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Tax Expenditures in Ireland: Key Issues for Consideration

Paper Type: Free Essay Subject: Finance
Wordcount: 2269 words Published: 8th Feb 2020

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Tax Expenditure in Ireland

Tax expenditures have been broadly defined as the deductions, credits, exclusions, exemptions, and other tax preferences that represent departures from a “normal” tax code (Dept. of Finance, 2017). The government’s current strategy for growth sets out a number of principles concerning tax expenditures. It states that the government will support economic growth by widening the tax base by removing preferential tax treatment and increasing tax revenue. The tax system can only be used in certain cases where there are evident market failures. All expenditures must have a time-limit and are subject to the ex-ante evaluation. Tax relief reviews must also be carried out on regular basis[1]. However, the Irish government has several key issues when it comes to reviewing tax expenditures. The four main issues that this paper will examine are defining the benchmark system, costing tax expenditures, data accessibility and transparency, systematic review and evaluation. This paper will also look at the merits and demerits of tax expenditures and the evaluation of R&D Tax Credit review by Department of Finance.


Section 1: Defining the Benchmark System

In Ireland tax expenditures are set and costed in relation to the benchmark tax system. Tax expenditures are usually identified as allowances, rate reliefs, exemptions, credits and deferrals[2]. Whereas, the benchmark measures are usually anything that would be considered an essential part of the wider benchmark tax system and are not classified as tax expenditures e.g. reliefs, credits, exemptions, etc. Tax expenditures are formed when a measure causes the tax system to diverge from this benchmark. The interpretation of the benchmark system varies greatly across the jurisdiction, making international comparison very difficult. Due to this variation, there is lack of agreement in the Irish tax system regarding which measures should be included in the benchmark system. For example, the Revenue Commission had identified personal tax credits under cost of expenditures while the Department of Finance considers it to be part of the benchmark system. It is evident that both departments used different methods of approach and how they defined benchmark measures and expenditures. If the two parties agreed on exact definitions this would help to eliminate discrepancies and would allow for the creation of common list of benchmark measures and tax expenditures[3]. Having a specific benchmark would help the government to compare tax systems with regional and international set of norms and comparatives a lot easier.






Section 2: Costing Tax Expenditures

Tax expenditures are calculated in terms of revenue that is forgone, in relation to the benchmark tax system. There are three main methods that can measure tax expenditures. The first method would be the initial revenue loss, which measures how much tax revenue is reduced due to tax expenditure being present. This method considers that there is no behavioural change or interaction effects with other measures. The second approach is the final revenue loss method, which measures how much tax revenue is reduced due to the introduction of tax expenditures. This measure considers the change in behaviour and the effects on revenue from other taxes as a consequence of this introduction. The final method is the outlay equivalence, it estimates how much direct expenditure would be needed to achieve the same net income. The Department of Finance uses the initial revenue loss method for costing tax expenditures. However, this type of method has few disadvantages. It does not consider interactions with different tax expenditures and behavioural changes on behalf of the taxpayers. Therefore, it cannot be certain that the elimination of a tax expenditure will cause the revenue amount to be equal to the estimated cost of that tax expenditure[4]. The final revenue loss method might be more suited as it incorporates behavioural effects and different policy measures.


Section 3: Data Accessibility and Transparency

The European Union requires the member states to annually publish a report on the impact of tax expenditures on revenues. The Revenue Commissioners have the most extensive source of data on the cost of tax expenditures in Ireland. Since Budget 2016, the Department of Finance has been providing annual tax expenditure reports that show Ireland’s tax costings. However, there is great inconsistency between the two departments in defining tax expenditures, which makes it hard to conclude the exact total cost of expenditures in Ireland. The European Commission identified that out of the 19 European Union Member States that published documents relating to tax expenditures, Ireland was one of the seven that was found to be providing non-regular publications. Since then, Ireland has published a Report on Tax Expenditures for the past four consecutive years. There is no legislation that states that an annual review of tax expenditures must be carried out. However, it is evident that improvements should be made to the access, availability and transparency of data on tax expenditures. It has been recognised by the Parliamentary Budget Office that there is a need for balance between data transparency and the administrative weight that may take place on taxpayers. It is important to consider strengthening the data provided by the Revenue and the Department of Finance in relation to the cost of tax expenditures. In addition, it might be worth also considering annual publication of the aggregated cost of tax expenditure and estimated cost of expenditures for the year ahead[5].



Section 4: Systematic Review and Evaluation

Tax expenditures are evaluated by the Department of Finance in two ways by the Ex-Ante and Ex-Post evaluation. Ex-Ante evaluation takes place before the introduction of a tax expenditure. It addresses issues connected to the underlying reason for the intervention and it’s planning and design. While the Ex-Post evaluation is carried out after the scheme has been in running for number of years. It is mainly concerned with questions relating to the continuing relevance of the scheme and its impact. In the report of tax expenditures, the Commission on Taxation has identified 258 tax expenditures. However, only 241 tax expenditures have been reviewed and only 130 of them were recognised to be part of the benchmark system. In addition to this, some of the tax expenditures needed to be discontinued or modified. The Department of Finance has published annual reports on tax expenditures for the past few years, however some additional reviews are long overdue. For example, an evaluation of the Research and Development Tax Credit, CAT Agricultural Relief, Film Relief etc., are all reviews that should be carried in the coming year. A systematic approach might be the best option for the regular review of all tax expenditures. However, it is important to consider the current guidelines by the Department’s for tax expenditure evaluation. The systematic Ex-Ante review of all tax expenditures should be considered to evaluate their appropriateness and planned execution. While timed Ex-Post analysis should be used to evaluate their effectiveness and success in execution[6].

Section 5: The Merits and Demerits of Tax Expenditures

The merits of tax expenditures would be that they can help provide incentives to people and companies to achieve economic, fiscal or social goals. Tax expenditures can focus on specific sector and can reduce or even be abolished if needed. Demerits of tax expenditure would be the fact that their effect on the budget is less noticeable than of the normal expenditures as they receive very little systematic examination. Individuals that would be considered as low incomes earners would not benefit from the tax system as it is mainly aimed at those who have high tax liabilities and high incomes. Tax expenditures would be very hard to eliminate as the government would have very little incentive to end them[7].

Section 6: Evaluation of the Research & Development Tax Credit (2016)

The evaluation of the R&D tax credit (2016) from the Tax Expenditure Report is an example of ex-post evaluation carried out by the Department of Finance. The tax credit is calculated at 25% of the qualifying expenditures and helps to reduce company’s Corporation Tax. The R&D tax credit continues to be a relevant tax expenditure as it helps to stimulate innovation, which in return leads to productivity and long-run economic growth. This showed that the tax credit had a huge impact on new firms since it was brought in and even encouraged other firms to increase their level of R&D activities. This evaluation brought in a framework that helps to estimate the level of R&D activity that is expected in tax credit. This framework relies on corporation taxpayer’s data from the Revenue Commissioners, which is one of the most effective ways of evaluating tax expenditures. It was found that since 2009, the tax credit was responsible for 60% of the R&D carried out by the companies. However, about 40% of the R&D would have occurred regardless of the credit being brought in, which shows heavy burden is associated with it. Since corporation tax expenditure is open to all companies, certain amount of heavy burden is hard to avoid. This type of review is essential to present a detailed and evidence-based assessment of the R&D tax credit. Without evaluations occurring on regular bases, policymakers wouldn’t be able to determine if tax expenditures make a notable difference and represent value for money[8].


The Irish tax system should try and work on having a more defined benchmark system to prevent a cross-over of measures between the Department of Finance and the Revenue Commission to eliminate discrepancies. Having a specific benchmark would help the government have regular publications and have more accurate estimates of tax expenditures for the year ahead. They should review and evaluate existing and proposed tax expenditures to see if they need to be discontinued or modified to help increase fiscal space[9]. A systematic approach should be considered in a regular review of all tax expenditures. The government should also take into consideration an alternative method to estimate tax expenditures as the current forgone method has few underlying weaknesses[10].



[1] Dept. of Finance. Tax Expenditures Review, pg.2, 2017.

[2] Commission of Revenue, Cost of Tax Expenditures. 2018.

[3]  Parliamentary Budget Office. Tax Expenditures, pg.6, 2018.

[4] Parliamentary Budget Office. Tax Expenditures, pg.9, 2018.

[5] Parliamentary Budget Office. Tax Expenditures, pg.13, 2018.

[6] Parliamentary Budget Office. Tax Expenditures, pg.15, 2018.

[7] Dept. of Finance. Tax Expenditures Review, pg.3, 2017.

[8] Dept. of Finance. Tax Expenditures Review, pg.11, 2017.

[9] Dept. of Finance. Tax Expenditures Review, pg.13, 2017.

[10] Parliamentary Budget Office. Tax Expenditures, 2018.


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