Tax and Community

Address by Revenue Chairman, Frank Daly, to the The 9th Annual C ifin Community Conference
"Freedom: Licence or Liberty? Engaging with a transforming Ireland"
8th November 2006.

Introduction

Good morning everybody and thank you for the invitation to speak here today. This audience, I suspect, is somewhat different to the congregations of tax practitioners, accountants and assorted financial experts who usually have to listen to me!

Just to make one point initially. I am giving a personal view today, so while you may certainly take it that this view influences my approach as Chairman of Revenue and as a public servant, I don't wish to put it forward to you as official Revenue - still less Government - policy. Please bear in mind also that I am a fulltime Civil Servant - and have hopes to remain so for at least another little while!

A transforming Ireland - a transforming Revenue

I am very taken with the title of this year's conference and particularly with the concept of "engaging with a transforming Ireland" because this indeed is a very good description of what Revenue now does every day. Over the past few years we have been transforming ourselves to deal with the new Ireland and the particular challenges this has brought. I like to think we have been responsive and quick to adapt but by no means would I claim that we are perfect or that there is not more we could have done or not more that we have to do.

[There is a wider debate to be had sometime perhaps about the way in which the public service as a whole in this country has involved itself in the transforming Ireland and whether it has been a leader, driver, onlooker or follower - but that's not for today.]

A "transforming Ireland" of course will mean different things to different people and will pose different challenges for different organisations and sectors. For Revenue the challenges have focused around a booming economy, an extraordinary increase in our business (and therefore our workload), managing wealth (from a tax aspect), changing work patterns, the new "techie" Ireland, a changing workforce and different expectations (often lifestyle influenced) of citizens and our own staff.

For example:

The number of self assessed taxpayers increased by 45,000 in 2005 compared to the previous year. In the same period the number of PAYE employments increased by 135,000. These increases are more than maintained to date in 2006 and recent reports talk of over 15,000 new businesses registered in Ireland since last January.
There is increased complexity in the cases we deal with (more people have shares, investment income, rental income and so on), and,
There is a new challenge of dealing with the vibrant multicultural society that Ireland is fast becoming - in practical terms giving extra support to those whose first language is not English and who are not familiar with the Irish tax system.

These factors (and they are only a few examples) mirror exactly Harry Bohan's apt depiction of: "an economy registering unparalled growth, a rising population buoyed by an enriching emigrant community" We in Revenue experience the reality of that description every day because Revenue, what Revenue does and how Revenue does it, connects with and impacts extensively every day on our economy and our community.

Funding Government

Government funding comes from taxes - for a very long time now! You can go back as far as ancient Rome or start with Pitt's introduction of income tax in 1799 or Gladstones' extension of this to Ireland in 1853 - wherever you start taxation is now accepted as the means by which Government provides for the public good. Tax generates almost all of the finance necessary to provide services, to develop infrastructure, to provide security and so on. It also, in most modern societies, has become a tool through which Government seeks to develop the economy, redistribute resources to the less well off and to influence behaviour positively - as for example with tax incentives to encourage certain types of development or negatively -as for example to wean people away from using plastic bags or smoking.

Although it should be unnecessary therefore to say it, taxation is not for the Revenue, it's not even for the Government - it's ultimately for the people, for the community.

This year over 94% of the resources that the Irish Government will spend will come from central tax revenues, duties and levies - the monies gathered by the organisation which I represent. This makes all of us in Revenue very aware of the importance of what we do and acutely aware that what we do is ultimately for the benefit of the community. In fact, without an awareness of that wider dimension, tax collection for me (indeed my job) would be a rather sterile affair. It becomes a totally different matter when I focus on what tax will be used for:

Perhaps to ease the lot of somebody on social welfare,
Perhaps to dignify the final days of somebody who is ill and can't afford private healthcare;
Perhaps to give a break to some carer by providing respite care for a loved one;
Perhaps to rehabilitate a prisoner and give him or her another chance
To make our communities safer
To develop depressed and rundown parts of our country
To provide development aid to a struggling nation
To encourage inward investment and provide good jobs for more people
To help welcome and integrate our new people from abroad
To support the individuals and groups who give so much of their time and effort voluntarily in education, sport, and other caring initiatives.

I could go on with this list - and no doubt you could add to it. Suffice to say that this is what makes the job I do worthwhile and I know it has the same resonance with my colleagues in Revenue. It's no accident that Revenue's Mission Statement begins with the words: "To serve the Communityby fairly and efficiently collecting taxes and duties and implementing import and export controls".

[I'm conscious of course also of the additional contribution we make through our Customs service to keeping society protected from drugs but that's for another day - our focus here today is on tax.]

Influencing the way we do things

The bottom line for Revenue then, indeed our primary business goal, is to collect the taxes and duties that are due and ensure that those who owe them, pay them. This is not just what Government requires of us. It is also what the community requires of us so that resources can be deployed and redirected for the benefit of all. It is also what individuals and individual businesses require of us so that they can be assured that they are being treated fairly compared to neighbours, colleagues or competitors.

Revenue's whole approach to administering the tax system has been well articulated in recent years - it is a combination of what we call the "soft" and "hard" approaches.

The "soft" approach encourages voluntary compliance by working to make it as easy as possible for people to pay their liabilities through quality and accessible services for taxpayers. We have done a lot in that area in recent years with on-line service, information provision and by becoming a more open and approachable organisation. We have more to do and take it from me we keep working on this every day.

The "hard" approach on the other hand is to provide a sharp and uncompromising response where there is non-compliance. Whether you believe it or not, this is not our favourite activity but it is, unfortunately, a necessity. It comprises activities such as audit, compliance visits, enforcement and of course special investigations. As far as I am concerned it is part of the unwritten contract we have with those taxpayers who pay their share - the deal is that if you pay then we will tackle those who do not.

There has never been a greater commitment or focus on this by Revenue and this focus will continue. Our ideal of course would be to see the need for the "hard" approach diminish as more and more people pay their share voluntarily - we are making encouraging progress towards this ideal but there's still quite a way to go.

The legacy of the past

Whatever about engaging with the present and preparing for the future the harsh reality is that we are still busy confronting the past. The legacy of widespread institutionalised tax evasion which came to light in recent years is deplorable. I'll leave to you and others to consider the lost opportunities and think about "what might have been" if Ireland inc had access to the hundreds of millions in revenues that were evaded over a couple of depressed decades. What an opportunity cost indeed!

What have become known then as the 'Legacy investigations' have been a major work item for Revenue. We have regarded it as a challenge and an opportunity.

The challenge lay in how we responded to the revelations. If we were not clearly seen to vigorously pursue these frauds how could we ever look compliant taxpayers in the eye and ask them to continue their voluntarily compliance? The culture of non-compliance would be seen to be rewarded and hopes of promoting a culture of tax compliance in this country set back enormously.

The opportunitylay in convincing people, by our response, that Revenue would not tolerate evasion, that time would not diminish our determination to pursue it, that we had the powers, the resources and the will to follow through - that we would keep our part of the deal with compliant taxpayers.

I know there have been some who did not fully support Revenue's determination to pursue these legacy cases - arguing that this was all in the past and that we should leave it there; arguing that it was wrong to pursue people now for old debts and liabilities; pointing out that in some cases payment of these liabilities was creating hardship.

They argued that it was not fair.

As far as Revenue is concerned however there could never be the option of walking away from this systemic and widespread evasion - in our view that is what would not have been fair - and in Revenue we're committed to treating all taxpayers fairly - it's the very first commitment we make in our Mission Statement: " To serve the community by fairly and efficiently collecting taxes and duties and implementing import and export controls".

Fairness - legacy investigations

This matter of fairness is interesting and indeed apposite in any discussion on tax and community. Fairness is a fundamental value for us and I'd like to talk about it for just a minute - firstly in regard to the legacy investigations and then more generally in regard to the wider tax system.

To those who say that it's unfair to pursue taxpayers who engaged in tax evasion twenty years ago I would respond - ok, I understand where you're coming from but I need to ask you these questions "What about fairness for the honest citizen? What about fairness for those who struggled every week to pay their taxes? What about fairness for those who struggled to keep businesses going in the face of unequal competition subsidised by tax evasion? What about fairness for those who may have been deprived of better services because tax revenues were not what they ought to have been during those years?

Obviously I have a particular view of the answers.

Most of you will know by now that Revenue has collected over €2.2 billion from these legacy investigations and there is more to come. But I've often emphasised that these investigations were never about money alone - they are about something much more important.

These investigations, the revelations behind them, the publicity that attended them and the demonstrated determination of Revenue not to ignore evasion by any sector or individual, have proved to be key drivers in promoting a growing public intolerance of tax evasion and an increasing public awareness of tax obligations. I have no doubt that they have also contributed to some restoration of belief in the fairness of our tax system.

Fairness

By now you may sense that I have a bit of a thing about fairness in the tax system - I certainly hope so! So let me for a few minutes to talk about it in a broader sense than just the legacy investigations.

For a start my preoccupation with fairness in the tax system is not just because all of 230 years ago Adam Smith listed equity or fairness as the first of his four Canons of Taxation nor is it that I'm any more paranoid than your average Irishmen about paying for their round when it comes to my turn.

I'm sure some of my preoccupation with fairness comes from the fact that like most Irish people I have an inbuilt sense of fairness and fair play. But mainly my preoccupation with fairness in the tax system stems from my role and from a clear belief after 40 years in the Revenue service that if our tax system is not fair, and perceived to be fair, then our goal of a tax compliant society will never be realised.

The ideal as far as I'm concerned is a tax system in Ireland that is resonant with fairness.

What does that mean? Do we have it?

A fair tax structure

To answer this we need to deal with two aspects - the basicstructure (a matter largely for Government) and the administration of the system (a matter largely for Revenue). Needless to say as a Civil Servant I'm much more comfortable talking about the latter rather then the former!

In discussing structure the debate will inevitably deal with the political policies and choices that determine the shape of our tax system - matters like the relative contribution of direct and indirect tax, whether stamp duty is properly structured, whether we should have more taxes on property, whether we should have more or less local taxation and the like. There will be strong views about the place of tax incentives in a tax system. There will views that these are likely to be of most benefit to the better off - sometimes conveniently forgetting the considerable benefit for the community at large of the outcomes (we have plenty of examples of these in the modern Ireland). These are essentially political choices - like everybody else in this audience I have strong personal views on these matters but it would certainly be inappropriate for me to comment publicly - I'll leave it to the body politic.

However, leaving aside the individual political choices that shape our tax system, I would expect and am quite prepared to say publicly that a tax structure "resonant with fairness" would at least contain these fundamentals:

Be based on classical principles which define a good tax system - equity, simplicity, transparency - treat people largely on the basis of their ability to pay but take equally from those with equal means;
Require an overall "tax contribution" that is reasonable and seen to be so. International comparisons will be relevant here as will relative levels of state intervention in different societies - material for another fine debate!;
Be required and used by government for productive, responsible and acceptable purposes - including as a tool of economic and social development
Be responsive and adaptable to the elimination of any abuses or unintended inequities as they are identified. Tax is complex and it's unrealistic to expect that any system can be totally immune to abuse or unintended effects - the important point is that these are constantly searched for and promptly eliminated.
Evaluating our present tax system by reference to those fundamentals, I am confident that in Ireland we are in the right space. We can be satisfied, but should not be complacent, about the basic fairness of the structure of our system. In particular I would argue (because it's an area we in Revenue have some responsibility for) that we now have a system that is responsive to searching out and dealing with abuses and to identifying and neutralising unintended effects. One example relates to the unintended effect of the aggregation of reliefs and incentives which enabled small numbers of relatively well off people to either eliminate their tax contribution or reduce it to unacceptable levels. This effect, as revealed in Revenue's series of Top 400 taxpayer surveys, certainly did little to help the perception of fairness in our tax system. The last Budget sought to deal with this and introduced what is in effect a minimum effective tax rate for high wealth individuals. We should of course remind ourselves - because we cannot be selective in applying our standards of "fairness" - that not so long ago we needed the impact of those incentives and the money of those investors to help rebuild our economy and get it to the "booming" stage that is underlying the theme of this Conference today.

A fair tax administration?

What then about the administration of the system - is that "resonant with fairness" today? Well that is certainly directly in my sphere of responsibility. Some of the fundamentals for fairness here will be:

That Revenue deals with all taxpayers equally and without fear or favour
That we administer the law consistently and reasonably
That we treat everybody courteously, in a non-discriminatory way, and that we preserve confidentiality
That we make everybody aware of their entitlements, give them every assistance with their tax affairs and expect and encourage them to pay no more than they should
That we are an open and accountable organisation
That we have open and easily accessible mechanisms for complaint and review
That we are relentless in our pursuit of those who do not comply

Many of you may recognise some of these as ingredients of our Customer Charter.

I'm sure everybody here will have a view as to how we measure up to these standards.

I would hope for a general acceptance that we have the right attitude, the right approach and a strong commitment to these fundamentals of fairness.

I would hope for an acceptance that we work hard at delivering what's necessary and that we are getting better at this every day. I certainly assure you that, insofar as we are not yet where we would like to be, it is not down to any lack of will or commitment - but perhaps sometimes the day to day struggle of managing a complex system, a rapidly growing workload and a constantly changing environment means we cannot always go at the pace we would want to. We are encouraged by the results from a recent survey of 2000 Small and Medium Sized Businesses (and which we will publish shortly) where 68% of respondents agreed that Revenue's approach to administering taxes and duties is fair.*

Evasion and Avoidance - the real unfairness

Most people I speak to make it very clear that by far the main criterion by which they judge whether our tax administration is fair is by reference to whether people pay what they should. Revenue certainly should be evaluated by reference to the effort we put into this.

There are two methods by which people do not pay what they should - tax evasion and tax avoidance. (Obviously there are people who at times may have a genuine inability to pay but that's a different matter.)

Tax evasion is a black and white affair - it is always inexcusable. We have been very visible in recent years in dealing with it - I've already referred to the legacy investigations, you will be aware of the quarterly publication of tax defaulters, you will have heard of our new focus on prosecuting people for tax evasion and many of you will be aware of targeted projects like those in the construction sector in 2006. So this is an area where we have really upped our game and are getting very good results. Indeed in that recent survey of 2000 Small and Medium sized businesses which I've already referred to, nearly 70% of respondents agreed that Revenue is effective in dealing with tax evasion.**

Evasion is not a grey area - it is wrong and it is unfairness personified. A tax system "resonant with fairness" cannot tolerate it.

But what about tax avoidance?

Well if tax evasion is black and white the mists really descend when tax avoidance is mentioned and the vision quickly turns grey and becomes obscured. Yet these days any discussion of fairness in a tax system cannot avoid this subject.

Tax avoidance

It's difficult to define tax avoidance - in layman's terms it entails either manipulation of tax law or exploitation of gaps or unintended consequences to give a benefit which was clearly never intended by the legislature. A single clever avoidance scheme is capable of giving the beneficiary a very significant "tax gain" - often amounting to a sum that would dwarf the "gain" in a straightforward tax evasion scam.

* Survey of Small and Medium Sized Business Customers 2006 - Strategic Research Unit, Revenue Commissioners (to be published November, 2006)
**Survey of Small and Medium Sized Business Customers 2006 - Strategic Research Unit, Revenue Commissioners (to be published November, 2006)

Avoidance is somewhere on the spectrum between evasion (always wrong) and legitimate tax planning (always right). Some commentators refine the definition a little - acknowledging a difference between so-called "aggressive" avoidance and (presumably) "ordinary" avoidance - although I could note with some amusement that antonyms for "aggressive" include "friendly" and "submissive"!

Defenders of avoidance put the case that tax is merely a matter of law. They argue that if it is legal then it's ethical and that morality or values don't come into it. To put this argument of course of itself betrays a set of values. As one academic put it:
"It is important to realise that one cannot escape decisions about business values. To take the view that 'business is business' is itself a decision which reflects one's values (in this case - probably - the value that one should maximise one's own personal gain)." ***

Aristotle has argued that justice cannot be entirely contained in legislative measures and that at its best justice is fairness. A French Academic commenting on this says that "someone who is fair is therefore just, even eminently so, but in the sense that justice is not mere conformity to law but a value and a moral requirement (my italics)". ****

I believe most people would find it hard to accept the proposition that just because something can be shown (or be artificially structured) to fit within the strict letter of the law that it then doesn't really matter if it clearly offends against the spirit and purpose of the law or against the intention of the legislature.

[We could of course get into a debate here about "literal" or "purposive" interpretation of the law in the Irish Courts system but perhaps we should just note in passing the enactment of the Interpretation Act, 2005 which provides for the position that, where a literal interpretation would fail to reflect the "plain" intention of the legislation, preference will be given to the intention of the Oireachtas, where this can be ascertained from the Act as a whole.]

I believe in fact that the majority of people act by reference to principle or standards which are not defined in any Act of the Oireacthas but which are based on values derived from a sense of social and civic responsibility and from the "norms" of the community of which they are part. Their actions have regard to an unwritten moral code which is influenced by these wider principles at the expense of a principle of just personal gain or advantage.

***Chryssides, G; Kaler, J, (1996) Essentials of Business Ethics), McGraw-Hill, Maidenhead: 10
****Andre Comte-Sponville, (2003) A short treatise on the great virtues, Vintage U.K.

One Australian academic, discussing tax avoidance put it like this: "What needs to be fostered is a change of attitude to the law, in which it is seen not as a game of words, a material to be worked on to one's own or one's client's advantage, but as an instrument of legitimate policy to be respected, with the policy, not just the words, looked to as the measure of compliance." *****

Evasion and avoidance offend the community because of the real sense of unfairness they generate in those who practice neither. They offend also because they subvert the intentions of democratically elected government. Government develops programmes of capital and current spending, including social spending and long term infrastructural development based on expected Exchequer funding largely provided by projected tax revenues. These revenues are based on Government and Parliament approved taxation policies and taxation rates. It is we who elect the Government and by doing so we give them the authority to make such decisions - including defining a tax base from which they can reasonably expect to fund their plans and programmes for the common good.

Attitudes to compliance

Before I finish I would like to address a question that I seem to be asked a lot lately. Is Ireland now a tax compliant country?

I think it would be naive of me to say it is. But I do say with some confidence that we are a more compliant country than ever before and that we are moving in the right direction and at a fair pace.

The improvement is partly driven by Revenue's recent initiatives, partly by a growing intolerance of non-compliance and partly by a growing awareness of the function of tax in community.

This is a welcome maturity in our attitudes and we need to foster it. We must keep hammering home the message that tax compliance represents not just a legal obligation but also a civic duty, a central element of social responsibility and a core component of good citizenship.

I agree with the former President of the Irish Taxation Institute who referred, quite rightly, to "...the civic duty of all citizens to pay their fair share of taxes." ******
The old concept of a 'social contract' is very relevant here: citizens enjoy rights such as security, proper legal process, access to education and health services. Business expects that the infrastructure will support its operations and its further development. All these public goods are bought through taxation, and failure to pay our fair contribution is nothing short of depriving ourselves and our fellow citizens of our rights and selling ourselves short on our legitimate expectations.

*****McBarnet, D., 2001, When compliance is not the solution but the problem: From changes in law to changes in attitude, Centre for Tax System Integrity, Research School of Social Sciences, Australian National University

******Frank Hussey, Irish Times (Letters) 31/7/04

Over the last quarter of a century or so we have seen attitudinal change in many areas. Drink driving might never have been approved of but it was condoned by many people. Twenty-five years ago someone taking up a job in the civil service was usually shown to a desk that had an ashtray on it. That's unimaginable now - it would also be illegal of course. We have also learned to be careful with our language - President Kennedy in the early 1960s promised to "Put a man on the moon before the end of the decade". Today he would probably promise to put an American on the moon.

We are careful not to offend - and rightly so. Although I might mention in passing that even the most liberal writers and journalists seem to feel it's perfectly acceptable to refer to an entity called the "Tax Man" - a phrase that is both sexist and pejorative at the same time!

I think it's fair to say that attitudes to tax compliance have mirrored these changes. Tax evasion, and increasingly even aggressive tax avoidance have joined drink driving, smoking in public offices, sexist language, insurance fraud as once tolerated but no longer acceptable to the vast majority of people.

Fostering this new maturity

The compliance effect of Revenue's own activities will of itself never get us to the stage where we can say we are truly a tax compliant society. We need to build on the attitudinal maturity.

We can do a lot more in the field of educating people and explaining to people what exactly is the role and function of taxation in society and convincing them of the very direct connect between taxation and the common good. We have lot of debates in this country about taxation but they almost always focus on the "burden" of taxation (and, as an aside, wouldn't it help a lot if we began to use the term "tax contribution" rather than "tax burden"?), or on the components of the tax system or the latest scam or the performance (or non-performance) of Revenue and of course it's not surprising that most of them revolve around different political ideologies.

We need to broaden the focus of the debate to address the role and function of tax and we need to get a wider audience involved - the taxation debate should not remain the remit of politicians, academics, tax practitioners or indeed Revenue. I would like to see the role of taxation feature more in our early schooling curriculum - building perhaps on the existing Civic, Social and Political Education Syllabus (CSPE) at junior level and into our transition year programmes at senior level. I would like to see the role of taxation on the radar of community and voluntary groups, of trade unions, of summer schools and of Conferences such as this. Most Sundays I hear thoughtful and stimulating homilies in Church but it's quite a while since I heard one about the role of taxation in community!

Certainly Revenue would be more than willing to assist in these areas in any way we can - short perhaps of giving Sunday homilies!

Conclusion

Tax is not merely a business cost, not merely a drag on business and the individual, it is the contribution which we all make towards the common good - it is how public services, infrastructure, security, economic policy and even Government itself are funded. In simple terms there are three broad consequences if an individual or business does not paying their share:

either the contribution of others is increased,
services for others are not delivered or,
investment in our future is curtailed.

Tax is not something forced upon the people by some body over which they have no control. In our democratic society we elect Government and in doing so we give them a mandate which includes that of setting taxation policy. You will all be familiar with the principle, first enshrined in the Magna Carta and later employed as a rallying call of the American revolution - of "no taxation without representation". It is also worth considering the corollary - that democratic representation is dependent on taxation.

Over the years, even though it has not be labelled as such, the concept of "social capital" and attendant themes of community values, civic responsibility and the like has been very much on the minds (and in the hearts) of participants in Ceifin Conferences. In his bestseller "Bowling Alone", Robert Putnam discusses the linkage between social capital and effective Government and reports the results of a US study which concludes that "social capital is the only factor that successfully predicts tax compliance".*******

Richard Adams, writing in the Guardian recently made the point that in the UK " paying taxes has become the most patriotic duty undertaken by the majority of the population." ********

In a transforming Ireland it is no less so.

Thank you.

Céifin Centre Website

*******Robert D. Putnam, Bowling Alone, 2000, Simon and Schuster

********Richard Adams, "Cash in hand", Guardian 12 August 2006

Print this page