Opinion David McWilliams

Sunday 20 January 2019

Our workers are being hit with the bill for those who opt-out

It is very clear that the Irish PAYE taxpayer is being squeezed every which way (Stock picture)
It is very clear that the Irish PAYE taxpayer is being squeezed every which way (Stock picture)

David McWilliams

This week the column comes to you from New York - Hell's Kitchen, specifically. I'm sitting in a café, looking out at a bar called Mickey Spillane's. It's funny how that name would have once terrified locals.

Today the name is in bright lights over a welcoming pub. In the early 1970s, Hell's Kitchen was still run by the notorious 'Westies', the last of the Irish Mob gangs, under the leadership of Spillane.

Of course, these days Hell's Kitchen has moved with the city. It is becoming trendy, expensive and displays that great indicator of social gentrification - flamboyant gay men walking dogs in waistcoats.

It is this constant reinvention - and, more accurately, the belief in the right to reinvent - that gives New York its special energy. Failure is a good thing; indeed, it is expected. One of my favourite New York expressions is: "If you haven't failed, you aren't trying hard enough."

My friends here - all late 1980s emigrants from Ireland - have had more careers than most of us would have in three generations. Some initiatives work and some don't, but they are still here, having a go.

We don't need to be reminded about how far this mindset is from the prevailing one in Ireland, where failure is often seen as toxic and contagious. The person who fails is shunned and avoided, just in case you might catch the failure germ. Success is celebrated, and rightly; but for every success, there will be a failure and the failure should be the learning curve for the next success and so on.

This belief in the recurring cycle of what Keynes described as the 'animal spirits' drives US economic policy.

Animal spirits drive every economy. It is animal spirits that get us to take risks, to imagine and venture where we can make money, to assess that tomorrow we can reward ourselves if we put our heart and soul in some initiative today.

However, if too much of that reward for hard work is taken away in the form of taxes, people will assess the numbers and conclude there is no point taking a risk, working harder or having a go because in the end too much of this effort will be taxed and the money will be given to someone else in the society who isn't having a go. If the doers give to the takers, why not be a taker?

When you hear that water charges will come out of some magical place called "general taxation", what thought goes through your mind? You realise this means in plain English that the money will come out of your pocket, the taxpayer.

It is very clear that the Irish PAYE taxpayer is being squeezed every which way. If social welfare goes up, if the takers are going to take, then the doers will have to give and if this exchange becomes too onerous on the doers, they won't give. They will give up.

When marginal rates of tax hit critical levels, the system falters and the black market takes over. Are we at this point yet? No one can be too sure, but the figures speak for themselves.

Chart 1 shows what's been happening to income in Ireland, vis-a-vis the UK and the eurozone.

Income has been growing here quickly as more people take risks, setting up businesses, releasing their animal spirits.

Traditionally, taxes should be going down as incomes rise because there is more tax to go around and, with more people working, the social welfare bill should reduce. But this has not been happening. Taxes in Ireland have been rising. And the gap between what we pay in income tax in Ireland on average incomes and what people pay in the UK and the rest of the EU on their average incomes, is large and getting bigger.

So how come this is happening? Well the next chart (Figure 2) tells its own tale.

It shows what you would expect: As incomes increase, the tax take increases. However, it hasn't just increased, in fact the recovery in the tax take has been dramatic. You can see very clearly that the annual tax take fell to €37bn in the depths of the recession. But the recovery in the State's revenues has been dramatic. Last year, the tax take was well above €50bn and by the end of this year should be close to €60bn. This means that taxes are up 40pc since the crash.

But where has this money come from?

The dramatic turnaround in the tax position is largely attributed to the surge in the number of people working. There are over two million working and paying taxes.

Historically, Ireland first hit the two million mark in Q1, 2006. This jumped to 2,169,600 people at work in Q3, 2007. After the crisis, it was only in Q2, 2016, that employment figures returned to their former glory and currently stand at 2,048,100 people at work as of Q4, 2016.

The massive upswing is creating its own demand and this is driving the income of the country. This increased activity is pushing up the tax take dramatically. Now here is the question: Where is that tax money going and what impact is it having on the society? Is all the money going on building infrastructure which will benefit the economy in the years ahead? Have we seen lots of new roads, ports, houses, schools, hospitals and the like being built?

No, we have not. In fact, the capital budget has been slashed, so much so that motorways and road building have been curtailed dramatically. Likewise, subventions to public transport have been reduced in real terms. Public house building is non-existent or at least is far, far away from a level that might give potential home-makers a break. This we know.

So where has the money gone and what might be the consequence of this spending?

Before we go any further, have a look at this chart (Figure 3). This shows the amount of people making themselves available for work here. You can see clearly that the number has fallen dramatically and not recovered since 2008. What does that tell us? It tells me that there are many people who are opting out of work.

This could reflect population dynamics, but with the youngest population in the EU, having too few people of working age is not our problem. The issue is whether they could be bothered working if they can get income elsewhere. Check out the chart. They are the takers. They are not working because their bills are being paid by someone else.

So let's go back to the original idea that people create business so that they can have a go. The animal spirits drive them. But then they find that they are giving and others are taking. We can see that the tax take has risen, but taxes haven't come down. What has gone up is social welfare spending. Now there may be some good reasons for this, but at least in the labour market the effect has been many tens of thousands of people deciding to take other people's money, opt out of the workforce and not make themselves available for work.

This is not a sustainable position and the political party that moves to protect the taxpayers, speak up on their behalf and agitate for the givers, must surely be in a strong position in the years ahead, don't you think?

Irish Independent

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