The facts on farmers tax

THE CHANGES in farm taxation announced by George Colley in the February Budget, will not persuade the P A YE sector that farmers have been asked to contribute a fair share of government revenue. By ALAN MATTHEWS

During the first three years that farmers were included in the tax net, between 1974 and 1976, a total of £6m was collected, or an average of £2m annually. Richie Ryan widened the net in 1 977 and announced that the yield would increase to £35m. Few people expect anything near that figure when the returns are finally in, and it could be as low as £10. It is ironic that it was for this paltry sum that the countryside turned against the

Coalition, and a further sign of the Coalition's incompetence that they were unable to signal to their traditional supporters just how light was the immposition they were being asked to bear.

We now have had further changes in the 1978 Budget and the Minister has announced that he expects to get £24m as a result. To compare this figure with that for the previous year, it is necessary to take account of the concession on rates on agricultural land introduced in the Budget. In future, full-time farmers in the tax net will be able to count their rates bill in the previous year as a credit against income tax due. Allowing that the farmers in the tax net paid £16m in rates last year, then on the

Minister's calculations, the gross yield from income tax is expected to be £40m. Of this £16m is deducted as the credit for rates and £24m is the revenue actually collected in income tax.

Again, there are few observers who believe that £24m, will in fact be collected from farmers in income tax as a result of the 1978 Budget. Indeed, as the Minister has deferred the due date of payment for the 1978 farm tax to January 1st, 1979, the actual sum that farmers will contribute in this calendar year will be derisory. There is little doubt about the frustration that will be vented by PA YE workers in the run-up to next year's Budget, and it
is worth asking what sort of sum could reasonably be expected if farmers were properly brought into the tax system.

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• If farmers paid tax on the same basis as the rest of society, half of them would be tax payers.

• But only one in eight farmers are liable for tax.

• If farmers paid taxes on the British basis thevwould.bs paying at least three times more than they do.

• The notional system of tax paying underestimates farmers' income by 12%.

• The Colley budget reduces the total tax burden on the richer farmers.
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There are a number of reasons for the low yield from farmers' taxation to date. The threshold at which farmers become liable for tax is now £60 rateable valuation of land, which means that 22,500 farmers out of a total of 170,000 are in the net. Many of these farmers, perhaps the majority, do not earn a taxable inncome. But it is likely that, on average, farmers, occupying land over £20 valuation would be potential taxpayers, which means that only one-quarter of potential farm taxpayers are liable to tax.

A second reason for the low yield is the option available to farmers to be taxed on a notional income (no pun intended), rather than on their actual income as assessed by accounts. The national income is assessed by applying a multiplier to the rateable valuation of a farmer's land, and will be chosen by farmers who can thereby lower their tax' liability. This notional income option is sometimes justified on the grounds that it provides an inncentive to farmers to increase prooduction (in r h e same way as the tax relief Oli export profits for the manuufacturing industry). But there can be no question that this is at the expense of yield. In addition, the multiplier itself, which is set at 90 for the coming year, 'underestimates even the average income per £ rateable valuation, which in 1977 was around £110.

Apart from the features of the tax structure itself, there are some other explanations for the low sums collected to date. 1974 was a loss-making year for many farmers due to the collapse of the cattle trade. Farmers were perrmitted to make their income tax returns for both fiscal years of 1974 and 1975 on the basis of the 1974 accounts, which meant little tax was collected in those years. In addition, the losses could be carried forward and offset against taxable income in 1976, which meant that little tax was paid in that year either. Furthermore, the amount of tax actually collected in any year depends on the extent to which farmers make use of the capital allowances for farm investment - a factor which must be taken into account in any estimate of the potential yield from farm taxation.

It is this last factor which makes it difficult to know how meaningful is the comparison between the average burden of tax on P A YE workers and the average burden on the farming sector. A more comparable group to the farmers are those otherwise selffemployed, with whom they share the ability to claim expenses and capital allowances, as well as the possibility of distinguishing between income actually earned and that imported. However, as the comparison with the PA YE sector is frequently made, it is worth examining the figures.

In 1977, PAYE workers paid, on average, 16.3 percent of their income in income tax. Income accruing to the self-employed in agriculture in 1977 is estimated at £7l0m, which would yield a potential tax revenue of £115m, if farmers paid a similar percentage of their income in tax. For the reasons mentioned, this would be unlikely, and in addition, Seamus Sheehy of UCD has argued that the Central Statistics Office estimate of income accruing to farmers is an overestimate of their taxable income.

The CSO make their estimate by deducting the cost of inputs and farm expenses from the gross value of agriicultural output. Dr Sheehy points out that this makes no allowance for interest payments by farmers which would, of course, be a deductible expense in their income tax returns. On the other hand, P A YE workers are also allowed to deduct their interest payments, on mortages, personal loans and the like, and there is not information available to indicate what adjustment, if any, should be made to put farm incomes on a comparable basis.

Dr Sheehy also argues that the estimate of miscellaneous farm expenses is too low when compared to information available from the latest Farm Manageement Surveys or to comparable informmation frorn Northern Ireland farms. This, the CSO dispute, pointing out that the relevant item amounts to 6.2% of the gross value of output in the Republic, compared to 7.7% for the North.

In any case, it is inevitable that a disparity will exist between the burden of income taxation on farm and P A YE workers. The principal reason for this is that not all of a farmer's income is used to sustain his or her standard of living. A proportion of it is re-invested in the farm and is effectively relieved of tax bacause of the availability of capital allowances. There is nothing wrong with this; it means that a farmer is only taxed on the income that he or she takes out of the farm in any year. But it will mean that the proportion of income. that farmers would pay in tax, even if fully included in the tax system, would appear less than for PAYE workers.

Of course, this cannot be taken to justify the present low yield because of the loopholes in the existing farm taxation code. Brendan Dowling of the ESRI has estimated the potential tax yield from inclusion of all farmers in the tax net on the assumption that farmers here would pay a similar prooportion of their income in tax as in the UK. Dowling estimates the potential yield at between £60 and £80m. Even these figures, he stresses, are conservative as they assume a very high rate of farm investment and maximum use by farmers of the capital allowances to which they are entitled.

In the longer run, a question mark hangs over the future structure of farm taxation. The Government has committed itself to retaining the notional option as a permanent feature of the farm tax code, though it will become less attractive if farmers who opt for it are required to stick with it for a three-year period. At the same time, the position of rates on land has been transformed. The Agricultural Grant in relief of rates (which relieved, on average, 68% of the farm rates bill on a sliding scale whereby small farmers were exempted completely and there was a progressive reduction in relief as one moved up the ladder to the largest farms) has now been withdrawn for farmers in the income tax net. As a result, their rates bill has been substantially increased.

This does not necessarily mean that the burden of total taxation on these farms has been increased because, as stated earlier, full-time farmers can claim their rates for the preceding year as a credit against their income tax liability. One effect of this is that a higher proportion of the farmers' contribution to the Exchequer will in future be paid in the form of rates. It also means that the overall impact of the Fianna Fail Budget was to reduce the total tax burden (i.e. rates plus income tax as a proportion of income) for those full-time farmers who were previously in the tax net. It was a further demonstration of the Budget philosophy that the burden of taxation should be shifted from the rich to the poor in our society .•

Alan Matthews is a Lecturer in Economics at Trinity College, Dublin.