IBEC's proposed tax cuts and Ireland's 'Low Tax Triangle'

Nat O'Connor: The business lobby group IBEC is advocating cuts to the higher rate of income tax. Such cuts would only benefit one third of income tax payers, and one sixth of adults in Ireland. The Taoiseach is reportedly sympathetic to this viewpoint, and Minister Noonan has focused on the higher rate of income tax for any cut in Budget 2015 (Irish Independent).

TASC has just published a six-page summary of how much tax people actually pay out of their incomes, in order to inject the facts about income tax into the debate.

The risk for most people is that if the tax cut lobbyists are successful, there will be cuts aimed at the 41% rate, which will benefit only the better-off in society - yet public services and social transfers will be cut again to fund those tax cuts.

In Ireland, most of us pay far less than the 52% 'marginal' tax rates (made up of income tax, USC and PRSI) and we pay much less tax and social insurance than most other Europeans, because our system has more tax credits, tax reliefs, etc. But there is no doubt that many people like the idea of a tax cut because they are under such pressure to meet their needs from their take-home pay.

IBEC has characterised the tax increases in recent years as "penal austerity taxes". Yet, they are ignoring the fact that the tax base was hollowed out during the boom, and tax take collapsed by a third between 2008 and 2010. There is a need to bring in new taxes to replace the unsustainable reliance on property-based tax from stamp duty, as well as income tax and VAT that was ultimately linked to the property bubble. If the Government further reduces taxation in Budget 2015, existing public services will become unsustainable and the national debt could become unstable. As it is, Ireland is still not generating enough tax and social insurance to pay for services.

IBEC's press release argues: "Cut income tax: The tax burden is too high and tax on work is way out of line internationally. The entry point to the higher marginal tax rate should be increased, and the marginal rate reduced below 50%. This will put more money into the pockets of Irish consumers, and ultimately benefit the Exchequer though greater economic activity and tax revenue."

On all points IBEC is wrong:

"The tax burden is too high" - Ireland total tax and social insurance take is three-quarters of the EU average.

"tax on work is way out of line internationally" - As shown in the OECD's latest taxing wages report, the 'tax wedge' on average workers in Ireland is the lowest among EU members of the OECD, and the second-lowest in the whole OECD for single people. This is largely because employer's PRSI is so very low in Ireland.

"The entry point to the higher marginal tax rate should be increased and the marginal rate reduced below 50%" - Why? Ireland's system grants generous levels of tax credits to everyone, while other countries don't. Rates or bands don't matter. What does matter is effective levels of tax paid and in this regard Ireland is much lower than other EU countries (as shown by the OECD and in TASC's analysis).

"This will put more money into the pockets of Irish consumers, and ultimately benefit the Exchequer though greater economic activity and tax revenue" - This is unlikely. Firstly, IBEC's proposal is to give cuts only to the sixth of adults with the highest incomes rather than lower income people who are more likely to spend all of their income in the local economy. Secondly, the ESRI has just demonstrated that higher earners are more likely to pay down debt, not spend in the economy. Even if they did spend, they are more likely to spend on imports or foreign travel - with no benefit to Ireland's economy. Thirdly, many people will have to put their hands in their pockets to pay for services that will be cut if tax revenue falls - so an extra €200/year would quickly be taken back through school costs, medical costs, etc. In sum, there will be little or no boost to economic activity and the loss of tax revenue will simply result in a loss of services. Simultaneously, GDP will contract to the extent that Government spending, investment and social transfer are cut. So the net effect of tax cuts in Ireland's context is far more likely to be a shrunk economy (lower GDP).
One way to understand the issue is to see a triangle connecting low taxes, low services and high 'out of pocket' costs for goods and services that would be provided publicly and paid for collectively in many other European other societies.

If Ireland is to provide better public services and higher levels of social welfare in future, it is necessary to address all three parts of the triangle at the same time.

There is a need to examine cost of living - food, rent/mortgages, childcare, energy, transport and more. This does not need to cost the public finances much. Stronger regulation and enforcement of competition rules to break cartels and oligopolies could make a significant difference, but that would require political will to stand up to businesses not engaged in fair and open competition.

Taking some costs away from individuals and families in favour of public service provision could also be a game-changer. For example, most European countries subsidise childcare to a much greater extent than Ireland. Equally, affordable rental housing is much more frequently available from towns and cities across Europe. Any move to open up new areas of public provision (or subsidy) would have to be funded with new taxes. But it's a question of cost-benefit analysis. Would most people be better off if all of society helped pay for child care, so that they could work in other occupations (growing the economy and paying tax too)? Would most people benefit if the state stepped in to provide cheaper rental housing for a category of workers who will never become home owners? The answer is probably yes.

Tax and social insurance is therefore not a question of 'cuts good, tax bad' - but needs to be part of a conversation about public services, best value for most citizens in the balance of collective services versus individual costs, and working out how to pay for public services sustainably and equitably.

TASC's latest policy brief provides a factual basis to do just that.