Dublin Opinion

Sean O’Riain has an excellent post up on the Progressive Economy blog at the moment, in which he says that the collapsing exchequer returns show that we need a growth strategy - a point which echoes many of Michael Taft’s posts on the topic but is rarely mentioned elsewhere. If we are even going to begin to think about increasing taxes then lets hit tax relief first, but cuts and tax increases can only do so much, says Sean:

The crux of the matter is that this gap is too huge to close with cuts and tax increases, even though those will play a part. We have scope for borrowing, given our low debt ratio but this will give a few years ‘breathing space’ at best.

What can close the gap is growth. After all, in 1987 we introduced some cuts but the public finances improved when we managed to generate growth. We need to be crafting a stimulus plan for growth, incorporating fiscal measures and programmes that generate employment and are geared towards the medium to long term developmental needs of the economy and society (education and training, greening the infrastructure and economy, small business development, innovation, urban design, caring and other social and reproductive work, and more).

But he also referred to a thread on Irish Economy on the restructuring of taxation, some of which is worth reproducing here.

Colm McCarty, Chairman of ‘An Bord Snip Nua’ (sound a hollow laugh) took issue with Patrick Honohan’s very scary suggestion that the government should reduce the tax net down so only those earning less than 10,000 will be exempt from tax, rather than the current 20,000, which is half the industrial wage:

Is it a good idea to drag a large slice of the bottom portion of the earned income distribution back into the tax net? Bear in mind that social welfare income is tax exempt. What is the impact on replacement ratios? The fact that a large portion of lower-paid employed people do not currently pay income tax can be seen either as a problem or as an achievement.

It is curious that the question McCarty raises barely registered with the others in the thread and certainly wasn’t something that Honohan seemed to consider. But thankfully it was picked up by Aedín Doris, a Labour Economics lecturer in NUI, Maynooth (and subsequently quoted in Sean O’Riain’s post). I reproduce it here in full, because with all the crap that is coming down the line in the next month it is an opinion that should be kept in the forefront of our minds.

Colm sounds a note of caution about bringing lots of low-paid workers back into the tax net, and I second this caution. Remember that the tax-free portion of income is pretty much set to exempt those working full-time, full-year on the minimum wage; if 38% of the working population aren’t paying tax, it’s because we have a lot of people working part-time and/or on low hourly pay.

This point struck me very forcibly at the Crisis Conference when Philip put up a table showing how out of line with other countries Ireland is in this respect. The table showed, among other things, that the average tax rate for a single parent with two kids earning (if I remember correctly) the average wage was -35% in Ireland (i.e. income is increased by 35% on top of labour market earnings), but is +35% in France, with an EU average of about 20%. Rather than thinking, Wow, Ireland is too generous, I was sitting there wondering how it made any economic sense (not to mention how it was fair) to take 35% or even 20% of the labour market earnings of someone on average wages trying to bring up two kids alone. Of course, part of the problem is that these figures aren’t comparable at all - such a person would be entitled to essentially free childcare in France, for example - but it does illustrate the problems of benchmarking to other countries, when it’s quite possible that it’s the other countries that have it wrong.

In my view, widening the tax net should be considered only after all possible tax expenditures have been pruned away, and the extent to which any one individual can benefit from them strictly limited.

I also believe that the income levy should stand for as long as the fiscal crisis continues (but no longer), which would bring the top rate for very highly paid workers to 51%, rather than Patrick’s 48%. Unlike Greg, I don’t think this is a problem if it’s temporary, as I don’t see where all these high fliers are going to go in the next couple of years.