TAX SURVEY Taxpayers willing to pay the price

THE SUNDAY BUSINESS POST JUNE 14 2009 n15 1 TAX SURVEY Taxpayers willing to pay the price Tax measures in the recent budget have increased our marginal tax rate. Now shifting the emphasis to the spending side of the equation is critically important ne of the more surprising findings i n our survey is the level of ac ceptance of the personal tax increases in the April budget. While the recent election results indicate that the budget was deeply unpopular, our survey suggests that people are willing to pay higher taxes ^ provided the money is wisely spent.The best evidence of this is the relatively high acceptance of the need to raise taxes during the current crisis, with 54 per cent of respondents saying they accepted that the supple me ntar y budg et t a x increases were necessary to address the economic difficulties. But it is clear that taxpayers expect this additional tax contribution to be put to good use. The poll shows they expect it to be used to help resolve our economic difficulties, with 50 per cent saying they would like some of it to be used to fund new employment initiatives. Another surprising finding of the survey relates to public perception of the burden of income tax in Ireland. In 2006, the last time the Irish Taxation Institute National Tax Survey was conducted, 53 per cent of respondents felt the personal tax burden in Ireland was high compared with the rest of Eur- O Jim Ryan ope.That figure has dropped to 50 per cent in the 2009 survey, even though we’ve seen significant increases in taxation in the two emergency budgets in October 2008 and April 2009. In fact, the reality is quite different. Some 18 per cent of respondents to our 2009 poll correctly hold the view that our income tax burden is typically lower than the rest of Europe (again, surprisingly, an increase from the 11 per cent result in 2006). Prior to October 2008, the personal tax burden in Ireland was quite low in terms of the Organisation for Economic Cooperation Development (OECD) average. While the tax burden has increased in the wake of the recent changes, the tax burden in In correcting our public finances, we must return to low taxes on labour and a simple and well-understood personal tax system TONY O’SHEA Ireland is sti l l b elow the OECD average. In fact, despite recent budget tax hikes, Ireland ^ along with New Zealand, Korea and Mexico ^ has one of the lowest tax burdens in the industrialised world, according to figures from the OECD. Benefits, such as child benefit, appear to be the most generous in the OECD, whose figures show that an Irish couple with two children earning an average wage were paying the lowest tax rate in the world, because of the amount paid through child benefits. However, our consumption taxes, such as Vat and excise, were proved to be high by international standards. Following the recent increases, our marginal tax rate is now quite high, and it is important that we monitor this key rate. The marginal rate refers to the amount of tax paid on every additional euro of income earned. It is important to recognise the tipping point in the marginal rate of tax and levies for all taxpayers, beyond which the entrepreneur’s drive to earn further profits, or the employee’s drive to earn further income, will be eroded. Going beyond the tipping point could become a serious disincentive to economic activity, productivity and recovery. Shifting the emphasis to the spending side of the equation is critically important to ensure our productivity is maintained and increased, and our international competitive position is improved. The survey shows a gap in understanding among taxpayers regarding the calculation of the various levies, the income levies and the health lev y. The increased levies, along with the change in mortgage interest relief, were the two major policy changes announced in April ^ and there is still confusion among many taxpayers as to how these are calculated and applied. The Irish Taxation Institute is of the view that, while the levies are an unfortunate but necessary short-term solution, they should not become a permanent feature of our system. In correcting our public finances, we must return to low taxes on labour and a simple and well-understood personal tax system. While our survey shows that the majority of taxpayers understand the ‘bottom line’ impact of the budget changes on their take-home pay, they do not understand how this bottom line is calculated. How could they be expected to? As it stands, we are currently dealing with a raft of income tax rates, income levies, health levies and PRSI. Some employers may shortly also be expected to administer a complex car park levy. The upshot of all this is a hugely confusing system of taxation, not only for taxpayers but also for the business community ^ which is exp e c te d to ad m i n ister the system for firms and employees.The complicated nature of the new levies is placing an unnecessary burden on businesses at a time when they need all the help and support they can get from the government. It is also increasing the workload of the Revenue, which is most unhelpful at this point, since the more time Revenue has to spend on added complexity on the collection side of the house, the less time it has to devote to processing claims and refunds, and providing support to viable businesses struggling to pay their taxes on time. At all levels, taxpayers should rightfully expect the unwieldy system to be simplified, in the interests both of clarity and transparency ^ two elements that should be key to the way in which taxes are collected in any modern economy. Our survey also shows that taxpayers are focused on what might be contained in the next budget, and are anticipating the possibility that even more will have to be done to address the deficit in the public finances. Against that backdrop, it is interesting to note that over 60 per cent of respondents are bracing themselves for the introduction of a property tax, most likely in the next budget, although only 40 per cent would prefer to pay this tax rather than face higher income tax. Minister for Finance Brian Lenihan has already signalled that there is no room for further increases in personal taxation, and the IrishTaxation Institute agrees that it could be detrimental to impose such increases, on the basis of the tip- ping point in the marginal rate and the potential impact on external competitiveness. In our small and extremely open economy, competitiveness is vital. Overtaxing the productive side of the economy could further stall its recovery. Therefore, taxpayers are probably correct to assume that, in addition to cuts in public spending, a property tax is the much more likely option. If there is a need to increase taxes further then, from a competitive point of view, the introduction of a property tax would certainly be a less harmful, if not a very popular, option. The IrishTaxation Institute’s position is that, if a property tax is to be introduced, it should have the following key features: & It should be simple to under- stand and administer. & It should be based on ability to pay. & Anyone who bought their home in recent years, at the height of the property boom, is probably servicing a large mortgage and has already paid very high stamp duty rates. In the interest of fairness, some form of credit should be allowed to avoid overburdening these taxpayers. & Any new property tax must be accompanied by a reduction in stamp duty rates on residential and commercial properties. Again, we need to avoid penal double tax on the same asset. & A ny new prop erty ta x should be introduced on a phased basis and after appropriate consultation with relevant stakeholders to ensure its smooth implementation. On the subject of pensions, the message from the survey is unequivocal. Do not remove the tax relief on pension contributions, as this will result in a cessation or reduction in contributions. Over half of all employed adults would be likely to stop or reduce their personal pension contributions if tax relief on these payments were removed. If this were to come to pass, it would place a huge additional burden on the state coffers in years to come. Now is not the time to remove assistance to taxpayers to fund their own pensions. The very reason for giving tax relief on pensions is that the money is inaccessible for such a long period. We must maintain a strongly supportive regime that not only encourages people who are already paying into pension funds to continue making these payments, but also encourages many more taxpayers to do so. The government has worked very hard to promote the need for people to invest in their future retirement plan. It needs to stay focused on this policy for the long term ^ to be diverted from this could be catastrophic to future generations, who would be left carrying the can. Jim Ryan is president of the Irish Taxation Institute Red C poll method 1,000 interviews were conducted by phone using a random digit dial sample to ensure all households, including ex-directory, were covered. The research covered those who are full-time or part-time employees or self-employed. The survey was conducted between June 1 and 3, 2009. n14 THE SUNDAY BUSINESS POST 1 JUNE 14 2009 TAX SURVEY Fine-tuning the tax system for all There has been an improvement in people’s understanding of personal tax issues Mark Redmond I n 2006, the IrishTaxation Institute, in association with The Sunday Business Post, conducted the first national tax opinion poll of Ireland’s PAYE taxpayers. That poll, conducted at the height of our economic boom, showed that a large number of PAYE taxpayers did not understand how the tax system worked. They did not understand their most basic entitlements under the tax code and how to claim them. It was clear that PAYE taxpayers were overpaying taxes by significant amounts, and addressing this became a national priority. In the subsequent budget, then finance minister Brian Cowen promised: ‘‘The government is determined to make it easier for ordinary taxpayers to claim and receive their rightful entitlements.’’ The Oireachtas Committee on Finance and the Public Service issued a special report on the issue in 2007. Our second national poll, conducted earlier this month and published today, shows that things have improved. It shows that 5 per cent more PAYE taxpayers now say they are claiming their tax entitlements in relation to medical expenses and service charges. Three out of every ten taxpayers have used the Revenue’s online PAYE refund service, and six out of ten believe it is now easier to claim back their tax refunds. Importantly, 63 per cent of PAYE taxpayers say they understand how the tax system affects them ^ a 5 per cent improvement in three years. PAYE taxpayers also realise that they should actively manage their tax affairs ^ their tax bill is probably the biggest bill they will ever pay, so demands far more scrutiny and checking than credit card or utility bills ^ especially as it is often overstated. Now 19 per cent of PAYE taxpayers use a tax adviser to help them manage their tax affairs, compared with 7 per cent three years ago. But we still have more to do.Two out of every five taxpayers still do not understand basic documents relating to tax, including their payslip and P60. Half of all taxpayers are still unsure of all their entitlements and the deadlines for claiming them. Credit is due to the Revenue and the tax profession for taking up the challenge, and recognising the need to promote greater understanding among taxpayers in the three years since our first national poll. However, there’s a lot more work to be done in this regard, and it is needed now more than ever. While over 60 per cent of respondents claim to understand the PAYE system in this country, this still leaves almost 40 per cent of taxpayers lacking understanding. This equates to a sizeable section of the population who may be overpaying tax, underclaiming refunds or not claiming them at all. Worryingly, one-third of respondents said they left everything up to their employer when it came to both tax and claiming reliefs, suggesting that they were neither taking control of nor actively managing their tax affairs. On top of that, as a result of the October budget and the emergency budget in April, we are experiencing significant changes to our personal taxation system, and that’s all the more reason to deliver clarity and understanding of the system to all taxpayers. All taxpayers need to understand the system and make it work for them.The Revenue and the tax profession have been working hard to address the information gap in recent years, but must step up the effort to make the system more accessible to the ordinary taxpayer, and ensure fairness across the board. The government and the Revenue should continue their efforts to simplify the tax system Tax survey: key findings & Almost two-thirds claim to understand the PAYE tax system ^ slightly more than in 2006. & Females aged 18-24 are more confident than males when it comes to understanding the PAYE tax system. & One-third claim to leave everything to their employer when it comes to tax and reliefs which they can claim. & Almost two in five are not confident they understand all the information on their certificate of tax credits and standard rate cut-off point ^ very similar to 2006. & The 18-24 and 65-plus age groups are less likely to understand all the information on their certificate of tax credits and standard rate cut-off point and how tax credits work, as well as the tax information on their P60. & Over two-thirds claim to understand their pay slip following the supplementary budget; however, over half do not understand how income and health levies are calculated. & Those aged 18-24 and 65-plus are more likely to disagree with certain statements about the recent budget and impact it has had on their tax. & Half of all taxpayers believe that Ireland has a high tax burden.This is down from 2006, despite the significant increases in personal tax since that time. & Although more than half agree that the supplementary budget tax increases were necessary to address the economic difficulties, a slightly lower proportion believe the current tax rates are fair in the current environment. & There is mixed acceptance of the supplementary budget tax increases.Those aged 18-24 and 65-plus are more likely to agree with the justification for taxes. & While more people are now claiming the reliefs they are due, more than two in five do not claim tax relief on refuse charges, and a similar proportion do not know the time limit to claim a relief/refund. & Six in ten agree that the process of claiming tax is now easier.The Revenue’s online service to claim tax relief is used by almost four in ten. There is uncertainty as to whether it now takes longer to receive a tax refund than it used to. & Six in ten believe that a new annual property tax will be introduced in the next budget. More than half of our sample would not prefer a property tax to further tax income increases. & Lower social classes are more likely to believe that a new property tax will be introduced in the next budget. & Over half of all employed adults would like to stop or reduce their pension contributions if tax relief on these payments is removed. & The standard rate of tax is seen as the fairest tax today. Opinion on the income levy sees an even split on whether it is a fair or unfair tax. The system has become complicated, with an array of taxes and levies now imposed on taxpayers. Against that backdrop, two things should be introduced without delay. A customer charter for the PAYE taxpayer which explains the system in an accessible manner and undertakes to meet certain criteria on behalf of the taxpayer should be introduced, along with a taxpayer advocate, with a focus on promoting ^ and defending ^ the rights of the ordinary taxpayer. Unlike other jurisdictions, we do not have a tax advocate in Ireland who could independently assess the position of taxpayers who are dissatisfied with the treatment they have received from the Revenue. While internal and external processes exist for taxpayers to challenge Revenue decisions, these are limited in scope and accountability. An independent taxpayer advocate would ensure that the rights of individual taxpayers were protected, and that they were entitled to a swift, cost-free administrative appeals mechanism if they felt their rights were being infringed ^ something taxpayers have every right to expect. The role could also include evaluating the fairness and efficiency of our tax administration at a systemic level, with appropriate reporting and recommendations for change to the Oireachtas. When it comes to tax and the taxpayer, we have to assume that the system appears opaque and inaccessible, and we must consistently seek ways to break down this perception. It is unfair to place the onus of ‘discovery’, as it were, on citizens. All of us, as taxpayers, should expect to be kept informed, in an open and active manner, of the details of the system. Furthermore,we would like to see the government and the Revenue continue their efforts to simplify the system for the ordinary taxpayer, with the active support of the tax profession. This means a radical reform of our personal tax code to phase out the plethora of levies ^ all with different rules and rates. It means an easily understood and proportionate tax burden on employment. It means a swift and clear provision of information and processing of refunds with protective over- sight provided by a taxpayers’ advocate. Our tax system has undergone major reform in the past year ^ more substantial reform will come in the next two years. For these reforms to work and be accepted, they must be understood by the most important and largest group of stakeholders in the system ^ PAYE taxpayers. The Irish Taxation Institute National Taxpayer Poll tells us the views and priorities of these stakeholders ^ they deserve to have them addressed. Mark Redmond is chief executive of the Irish Taxation Institute Six in ten agree that the process of claiming tax is now easier. Almost four in ten use the Revenue online service. There is uncertainty whether it now takes longer to receive a tax refund than it used to.