Now for one helluva sell -- making the lower earners pay more tax
The painful reforms of 1986 were abandoned in the boom
IN these days of national emergency, it behoves us all to do our bit to help the Government through its travails -- whether we be the Fine Gael and Labour parties, or humble commentators. Or so the Taoiseach tells us.
In that spirit, I give the following advice freely (well, €1.80 for hard copy). If what the experts tell us about the tax system is true, the Government has less than three weeks to let the public know that it is going to be a very odd Budget on April 7. If the experts are right, and the Government doesn't tell us, they will be in yet more trouble.
The boffins say it is not really possible to change the tax system one-third of the way through the year. Yet there is any amount of speculation about higher tax rates, new tax rates, narrowing of tax bands and the rest.
If the Budget turns out to be just an enormous hike in levies and duties on the old reliables, there will be an explosion of complaints about lack of fairness, lack of planning, lack of imagination, and so on, and so on.
It is all very awkward. If, as I argued last week, Ireland is looking at a tax burden of close to half its national income, the tax system will have to be structured very carefully if it is not to become a drag on the chances of recovery, or of permanent growth.
Take those amazing Danes I mentioned last week, who prosper with -- or despite of -- the highest tax burden in the rich world.
But look closely, and their taxes on business are as low as Ireland's. Their business regulation, though rigorously applied, is lighter than ours. They pay for their elaborate public service almost entirely through taxes on income -- otherwise known as taxes on work.
Incentives
Theory, and general experience, say this should be bad for employment. But not in Denmark.
Is it because, being Danish, they don't need financial incentive to work? A bit, probably.
But the Danes also force people to take jobs once they have been re-trained; otherwise they cut off their unemployment benefit.
We are not Danish. The Irish tax system provides generous incentives to work, and the Irish welfare system provides generous incentives not to.
As yet another report pointed out again the other week, Ireland has the least conditions applied to its unemployment benefit of just about any OECD country.
A word on welfare. The Irish system bears a striking resemblance to the public service in general, where the outcomes appear very unimpressive for the money spent.
It must be asked why almost a third of government spending went on social welfare in a country with full employment and, by European standards, hardly any pensioners? And what will happen now?
It is all the more curious when there is such widespread outrage about the actual levels of basic social welfare.
Unfortunately, we have been here before, with both tax and welfare, and the portents are not good.
Charlie McCreevy has not been forgotten, or forgiven, for his "Dirty Dozen" attempt to distinguish welfare payments from additional income and query the latter. His failure may help explain why the social insurance fund is already in the red, even at a normal, cyclical unemployment rate of 9pc.
The recidivist nature of Irish politics is even more striking when it comes to the history of the tax system. It is strikingly illustrated in last week's report from the National Economic and Social Council (NESC). The council is the social partners' "think tank" and a creature of the last great crisis in the 1980s.
Its reports bear witness to the success of the policies which followed that crisis, and then the failures as those lessons were forgotten, or ignored, and the successful policies reversed once economic recovery took hold.
By 1999, a NESC report complains about the "proliferation of discretionary tax reliefs". Well, by 1999, it hadn't seen nothing yet.
The eventual scale of them, especially on property, not only eroded the tax base, but grossly violated the principle set out in the original Commission on Taxation that the tax system should have minimum impact on individual or business choices.
Grotesque
Added to this was Albert Reynolds' decision, based on no recommendations whatsoever, to have two rates of tax, instead of three.
This seems to have been inspired purely by a similar move by Mrs Thatcher but, given Ireland's fiscal position, the grotesque result was a low rate of tax for really higher earners and a top rate of tax for anyone earning more than the average industrial wage.
Since then, government ministers, TDs and senior civil servants have become, by any definition, really high earners.
It is already clear that they are not minded to bring back a new, higher top rate. At the other end of the scale, the inequity of the two-rate system led to various adjustments, so that now around a third of workers do not pay income tax at all.
The Government has recognised that it cannot build a stable tax system without applying some income tax to that third earning less than about €25,000 a year. The politics of that will be horrendous, and there will be few voices in support.
History shows that income tax revenues were stable at around 38pc of the total from the late 1980s until the property boom taxes reduced them to a low of 29pc of revenues by 2007.
We will now have to return to something like 40pc of tax revenue coming from income tax.
At current public spending levels, that is about €20bn a year. Last year, income tax receipts came to €13bn. Oops.
As income taxes inevitably soar, all that can be done is to try to maintain low marginal rates for the bulk of workers, so as not to destroy the undoubted employment success from Ireland's famously small tax "wedge" -- the difference between gross and take-home pay.
Abolishing the egregious tax breaks and introducing a third rate for those who have enough incentives from their six-figure payslips will help, but it will not be enough.
Keeping the marginal tax rate, after PRSI, below 50pc for the bulk of workers will, paradoxically, require that more workers pay some tax, as well as all workers paying more tax. It will be one helluva sell.
- Brendan Keenan
