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Thomas Molloy: Labour beats Fine Gael in tricky art of taxation

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Economist Milton Friedman once wrote that governments can raise taxes because they can persuade a sizable fraction of the populace that somebody else will pay.

To their credit both Fine Gael and Labour admit pretty much everybody will have to pay something to get us out of the present mess.

The problem is they are coy about exactly how much it will cost you and your family and like to imply that somebody else will end up paying more than you.

Fine Gael concedes its taxes will cost the average family €1,800 over the next four years, but claims the Labour Party will add €3,200 in extra taxes to the same family.

At a time when inflation is advancing, the European Central Bank is set to hike interest rates and pay freezes are the order of the day, extra taxes are likely to pile up the misery for all of us in the years ahead. The problem is that they are inevitable.

At first glance, any increase might seem strange. After all, Labour and Fine Gael have promised there will be no increase in income tax for anybody earning less than €100,000 a year. While that promise will go down well on the doorsteps, the reality is both parties plan a series of other taxes on everything from a bottle of wine to a pension contribution.

There is such a bewildering array of tax hikes and tax breaks contained in each party's manifesto it is useful to step back and look at the big picture.

Fine Gael wants to raise €2.4bn in taxes over the years ahead. Some of that will come from PRSI, capital gains and all the other taxes which parties love to pile on business, but a fair chunk will come from your pay packets.

Labour wants to take €3.5bn out of the system in the next few years assuming (and it is a big assumption) the European Commission allows the party to extend the deadline for bringing the country's finances into order. If the EU says no, then Labour must raise €4.5bn.

These are the back-of-the-envelope calculations used by Fine Gael yesterday -- but the terrifying thing for those who are already stretched financially is that they are probably too conservative.

With 100,000 people expected to leave the country in the next 24 months, the number of families could shrink quite dramatically.

Fine Gael assumes there are 1.47m households in the country, but that figure may be wrong and may sink significantly in the years ahead -- leaving those families who stay behind with a bigger tax bill.

When it comes to fairness, Fine Gael's tax measures tend to be spread more evenly across families and target consumer spending while Labour's hikes will hit wealthier families disproportionately.

Among the FG policies set to cost families significant amounts of money are changes to child benefit. This benefit, which ballooned in recent years, is set to be trimmed back by Fine Gael for most middle-class families by an amount not yet quantified although Labour reckons it will cost a family around €125 a year for every child, something that was denied by Enda Kenny yesterday but looks about right.

Labour has been less open about its policies during the election campaign and it is a little harder to see where the tax hikes will come -- but come they must.

Among the biggest tax hikes for many families will be the abolition of mortgage interest relief for those who own second houses (Fine Gael will keep it) and changes to the pension rules aimed at saving the State around €500m. Another large tax increase is contained in Labour's plan to raise €310m from VAT which will hurt all families' spending power. FG hopes to cut the lower VAT rate to 12pc from 13.5pc in the same period along with increases in VAT elsewhere.

Some taxes are new and unfamiliar. Carbon tax for example has only recently entered the lexicon and remains a somewhat abstract notion but all parties have embraced it, perhaps because it is so difficult for consumers to quantify. FG wants to raise it to €25 a tonne -- which is the same as Labour and €5 less than Fianna Fail.

Louis XIV's finance minister Jean-Baptiste Colbert, who knew a thing or two about taxation, once said the art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing. On this basis, it may be that Labour understands the art better than Fine Gael. Many of us will probably be more inclined to notice that our favourite bottle of wine has jumped a euro in price while failing to notice that the cost of our weekly shop or monthly haircut has been pushed up through higher VAT rates.

While Fine Gael's calculations are crude measures which do not deserve to be taken too seriously, the basic conclusions are sound at this stage in the economic cycle.

Labour will tax us more, although many of Fine Gael's taxes and reductions in benefits will be more noticeable in the short-term.

Irish Independent