OECD Proposes Major Tax Reforms to Broaden Base and Increase Revenue

The Organisation for Economic Co-operation and Development (OECD) has released a new report outlining significant recommendations aimed at reforming VAT and personal tax systems. According to the report, these changes are designed to broaden the tax base and increase revenue while addressing economic inequalities.

VAT Rate Adjustments for Hospitality and Tourism

The report suggests maintaining the 13.5% VAT rate for hospitality and tourism, which overrides sector demands for a return to the previous 9% rate. The OECD believes this decision ensures the sector is subject to rates higher than those for basic necessities, which are currently at 9%.

“Increasing these rates by one percentage point could result in additional annual revenues of €64 million and €519 million,” the report states.

Broadening the VAT Base

To further enhance the VAT base, the OECD recommends merging the current special reduced rates and gradually aligning them to the standard rate over time. Specific attention is given to sectors that predominantly benefit higher-income households, with hospitality and tourism being highlighted.

“Such adjustments would ensure a more equitable distribution of tax burden and make the system more robust against sector-specific vulnerabilities,” the report notes.

Considerations for Low-Income Households

The OECD acknowledges that increasing VAT on essential goods could disproportionately affect low-income households. The report proposes using part of the increased revenue to provide targeted support to these individuals through social transfers.

Expanding the Personal Tax Base

The personal tax system currently excludes a significant portion of workers, with approximately one-third of income earners not contributing to personal income taxes or the Universal Social Charge (USC). The OECD recommends broadening the tax base to include more of the population in the tax system.

“This change would reduce the revenue burden on the top 20% of taxpayers, who currently shoulder about 80% of personal income tax receipts,” the report explains.

Removing Participation Threshold Effects

Narrow tax bases often result in “cliff edges,” where a small increase in income can significantly boost tax liabilities or reduce benefits. The report suggests removing such thresholds to encourage higher levels of workforce participation.

“Specific policy recommendations include aligning the liability thresholds for PRSI and USC at more reasonable income levels,” the OECD states.

The Impact on Public Finances

Despite the robust short-term financial situation, the OECD advises maintaining fiscal restraint to ensure long-term stability. The report points out that untargeted cost-of-living measures in Budget 2025 will breach the 5% domestic net spending rule.

“It is crucial to avoid pro-cyclical expansion in current expenditures, which can exacerbate price pressures,” the report concludes.