Thursday 14 December 2017

The invisible hand that has been clawing money out of your pocket since the bust

The average worker pays nearly three-quarters more tax today than they did before the financial crisis took hold

Thomas Piketty, French economist and academic
Thomas Piketty, French economist and academic

James Fitzsimons

They say our tax system is one of the best in the world, that it's progressive and fair, and the vast majority of people pay their tax willingly. That puts me in the minority that struggle to see the fairness or equity in the system, and I certainly don't think it's progressive. Nevertheless, I try to comply, even though I might as well beat my head off a brick wall as expect the system to be reasonable. Let's have a look at the numbers and see if you think it works for you.

If you pay less tax now than you did when the recession began, you are already dead and it doesn't matter anymore, or your income is down. A single person on €36,000, pays about €3,300 more now than they did in 2008, when the recession began. Add local property tax and water charges, and the recession is taking another 10pc of gross income from average workers.

By the end of the year, the recession will have cost the average person a whole year's net earnings, or what would make a fine deposit for a house. Those at the top pay the lion's share, but only because the disparity in incomes is high. The last Budget gave something back, but it's a drop in the ocean relative to what has been taken since the recession began.

A person who earns five times the average (€180,000) will contribute less than 6pc of their income in austerity tax. Their tax charge has risen by about 15pc since the recession began, while a person on €36,000 pays 75pc more than they used to. Is it any wonder that domestic demand has been depressed for so long? Austerity taxes hit consumer spending the hardest and stifle domestic demand. It's a Greek tragedy, and the Greeks may be our best hope of a better deal.

The French economist Thomas Piketty revealed the growing disparity in earnings and wealth last year. The benefits are concentrated in a small minority around the world, and the problem is getting worse. Austerity attacks the masses, who have nowhere to hide, and nothing left to tax. Effective tax rates may be portrayed as lower here than elsewhere, but we get a lot less in return. Good healthcare is prohibitively expensive, and if education is nearly free, it's pointless if you can't earn a decent living, or get a job in the end.

A person earning €23,000 (about 1.5 times the minimum wage) pays 100pc more tax today than they did before the recession. They have barely enough to get by, and from what little they have, the powers that be have taken another pound of flesh. The tax system may be progressive up to a point, but in Ireland that stops at €33,800, where the top rate kicks in. Elsewhere you could earn a lot more before the higher rates apply.

A progressive tax system should take an increasingly higher share of tax as income rises. We've only got two rates of income tax (20pc and 40pc) designed to target workers on relatively modest incomes. The loss of basic credits for a single person are worth €360 annually and the extra tax due to the change in bands was €756, until last year. The loss of tax relief for rent, mortgage interest, bin charges, health expenses and other personal credits are worth more than €1,000 a year too, and much more in some cases.

The real austerity tax is the USC (universal social charge) which overrides personal tax credits to tax small incomes that are otherwise exempt. The USC is an attack on spending in low- and middle-income groups. It may only take 7pc of your income, but if you don't have enough to pay the bills, it's a tax on life itself. It's economically flawed.

The USC has four different rates - five if you include the rate that discriminates against the self-employed. Multiple rates don't make it progressive - that would require equity, and that isn't there. Like income tax, it is progressive to a point and for the USC it hits hard at all income over €17,576. Above that, the charge is flat and everybody essentially pays the same. The rate goes to 8pc, to claw back a cut in the top rate of tax for incomes above €70,044. But that isn't progressive either. It might be fairer, but not a lot.

PRSI is charged at 4pc. It's clearly not progressive and there is little, or no correlation between what you pay and the benefits you get. Those who pay the most might never receive the benefit. And those who benefit most might never pay. I'm not saying that benefits should be cut, although some clearly should. It's a case of who should pay, what should it cover, and should it be limited based on need? Those who were left to carry the extra burden that the recession created were least prepared for what was asked of them.

The average worker pays over €1,000 a year more tax due to the loss of credits and the extra income that was trapped by the top rate. Up to €1,000 more is lost for rent relief, mortgage interest, health expenses and other discretionary credits. The USC can take another €1,500 and much more in many cases. You'd be lucky to gain €300 from the recent Budget bonanza.

Local property tax seeks €300 to €400 from an average case, and if you are lucky enough to own a relatively nice house, the sky's the limit as to what LPT might cost. You could be forced to downsize and move somewhere else if LPT is too much. It will create class discrimination as well as being a burden that many cannot bear. It should be repealed and not even considered again until the economy is booming and income is there to sustain it.

If you earn €36,000, your effective tax charge is about 3pc less than it was in 2014. But given that you were paying 76pc more than what you did before the recession, it doesn't make much difference. Take in LPT and water charges and things are even worse.

If you earn €180,000 your tax charge will have fallen by less than 1pc this year, but you'll save nearly three times more than someone on €36,000. Your benefit is nearly €550, compared to theirs which is about €200. If the 8pc USC didn't claw back more, you'd be better off by another €1,100.

James Fitzsimons is an independent financial adviser specialising in tax and financial planning

Sunday Independent

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