News Comment

Saturday 20 September 2014

Why raising taxes in Ireland would be good for everybody

Nat O'Connor

Published 20/06/2014 | 02:30

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People queue for social welfare. Picture: Mark Condren
People queue for social welfare. Picture: Mark Condren

Irish society is split between those with 'good jobs', full-time with decent pay, and those with low-paying, part-time or irregular work. As the National Economic Social Council (NESC) has just reported, Ireland has the highest level of jobless households in Europe, at 23pc – namely households where no one has a job or is likely to have a job. This is not only far higher than the EU average of 11pc, but higher than the second highest (UK and Belgium) at 13pc. This points to severe inequalities of opportunity in Ireland, and inequality of outcomes.

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The material divide between those with good jobs and those without also distracts attention from the rise of the top 1pc who have extraordinarily high levels of income compared to everyone else, and who are the major champions of Ireland's current economic model.

Professor Thomas Piketty's meticulous examination of tax records demonstrates income inequality's rise in Ireland since the 1980s. Wealth inequality is likely to follow a similar pattern, with even greater concentration at the top.

Getting good quality employment remains the primary equaliser: if you can get one of the increasingly elusive good jobs, you can probably afford the car, the house and to bring up your family with some dignity. But there are simply not enough jobs to go around. The forces of globalisation and technological change help explain why – computers reduce the need for clerical workers, robots or cheap labour in developing countries replaces manufacturing workers, and internet shopping combined with bigger chain stores and automated processes replace people working in retail or services.

Economic inequality has very real consequences. Social mobility is lower in Ireland than other European countries, while inter-generational poverty and deprivation are high. We are stuck in a cycle of low taxes, low public investment and low public services. As a result there is no way to boost the economy, while people have to pay higher out-of-pocket costs and do not see value in public services.

This makes raising taxation both difficult and unpopular. Yet there is reason to believe, from those countries that fight economic inequality, that all of society benefits from a more balanced economy promoting equality.

One goal should be for all workers to receive at least a 'living wage' from full-time employment, sufficient to cover the needs of a single person so that he or she can live a dignified life. Stronger trade union rights and a higher minimum wage would help achieve this.

Similarly, those engaged in socially useful unwaged work, including care duties and bringing up families as well as volunteering, save the State billions of euro. They too should be paid a living income. This is not only fair, but higher incomes would lead to more spending and more jobs in a virtuous cycle.

Public investment can generate employment in the public and the private sector. One viable option would be to develop and implement a comprehensive social and affordable housing strategy. Ten to 20pc of the population need rental options that do not currently exist, including strong tenancy protection in affordable rental accommodation.

Public services should share risk across society and level the 'playing field' of the economy to give everyone a fair chance for social mobility. We need to do more to ensure that health, education and housing services help tackle economic inequality in Ireland.

We must also reduce the cost of living. Food, energy, transport, childcare, legal services and insurance are all expensive in Ireland.

Analysis is needed to identify where competition is falling short, and to provide stronger regulation and/or public provision to lower the cost of living.

Of course, improved public services will have to be paid for and that will largely be through our tax system. Ireland has one of the lowest levels of taxation and social insurance in the EU, and there is much scope to raise tax on those who can afford to pay it.

Options include reducing Ireland's exceptionally high level of tax reliefs. There were more than €8bn tax reliefs (not including personal credits) in the income tax system in 2010, such as tax breaks on health insurance premiums and private pensions, which mostly benefit higher earners.

Another option would be for Ireland to re-introduce a third income tax band. For example, charging 48pc on that part of incomes over €100,000 per annum would raise €365m, according to Revenue figures, and would only affect the top 5pc of income earners. Ireland last had a 48pc rate in 1992.

Another alternative would be to increase social insurance (currently at the lowest level in the EU) so that we provide stronger state pensions and higher income replacement when people lose their jobs. Higher social insurance would not impact on the 'marginal' income tax rate.

Greater benefits, such as a strong state pension and higher income replacement, would not only boost consumer spending but would make losing work less risky and so boost entrepreneurial activity.

Nat O'Connor is a director of the economic think-tank TASC

Irish Independent

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