Monday 24 October 2016

Before we get fooled by tax cuts, let's think about how we will pay for them

Published 05/01/2016 | 02:30

Taoiseach Enda Kenny with Tánaiste Joan Burton at the first event to mark the centenary of the 1916 Rising, as three flags that were flown on O’Connell Street during the rebellion were raised over Dublin Castle. Photo: Brian Lawless/PA
Taoiseach Enda Kenny with Tánaiste Joan Burton at the first event to mark the centenary of the 1916 Rising, as three flags that were flown on O’Connell Street during the rebellion were raised over Dublin Castle. Photo: Brian Lawless/PA

When you think about it, our politicians are modern messiahs. Just as Jesus fed the masses with only five loaves and two fishes, our TDs have figured out a way to slash taxes while also providing stellar public services.

  • Go To

After the country spent the past seven years suffering pestilence and plagues, Labour leader Joan Burton chose the dawn of the new year to tell us that we have finally reached the promised land. Our suffering is over.

On the horizon are USC cuts for everyone earning up to €120,000 a year; a job for anyone who wants one; the smallest class sizes in the history of the State; high-quality child care and free GP care for all.

What do we have to do to receive this incredible bounty? Just vote for Labour in the forthcoming election. One simple mark on a ballot box and all of our problems magically go away.

Now, some of you may not be ready to hear the good news. Some of you lost your faith after you followed a false prophet named Gilmore who made identical promises before. But this time it's going to be different. Why? Because that's what our saviour is telling us.

Having described the land of milk and honey that awaits us after the next election, Ms Burton acknowledged that some wretched cynics out there would be dubious about her claims.

"There will be those who say this sounds like auction politics. It is nothing of the sort," she wrote in the Irish Independent yesterday.

Auction politics is what other base politicians do when they make fantastical promises to the electorate in a blatant attempt to buy their votes. But the Labour Party would never engage in that kind of snake-oil salesmanship. Not since the last time, and that infamous 'Tesco' ad, anyway.

Ms Burton isn't the only politician preaching a mantra of recovery and prosperity. Renua leader Lucinda Creighton was filled with righteous zeal yesterday as she extolled her big idea - flat taxes.

If we vote for Renua after the next election we will pay a single 23pc rate of tax, motor tax will be abolished and capital gains tax will be slashed, but despite this gouging of €3.5bn from the public purse, investment in gardai, the health service and education will surge.

As Ms Creighton was decidedly vague on the details of how this hole in the public finances would be filled, I looked up a blog she wrote in October and learnt economic experts like TCD Finance Professor Brian Lucey and UCD Economics Professor Karl Whelan had endorsed a flat-tax plan.

However, this endorsement proved to be qualified. When I contacted Mr Lucey and Mr Whelan yesterday, they said a flat tax could theoretically work, but only if it was pitched at a rate significantly higher than the 23pc mooted by Renua. According to Mr Whelan, the rate proposed by the party would "radically increase inequality" and it would need to be around 40pc if it was going to raise as much money as the current taxation system.

Renua isn't the only party whose sums don't stand up to scrutiny. Fine Gael don't just want to abolish the USC for anyone earning up to €70,000. They want to eradicate it for everyone in the "most radical overhaul of personal taxation in a generation".

Sounds great doesn't it? Everybody hates the USC and getting rid of the damn thing is sure to be a vote-winner. But if you vote for the abolition of the USC, you're also voting for patients on trolleys, children on waiting lists and people with disabilities being warehoused in Dickensian institutions.

A Central Bank report, published at the end of last year, underscored how important the USC was for the country. It detailed how, during the boom years under feckless Fianna Fáil governments, personal taxation was reduced to a minimum while the money the State earned from people selling houses to each other kept the national coffers bulging.

Today, after years of hard slog and pain, we finally have something remotely resembling a stable taxation system and much of this is thanks to the USC, which comprised 20pc of the €17bn raised in income tax in 2014. What is Fine Gael proposing to do to replace this €3.4bn? Perhaps it can brainstorm with Renua to come up with some ideas.

Another alarming fact from that Central Bank report is that, having spent €57.5bn rescuing the banks, we are now seeing a modest return, which amounted to a peak of €3.4bn this year but will reduce to €2.1bn by 2020.

It warned that: "Given the transitory nature of these revenue streams, managing the transition to lower levels will pose a particular challenge."

Has Fine Gael budgeted for this in its plans?

In 2007, income tax represented just 26pc of total tax revenue but today that figure has climbed to 40pc, because we were supposed to have learnt that scaling personal taxation back to the bone and relying on transient taxes was economic suicide.

Regretfully, our amnesiac politicians, possibly suffering from a serious case of post-traumatic stress disorder, seem to have forgotten that lesson just in time for the election.

Politicians will tell voters what they want to hear to get elected, but if people vote for them without interrogating their plans or demanding to see the research that backs up their claims, then all the pain we endured returning the economy to growth could be for nothing.

Instead of politicians fighting over who is going to cut taxes the most, perhaps we could spend the two months we have left before the election having a rational discussion about the kind of society we want to live in and how we propose to pay for it.

Or maybe we should just keep the faith and take politicians at their word - because that's worked out so well for the country so many times before.

Irish Independent

Read More