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Pandemic effect on tax take was ‘muted’

A report from the Department of Finance says that the effect of COVID-19 on income tax receipts last year was “muted”, despite record levels of unemployment due to restrictions on economic activity.

In its Annual Taxation Report, the department also reiterates a warning about the “significant risk to the public finances” posed by the high proportion of total tax receipts coming from corporation tax.

It says that efforts to reform the international tax system are likely to knock at least €2 billion off tax receipts by 2025.

The report shows that total tax revenue fell by just 3.6% last year – compared with a fall of nearly one-third during the financial crisis.

‘Tax-poor’ sectors hit

The document attributes the relatively small drop to the resilience of income tax, which dropped by just 1%.

“While employment fell sharply last year, the shock to the labour market was concentrated in sectors that are relatively ‘tax-poor’,” the department says.

It adds that ‘tax-rich’ sectors that could adapt to a remote-working environment were largely insulated from significant impacts.

The report adds that the progressive nature of the income tax system also limited the impact of the pandemic on income tax receipts, as those at the lower end of the pay spectrum pay a relatively small share of overall income tax.

Spending taxes suffer

The department’s figures show that workers in the accommodation and food sectors accounted for 8% of all employees and just 1% of the tax paid in 2020, while those in the ICT sector made up 3% of all employees and 10% of total PAYE receipts.

Corporation tax hit a record €11.8 billion last year and now account for 20% of the total tax take – up from 12% a decade ago. The top ten largest firms accounted for just over half of all corporation tax revenue.

The pandemic impact was seen mostly on taxes related to consumer spending, with both VAT and excise duties recording steep declines during 2020, reflecting the effect of restrictions on personal spending.

VAT receipts fell by nearly 18% compared with 2019, while excise duties were down more than 8%.