Leading Economist

Transfer tax burden away from income and towards land and property - leading economist

Ireland's tax system was designed for an environment that no longer exists and it needs to be dramatically overhauled, a leading economist has suggested in his first ever address to business leaders in Waterford.

"Our economy will continue to struggle until we transfer the tax burden away from income,” according to Dr. Constantin Gurdgiev, Head of Research for St. Columbanus AG, and Adjunct Lecturer in Finance with Trinity College, Dublin.

"The tax burden on income has rocketed from close to 29% in 2007 to 40.55% in 2011".

Dr. Gurdgiev also believes that increasing income taxes inevitably leads to leakage from the Irish tax system as it forces businesses, entrepreneurs and the self-employed either offshore or into the black and grey economy.

He made his comments, in his first ever address in Waterford, to an 'Ireland's Crises: The Way Forward' breakfast briefing hosted by leading accountancy firm, MK Brazil. It drew business people from across Waterford and the South East and was exceptionally well received.

"It isn't feasible to continue to increase the tax burden on a diminishing number of taxpayers. In addition, reduced earnings have had a domino effect, stifling productivity and motivation, reducing consumption, reducing long-term savings, diminishing the potential investment pool and creating a lower ability to deleverage," Dr Gurdgiev said.

Dr. Gurdgiev examined and contrasted the average income of different categories of people over recent years to illustrate the impact increasing taxes has on households and thus on the wider economy. He feels that a move away from earnings-based taxes towards a land-based tax needs to be considered, but cautioned against taxing buildings as it could discourage value-adding and productive activities.

"Taxing productivity also leads to the loss of talent and intellectual capital as people move abroad, and these things are not easily recovered. We need to encourage people to stay here and, while Ireland rates well in terms of facilitating start-up business, improvements can still be made in practical areas like access to credit and opening protected sectors, such as energy, healthcare, education, to competition and business creation.”

He also spoke about the urgent need to address the issue of debt forgiveness. "It is nonsense to argue that effects of excessive debt can be dealt with through normal trading out or that negative equity only affects people when they sell their property. We need to start getting serious about the debt overhang stifling Irish businesses and Irish households and be honest about the impact it has on our economy and society.”

Dr. Gurdgiev dismissed the moral hazard argument and explained: "People make mistakes, that is what people do, and unfortunately the current system allows one bad investment mistake to undo years of hard work. It is futile and counter-productive to punish people for being human.”

MK Brazil is one of the most progressive business advisory and accounting firms in the South East providing an array of financial and taxation services to a wide-range of clients. The firm is also very active in a representative capacity and Dr. Gurdgiev praised MK Brazil for the work the firm had done, especially in relation to the income levy and USC.

Brendan Twohig, Tax Direct with MK Brazil, also spoke about the Irish tax system and in particular the changes to Revenue's Monitoring activities over the years."There were over 557,000 Revenue interventions last year, compared to a circa 113,000 in 2005. Obviously increases in Revenue inspections at a time when the number of tax-payers is falling inevitably means that businesses can expect a greater level of scrutiny going forward. We'll also see a continued move away from traditional monitoring activities such as Revenue Audits.

"For example, the Revenue carried out 225 streetscape operations last year which involves unannounced 'drop-in' visits and spot checks on businesses. One interesting aspect of these visits was that the Revenue discovered 435 cases of employees being paid 'under the counter'.”

Brendan cautioned against such practices as "the risks and sanctions can be quite severe and often such practices stem from a mis-understanding of the tax and social welfare systems.”

Brendan explained that many of the problems that typically arise in Revenue Inspections are avoidable. "Many problems stem from cash-flow difficulties or simple disorganisation rather than dishonesty. Our advice to businesses is to get advice and to get it early - the tax system is very much geared towards helping people who confront their problems.”