Planned tax cuts likely to increase inequality

Cormac Staunton:  The Government's Spring Statement, announced yesterday, was seen by some as a bit of a damp squib, with very little detail about economic policy. However, drilling down into what the two Ministers said, we see that there is a clear intention being laid out.

Ireland's income tax rates compared to other OECD countries 

Size of Tax Cuts
The sheer scale of the tax cuts announced highlights a significant lost opportunity. Despite recent increases, Ireland's income taxes are still low-to-middle compared to OECD countries (see diagram above). By choosing to cut taxes further, the Government has chosen to forego €2 billion in additional tax revenue over the next three years.

This is income that could otherwise be spent on health, education, public transport and public housing.  That sort of investment could really be used to tackle some of the inequalities highlighted in TASC’s publication Cherishing All Equally. And it could have been achieved without raising taxes on anyone.

Setting the Parameters
The Government have stated that it will allocate between €600 and €750 million in additional expenditure in 2016. However, as Minister Howlin stated in his speech, this is largely to keep up with rapid demographic changes. While there will be a ‘National Economic Dialogue’ with civil society to discuss spending, he made it very clear that this will not include a discussion of the balance of tax cuts versus spending increases.

“Those groups have obligations too. We cannot meet all the demands of each and every one. To try to do so would be to bankrupt the State. Proposals for increased expenditure should be matched by genuine attempts to find matching funding, commensurate with the proposal. No party can ignore the general parameters under which public policy has to be made. Our engagement will be firmly rooted within these parameters.”

Impact of Tax cuts
Which brings us to the impact of the tax cuts. While the statement made no mention of what the tax cuts will look like, Minister Noonan helpfully stated in later media appearances that

“We’ll mirror what I did last year. We’ll direct the benefits of the tax cuts to low-paid people and to middle-income people. Everybody will get something but we will cap the benefit, as we did last year, so that there aren’t disproportionate gains for people on very high incomes.”

Assuming that by ‘mirror’ the Minister meant ‘repeat’ (rather than ‘do the opposite’) then we know exactly what the impact of tax changes in Budget 2016 will be on incomes. While there will be some benefit for low and middle income earners, the overall effect of changes to USC and income tax rates and bands will be highly regressive.

In Budget 2015, the majority of the benefit, both in relative terms and absolute terms, went to those between €35,000 and €70,000, with the greater benefit higher up. In fact, last year €70,000 was the income ‘sweet-spot’ where the benefits in both absolute and relative terms were maximised. An income of €70,000 puts you in the top 10% of income earners in Ireland.

Income changes from Budget 2015 - TASC calculations

Income changes from Budget 2015 - TASC calculations

TASC’s analysis is consistent with the ESRI research which looked at the effect of all tax and welfare changes, and showed that Budget 2015 lead to income losses at the bottom, but increases at the top.

As the ESRI put it:

“This pattern of losses in the bottom half of the income distribution, declining as income rises, and gains in the upper reaches, rising with income can clearly be described as regressive.”

While the losses in this picture are due to water charges, the distributional will be similar in 2016 if the government pursues the same tax strategy: those at the top will gain far more than those at the bottom. The government has signaled that it intends to do this every year until 2020.

If they do, we can expect that economic inequality will rise accordingly.

Cormac Staunton is Policy Analyst at TASC. You can follow him on Twitter @Cormac_Staunton