ireland. The OECD said this reform would attract skilled employees without damaging the progressivity of the tax system.
The survey remarked that only a modest rise in the LPT rate “may be needed to generate a substantial increase in revenues from 2017 given rapidly rising house prices.” It argued that the Government should regularly update property valuations and ensure that the LPT remains directly linked to property values. However, because of the upward trend in house prices, the Government should consider phasing in the increase in the LPT over more than one year and introduce a low-income waiver to protect poorer households.
The OECD was also concerned about the impact of “expensive” measures such as the reduced nine percent VAT rate for the tourism industry. It recommended that this incentive be reconsidered in favor of lowering social charges or increasing direct employment subsidies.
