The celebrations around recovery may be premature

If government debt was under control and a high rate of economic growth could safely be assumed into the medium term, a case could be made for reductions in some of the tax impositions of recent years, the most significant of which is the Universal Social Charge (USC). But the debt is not yet under control and continues to rise.

While economic prospects have improved there are no guarantees that favourable conditions will endure. That means that government is free, as always, to modify existing tax arrangements while holding overall revenue constant, or to find more expenditure cuts to fund tax concessions.

Just about everybody is in favour of tax reform, by which they mean reductions in the burden of tax they bear themselves, and are also in favour of fairness, by which they mean the same thing.

During 2015 the Irish Exchequer will add €6.5 billion to outstanding debt, since government revenue continues to come in well short of government spending. The premature celebrations surrounding the end of the troika programme at the end of 2013 may have created the impression that the country's borrowing woes were over.

Indeed the improved economic performance in 2014 permitted a softer budget than had been expected and has sparked talk of tax cuts in the run-up to the election, due in a year's time. But the harsh reality is that borrowing continues and the debt mountain will continue to grow until the deficit is eliminated. The government is obliged, under EU rules, to get the deficit as measured by Eurostat under 3pc of GDP in 2015, and should do so. But it is still a deficit and the debt is still growing.

It looks as if demands for tax 'reform', meaning tax reductions, will focus on the USC and on assorted measures designed to soak the rich. It is regularly asserted that USC is a regressive tax, in the sense that it does not spare those on lower incomes while progressively extracting more from those who can afford it. This is simply not true. USC may well be a clumsy tax and in need of modification, but it is progressive with (gross) income.

After the changes in the recent budget the tax works like this: the first €12,000 of gross income is liable at 1.5pc, the next €5,500 or so at 3.5pc, then €52,500 at 7pc with the balance at 8pc. This is a progressive tax structure. The USC is blunt however compared to income tax proper, which contains an extensive system of tax credits and reliefs.

While USC is increasingly adorned with exemptions and favourable rates, for example for the elderly and medical card holders, it is almost comprehensible to the average citizen. The principal objection to USC is not that it is regressive, but that it must be paid.

A quirk of the USC system is that self-employed people with incomes over €100,000 pay a top rate of 11pc rather than the 8pc applicable to everyone else. Added to the quirks in the other two income taxes (why does Ireland need three?), namely income tax proper and PRSI, the self employed pay somewhat more tax than employees. The figures are as follows, for a single person:

Average Total Tax Take in pc, Income Tax, USC and (standard) PRSI

Income SingleSingle

Leve lEmployee Self-Employed

€15,000 1.9pc 14.9pc

€25,000 10.2pc 18.5pc

€40,000 23.7pc 27.8pc

€100,000 40.4p c42.0pc

€120,000 42.3pc 44.3pc

The figures take account of income tax credits and the rates applicable at various income levels under the three headings. The pattern for married people is similar. The self-employed lose out at all income levels but interestingly lose most, relative to employees, at the lowest income levels. So the medical consultant and the barrister pay a little extra but the bicycle courier pays a lot extra.

There is no harm, in the considerable time left before the final pre-election budget, in ironing out these kinds of anomalies. But to reduce substantially the overall burden of direct taxes for the lower and middle income earner, requires either that alternative revenue sources be found or that further expenditure cuts be sought.

A popular source of extra revenue is the taxation of The Rich, a group presumed to be numerous. The difficulty is that their actual numbers tend mysteriously to dwindle during the transition from opposition to government.

One regular suggestion is that there could be a new top rate of tax at a rate higher than the current figure (40pc for the income tax component) on the highest incomes.

Many European countries have more than our two rates of income tax. For example in Germany the top rate is 45pc (in addition to heavy social insurance charges). This rate clicks in at no less than €250,000 for a single person or €500,000 for a married couple.

Most people would have no objection to a similar new top rate in Ireland since they don't see themselves ever making those levels of income.

The trouble is that a new top rate at a high threshold will not yield very much revenue. To make a Soak the Rich policy deliver serious revenue, it is necessary to employ a pretty liberal definition of 'rich'. An honest proposal that would raise real money, say to soak at incomes of €70,000 or €80,000, will antagonise those already making such incomes but also those who hope to do so some day. Rather a lot of voters, particularly in the second group.

One route to a lower overall burden of tax on earned income is to raise taxes elsewhere or to embark on a new search for expenditure savings.

The recent drop in oil prices has encouraged some governments to help themselves to a little extra revenue from auto-fuels, especially diesel whose popularity in Europe has risen partly as a result of tax favouritism. There has been a change of view among the scientific community about the tax favours for diesel given its emission characteristics and diesel cars are in danger of being banned in some European cities.

The government appears to have lost its mojo when it comes to expenditure savings and it may not return before the election. There are some very fortunate quangos around whose deserved fate must perhaps await the next downturn. Everybody is against waste, but since governments do not actually incinerate money, one man's waste is another man's income.

Next week: Where can the savings be found?