Remember the ‘good old days’? When budgets were giveaways, not hairshirts? When politicians ratcheted up the bidding to cut our taxes come election time? Sure, we didn’t need those billions from Stamp Duty. And, wasn’t income tax too high anyway? Yes, remember the good old days the next time you hear someone wax lyrical about why ‘we are where we are’.
So, where are we now then? The economy is still half banjaxed, even if it has been on the mend of late, but no sooner had the Troika rolled out of Terminal 2 than it was like déjà vu all over again. At a time when they’re still planning to make a billion or more in spending cuts at the next budget, government Ministers were hitting the airwaves with variations on the same tax cutting mantra. ‘Middle Ireland’ needs a break, apparently. Well, who doesn’t?
Of course, all else being equal which of us wouldn’t rather pay less tax than more? Certainly, there’s several ways to skin the tax-cutting cat, but before we explore them, let’s take a step back and nail a few myths:
– Ireland is now a high tax nation. No! According to the OECD’s latest research on Taxing Wages, the tax wedge – the difference between total payroll and employees’ take-home pay – in Ireland is, at 25.9%, the lowest of all EU countries, even after years of austerity. Total tax revenue as a proportion of GDP is lower than it was in 2007, and also the lowest in the EU.
– Ireland’s tax system is progressive. No! Income tax is reasonably progressive, but as recent research from the Nevin Economic Research Institute demonstrates, when all taxes are taken into account, the poorest 10% of households pay only 1.5% less of their income in tax than the richest 10%. This is because Ireland relies more than other countries on regressive indirect taxes like VAT.
– Middle-income earners pay half their income in tax. No! They may theoretically pay half or more of every extra euro they earn in tax, but the combination of reliefs and credits means they pay nearer a quarter of their income in tax. The Revenue Commissioners estimate that even the highest earners pay 30% or less in tax while, overall, only 14% of gross household income is paid in tax.
Having said all that, if you were going to cut income tax, what would be the fairest way of doing it? Aping the British Tories, Fine Gael want to cut the higher rate. Of course, this would benefit only a minority of workers, and the more they earned, the more they would benefit. So far, so regressive. Labour seem more intent on tinkering with the hated Universal Social Charge. No doubt, this would benefit more far more people, but is this most progressive approach?
One of the quirks of Ireland’s income tax system, you see, is that no matter how much you earn, you are entitled to the same tax credits. These replaced the old Tax Free Allowance, but function much the same way. Their relatively high level means that the lowest earners pay little or no income tax while middle-income earners face relatively low income tax bills despite facing high marginal rates. Streamlining and reforming tax credits along the lines of the US’ Earned Income Tax Credit or the UK’s Family Tax Credit could raise revenue from the highest earners – perhaps even while reducing the marginal rate – while improving incentives to work for everyone.
The current government inherited a fiscal mess which its architects had, to be fair, begun to clean up before them. According to ESRI research, the first four austerity budgets were ‘progressive’ in that they broadly imposed the biggest burden on those who could best afford it. In fact, they were so progressive that even after a hat-trick of regressive FG-Labour budgets, the overall burden of austerity has – in purely statistical terms – been progressive. Why? Income tax.
Admittedly, the answer is not as clean and simple as that, but income tax is a big part of the story. This was the lever that FF-Greens reached for first and most aggressively. By contrast, it is an article of faith of the current government not to touch it. But, the simple thing about taxing income is that the more you earn, the more you pay. Unlike say VAT, income tax is by its nature progressive and leaving it out of the austerity toolbox pretty much guarantees a regressive result as the burden falls to a greater degree on public services, which the less well off depend on disproportionately.
Ireland is not highly taxed – we just got used to abnormally and unsustainably low income taxes during the ‘good old days’. As esteemed physicist and noted socialist Albert Einstein famously said, insanity is doing the same thing over and over again and expecting different results.