Sunday 18 March 2018

Making the case for income tax cuts in post-austerity Ireland

We must search for ways to stimulate the economy and get people spending again
We must search for ways to stimulate the economy and get people spending again

Ronan Reid

They say success has many fathers, but so do pain and suffering. I suppose the old media idiom - "if it bleeds, it leads" - equally springs to mind.

The context is that reading different publications of differing political persuasions, everybody seems to have taken all of the brunt on the austerity front.

Comments from European commentators that Ireland is the poster boy of European reform rankle. It feels like winning the race to get to the dentist.

So who did pay?

On a pure income/expenditure basis, it was income taxpayers.

Income tax is the only heading within tax receipts that has increased from 2007 to 2014, up by 26pc to €13bn in 2014. Other taxation categories have fallen by an average of 25pc. Despite changes in taxation rates and bands over the period, a salary of €60,000 results in an average tax rate of circa 22pc and, given marginal rates of taxation, a €100,000 salary results in an average rate of tax of 32pc.

The argument will ensue that the reduction in government spending impaired those without salary who were reliant on the State.

But expenditure has grown over this period. The allocation of that spending is a much-heated public debate that will be sorted out at the polls next year - but the average citizen has not seen the Government spend less.

There were one-off impacts to spending. Let's examine this point from the same income and expenditure basis and set the scene from 2007 to 2014.

Expenditure in 2014 was €64bn versus circa €50bn in 2007. So spending has in theory increased.

But where has it increased?

Unemployment assistance and interest on national debt spring to mind.

I estimate crudely an impact of €7bn in total per annum under these two headings. GNP, our domestic measure of output, in absolute terms is broadly unchanged from 2007 to 2014 at circa €155bn. Unemployment has grown from 113,000 to 208,100.

It is hard to argue against the fact that underlying spending has not increased. It may not have increased in the areas where it should have, or where society is vulnerable, as is argued in some quarters - but on the average it has increased.

In 2014 the interest on the national debt - on our borrowings - was €7.4bn. The national debt rose by €150bn (from €50bn to €200bn) from 2007 to 2014. Some €64bn of this rise in debt is accounted for by bank bailouts.

Receipts from Bank of Ireland sales, the IBRC liquidator and (in due course) AIB and perhaps Irish Life and Permanent have and will reduce this €64bn.

What accounted for the rest of the debt increase? We were living beyond our means, expenditure exceeded income and debt increased. Expenditure also rose due to increased social welfare, given the increase in unemployment, and income fell as GNP reached a low point of €138bn in 2009.

In summary, despite the arguments that the banks account for the State debt and expenditure increase, it should be noted that increased interest payments account for circa €5bn of increased government spend.

So directly, banks have increased expenditure by €2bn per annum on an ongoing basis by 2014.

Certainly they contributed to the growth in national debt and a very significant manner to our economic collapse - but not quite at the level often quoted elsewhere.

Detailing this is not a defence or otherwise of the banks. It is merely to point out that spending excesses at government level should remain a focus - and as the taxpayer bore the financial cost of a lot of the refinancing of Ireland, tax cuts should be considered, if only to stimulate demand and allow continued growth of domestic demand and GNP.

We have left future taxpayers with a burden of debt.

A major part of any bank finance to developers in the boom was to fund land-acquisition costs. I always therefore regarded part of the property boom as effectively a leveraging of the young to crystallise wealth in the older generation as property was sold.

Where bank loans were restructured domestically, it was a zero-sum game.

A developer borrowed to buy property and build. Land costs were paid and retained and goods/services purchased to build.

The real damage to national wealth was the discounted sales of loans outside the State. They are monies that never will be recovered or were never spent domestically.

That may have been the logic of greater inheritance tax rates and smaller allowances - but surely parents giving monies to children in negative equity should be encouraged and not taxed?

Remember, the inheritance band is now below the average price of a house in Ireland.

Don't expect a bonanza of lower tax any time soon, just a gradual improvement to restore much-needed confidence.

I think the pension levy should go as a signal to encourage savings. Even at a reduced level, it breaks the bargain that citizens could save for their retirement and by so doing reduce the demands on the State. We need now to plan for an ageing demographic.

How much tax do we pay in total over our life? We think of income tax/PRSI/USC charges obviously, but often forget VAT, excise tax, inheritance tax, capital gains and acquisition taxes, property tax, pension levies... and, yes, water charges.

I worked out that between all the above levies, a married couple who are in their 30s and earn €140,000 between them (or €70,000 each) are likely to pay - in some form or other - more than 50pc of their income in tax.

If they buy a house for €650,000, they will pay circa 15pc in mortgage charges and repayments and 26pc in living expenses. This allows them to make a pension contribution of 10pc and save 10pc of their income. Remember their employer will have paid a further 11pc.

Other commentators may criticise the choice of such salary levels, given the average wage of €39,000, but this level of salary reflects the need to create more better value jobs. Further taxation of any form will just impair demand and undermine the workforce in total.

While low corporation tax rates entice value-add jobs by foreign investment, equally tax policy can influence domestic investment to create high skill jobs also.

There is much complaint of the distribution of wealth and no doubt inequalities exist in society - but that's beyond my remit.

The person earning the average industrial wage of €39,000 takes home €32,000 - and the employee earning €78,000 takes home €52,000. That is certainly progressive taxation.

The issue for me is that policymakers need to consider the impact that tax policy decisions have in the longer term.

Pension levies may mean that people save less. Higher capital gains rates and inheritance tax rates slow the process of parental asset sales and distribution to children - who may themselves be in negative equity and have higher medical healthcare costs.

Meanwhile, a lack of tax relief means that more and more will rely on the public healthcare system.

The cost of creches and childcare is still seen as an impediment to a return to work for some parents - a move which would result in more income tax for the Government.

We are a young country and we've got to work with what we have. Other countries have greater inherited wealth, so the impact of tax increases in those countries would be offset by this wealth and in turn the impact to domestic demand would be less extreme than is the case in Ireland.

The more extreme the impact, the greater the employment loss in the retail and hospitality sectors - two sectors that are big hirers and are quick to take on workers.

Most importantly, income tax cuts are needed to show everyone that austerity is at an end and encourage people to start spending again. Never forget, fuelling domestic demand will help the economy grow. We will all benefit.

Ronan Reid is CEO at Cantor Fitzgerald Ireland

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