How to Increase the Tax Take

I am interested in the readership’s opinions on how to increase the tax take in ways that respect the advice of Jean Baptiste Colbert (1619-83), finance minister to Louis XIV: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

Ireland can learn much from the new Mirrlees Report in the UK that commissioned studies from the world’s leading tax experts. See the material here.

It is also interesting / entertaining to read about some novel taxation strategies: taxes that vary with age, gender and height at least do not suffer from moral hazard, since it is quite difficult to change these personal attributes!

Alberto Alesina’s propsal to condition tax rates on gender is explained here.

The logic of conditioning tax rates on age is explained in this post by Greg Mankiw.

His proposal to condition tax rates on height is explained here.

6 replies on “How to Increase the Tax Take”

My proposal: A selective inheritance tax, which taxes intestate estates at 100% over a certain minimum threshold (say, €10,000) for any decedent aged over, say, 50 years.

The tax does not apply to estates through testate, and is therefore designed to capture “unintended bequest” resulting from surplus precautionary savings of life-cycle consumers.

Anyone can avoid paying by simply writing a will, and those who do not bother clearly signal that they are happy to see their residual wealth subsumed by the Exchequer.

Since, as J.S. Mill wrote, inheritance is not a right, but bequest is, it respects fundamental property rights in a way no other tax does. It is equitable and efficient, and because intestacies must pass through Probate, the compliance and collection costs would be near-zero.

The only losers are nephews and neices who have neither the expectation of, nor the right to, such windfall money.

How much such a tax would net to the Revenue is unclear, since it’s never been tried. But my Masters work suggests it would be quite a bit more than people think, as such “accidental bequest” is a much more important reason for people not spending their money in old age than is commonly realised.

Using statistics I colleced from the Dublin Probate Office in 2004 for the year 1999, I estimate 13% of estates in that year went to beneficiaries intestate who were not the decedent’s children. These estates had an average sample value of £43,000 (€54,000). Based on an estimate of 25,000 probates a year, and in 2008 prices, this suggests a potential tax take of around €212m. That won’t fill the fiscal hole, but it’s something, anyway.

Of course, the best way to make new taxes palatable is to earmark them for something warm and fuzzy, so it could be used to offset funding cuts to the Arts etc.

Inheritances are in effect unearned income and the idea of allowing anyone to pass them on without suffering any tax is clearly not rational. For example a surviving spouse with say four children could transfer €25M without the estate suffering a single cent of CAT.

Business relief reduces the value of the business assets transferred by 90% and the value of assets held in a pension fund are exempt.

The basic child threshold for a business transfer is therefore inflated from 540K to 5.4M.

The Revenue in a paper examining “Small” Self Administered Pension Schemes, available on Dept. of Finance website, suggested that no more than 7% were being used for pension provision.

This is also without going into the relief granted around private residences. It strikes me as amazing that there is any CAT paid.

On the point raised by the previous contributor, the thresholds for distant relatives are very low and perhaps they are the only group currently paying any CAT.

We don’t need to be too innovative in order to fix the gross deficiency in tax revenue, and it may not be a good idea to wait around for an innovative solution.

At the end of the day the bulk of the urgently needed revenue recovery will have to come from the broad-based expenditure and income taxes on which we have always relied.

If we had not gone over-board in lowering these taxes in the last decade we could now be sitting on zero public debt and a manageable deficit. Rolling back the excessive reductions in these rates (and bands) will be the main course. Property and carbon taxes will be the soup — wholesome and good for the system but not very nourishing. Eliminating fat-cat tax breaks will be the dessert, delicious but not enough to survive on.

I’m all for additional innovative structural reform in the tax system, and times of crisis are good opportunities for implementing overdue reforms. But structural innovation should be done for efficiency and fairness reasons, not least because they can be problematical for raising revenue.

Well done Philip for raising a critical issue.

I am less sanguine than Patrick about raising income and expenditure tax rates. My reading of the evidence (nicely summarised in the Meghir and Phillips paper linked to above) is that raising marginal tax rates substantially from current levels would have a large efficiency cost.

There are good fairness-based reasons for concentrating the fiscal adjustment on higher income earners. I have no doubt these reasons will be well-represented in the political debate. Economists should play their conventional and typically thankless role as advocates for efficiency. (There are few ideas in economics quite as un-intuitive as the importance of the compensated elasticity of labour supply in the calculation of the deadweight loss of taxation.) This suggests an emphasis on broadening the tax base over raising marginal rates.

If you had a blank piece of paper to work from rather than trying to adjust the current system where would you go? Any votes for a solely consumption based tax system?

The psychology of people and how they behave when faced with our current financial crisis cannot be underestimated. However, it is underestimated all the time. At the moment, people are very angry about what is happening. Trying to dream up “painless ways to pluck the goose” i.e. tax the goose, totally ignores the fact, that the goose has a number of weapons at his/her disposal. These can be deployed and to a certain extent are being deployed already with devastating consequences. This collective cognitive behavior when acted out at the micro economic level soon impacts the macro environment. Painless, plucking of too many geese can actually lead to insolvency of the farm itself.

The geese invariably decide to become meaner as they are taxed more. They often feel they have been singled out. The feeling among the geese, is, that there is a misperception that they are handy targets for revenue. They respond by cutting discretionary spending to the bone. The multiplier gives their decisions an even more lethal effect and the government wonders why the extra revenues are not flowing in? Of course, the revenues do come in, but are counterbalanced by the above and some of the following.

The geese start to move their money out of the country and liquidity ratio’s have to be repaired again and again. They shop in other jurisdictions. They drive their cars less and hold on to them for longer. They postpone holidays and other purchasing decisions on furniture, hi-fi, computers etc etc.

There is a desperate attempt to pluck some more feathers. The geese decide to extract every benefit they can from a faltering system that is only interested in milking them of more revenue. They sign on, get medical cards, rent allowances, apply to have their mortgages paid by social welfare, etc. etc!

Philip, in short, there is no way, in the current situation, to conjure up painless tax increases. It is going to have to come from broadening the tax net and by getting the people who have traditionally avoided tax to pay taxes. The farmers, the bankers, entrepreneurs, developers anyone earning over a hundred thousand euro a year. Also, just to throw a spanner into the works. Do we really need people of sixty five and seventy years of age “retiring” with pensions that are indexed linked to 80% of the salaries they used to earn when they were young men and women? What about the old age pensions that our grandmothers lived on? Why the need for these huge pensions.? Youth, adolescence, maturity, old age, death!

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