Monday 26 June 2017

We need to cut taxes but increase social insurance to get a fair society

Reform of tax and social insurance will help to attract and retain talented people, and incentivise people to work harder. In this way we can ensure that our economy continues to grow (Stock photo)
Reform of tax and social insurance will help to attract and retain talented people, and incentivise people to work harder. In this way we can ensure that our economy continues to grow (Stock photo)

Leo Varadkar

Taxes should be low, simple and fair. In Ireland, this principle is broadly accepted when it comes to taxing corporate profits, but not when it comes to personal taxation. Why is that?

It's widely agreed that our low corporate tax rate has attracted jobs and investment while helping Irish-owned companies to expand. We get a higher revenue yield than countries with a higher tax rate.

It's not just the low tax rate. It's also the certainty, stability and predictability arising from the fact that it has remained at the same rate for decades, the simplicity of having only two rates with few exceptions.

Personal taxation is very different. There are three charges: income tax, USC, and PRSI, three different sets of thresholds and entry points, seven bands and eight rates. There are any number of exceptions and incentives that enable avoidance.

The high marginal rate in particular is a real problem. The Government should never take more than 50pc of any euro you earn. If economic policy in the past was centred on competition for foreign direct investment, I believe the future will be as much about competition for talent. High tax rates make it harder to attract skilled, qualified and talented people home from London and from other countries, and it is one of the push factors that causes our homegrown doctors, IT professionals and others to take opportunities elsewhere. With Brexit, it's more important than ever that we bring these tax rates in line with our competitors.

We also start paying the highest rate far too early. Middle-earning public servants getting pay restoration in April will lose at least half of it - and possibly more than half - in taxes. The same applies when you get promoted or work overtime. It's a big disincentive.

In other countries, the highest tax rates only apply to the highest earners. The extra 3pc USC paid by self-employed people is also unfair. Okay, it only applies to high earners - but why should someone who is self-employed ever have to pay a higher tax rate than someone in regular employment who has more protections?

The USC is associated with the financial crisis and you get nothing for it. It's Fine Gael policy to abolish it. It is very different to PRSI for which you get clearly defined benefits. Perhaps it would make more sense to simplify the system and replace the USC and PRSI with a new PRSI-style charge: Social Insurance.

This could in turn be linked to wider and better benefits. People will be assured that the social insurance is ring-fenced to fund better services and does not just go into the big pot or black hole like the USC.

I have started the ball rolling already with paternity benefit last year, new benefits for the self-employed, and better dental and optical benefits for everyone.

We could go further in years to come by restoring the linkage between earnings and benefits and extending treatment benefit to give people more refunds for medical expenses. It would also underline the contributory principle according to which everyone who can pay, should pay something into the system, knowing that they will get something out of it.

It might seem odd to propose that people should pay less tax but more social insurance, but it actually makes sense. Too often, we have allowed Irish society be divided into one group who pays for everything but gets little in return due to means-tests, and another group who believe they should be entitled to everything for free and that someone else should pay.

Reform of tax and social insurance will help to attract and retain talented people, and incentivise people to work harder. In this way we can ensure that our economy continues to grow.

The so-called choice between tax cuts and increased investment in services is a false one. Tax cuts and social insurance reform done in a prudent manner assists economic growth, and ring-fences the additional funds for services. It's about creating the conditions to ensure our future economy is built on lines that unite rather than divide our society.

Irish Independent

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