The The Unbearable Lightness of Economic Ignorance. The Recession Diaries - July 6th
I have to admire those who claim we must bring the low-paid into the tax net. I admire their chutzpah, their audacious willingness to flaunt in public their remarkable ignorance of the tax system. For the low-paid are already in the tax net - big time. Let’s go through the arguments and see if those making these claims are agenda-driven or just badly misinformed.
First, nearly half of all tax revenue comes from indirect taxation - VAT, excise, etc. In 2010, 47 percent of all our tax revenue will come from these sources. Ireland is somewhat unique in the EU for its over-reliance on indirect taxation. In 2008, the latest data year, indirect taxes made up 34 percent of all taxation in other EU-15 countries; in Ireland it made up over 42 percent.
Second, indirect taxes are highly regressive. The ESRI-Combat Poverty Agency found that households on the lowest incomes - the poorest 10 percent - paid over 20 percent of their gross income (social welfare, work income, etc.) on indirect taxation. Households on the highest income - the top 10 percent - paid 9.6 percent. While this data is somewhat dated, the proportions are still relevant; after all, taxes on consumption are regressive throughout the EU and the US.
Let’s pause here for a moment. In our biggest tax revenue stream old age pensioners living alone, lone parents, the unemployed and disabled, casual workers, part-time minimum wage workers pay more than twice the tax ratio as those on the highest income. Hmmm. And yet, we have commentators urging the Government to take the ‘bold, courageous’ decision - and bring the low-paid into the tax net. Hmmm.
But it gets more weird and creepy. A Department of Finance survey found in 2007 that of high-income taxpayers earning up to €500,000:
- One-fifth paid less than 5 percent of their income in income tax
- Over a third paid less than 10 percent
This tax avoidance is due to the proliferation of tax breaks. We have to be cautious about putting two different studies together (different methodologies, different source data, etc.). However, if only as an exercise, let’s combine the ESRI-Combat Poverty Agency study with the Finance survey, We still find that that the poorest in society pay a higher tax ratio than many making hundreds of thousands of Euros a year. The Government tightened up slightly the ability to avoid tax in the last budget but it will be interesting to see what numbers the next tax survey produces (even so, none of this includes income streams which are exempt such as income from woodlands profits, artists, etc.).
The issue therefore, would seem obvious: how can we bring the highest income earners into the tax net, how can we increase the tax ratios of high income groups above that of the unemployed and the low-paid.
Then there is the economic ignorance of arguing for hitting low income earners - whether that hit comes via increased taxation or reduction in income supports. What happens when you hit such groups? You reduce consumer spending which in turn reduces tax revenue, hits domestic business which in turn reduces payrolls (either laying off staff, cutting hours, cutting wages) which in turn cuts revenue even more while increasing unemployment costs.
Of course, our economic ignoarti don’t get this simple ‘1-1-1 = -1′ equation. They keep shouting for more courage, more boldness, more ‘tough-love’ policies - without the love, of course. And when consumer demand falls by more than 10 times the Eurozone rate, when tax revenue collapses, when employment keeps falling - what is their response? Hole-shovel-dig-more.
So are such policy demands based on misinformation, laziness (looking up facts to back-up one’s argument can be such a drag) or plain ideology? Is there a connection between the demands to ‘bring the low-paid into the tax net‘ and the warning that ‘if we tax high-income groups too much they’ll (a) leave the country, (b) go on an investment strike, (c) have a hissy fit, etc.‘?
I’ll leave that to you. Whatever the reasons, the demand to increase taxation on the low-paid is a recipe for further bleeding the economy of demand - a low-growth, high-debt future in which unemployment will remain high, poverty will grow and the proceeds of any minimal growth will be concentrated among high income earners.
It’s time we got a bit angry about all this.
Discussion
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Comment by: gemma
Jul 6th 2010 at 16:07
excellent article, I refer you to an article on current.com
http://current.com/news/92514043_the-war-on-the-middle-class-is-nearing-completion.htm?xid=124?
Comment by: Colin Quirke
Jul 9th 2010 at 12:07
This is an excellent piece, and points out the hypocrisy of the call for bringing the low paid into the income tax net, but in principle I think it was a mistake to ever remove so many people from it. As shown, lower income groups are still heavily taxed by stealth, but don’t see themselves as tax payers. While the reduction of citizens to stake holding groups such as tax payers (or worse consumers) is undesirable, it is necessary for the citizens to be interested in how public money is spent. If people have to directly make, even a small contribution, to the public finances they are likely to take more ownership in how that money is managed, and who should manage it.
Comment by: Conor McCabe
Jul 9th 2010 at 13:07
“If people have to directly make, even a small contribution, to the public finances they are likely to take more ownership in how that money is managed, and who should manage it.”
Funny thing about that Colin is that the very rich in Ireland don’t pay any direct tax whatsoever, yet they feel that their interests should be the interests of the State. I pay more direct tax than Dermot Desmond, but there’s no sign of Dermot Desmond feeling disenfranchised as a result. Instead, he’s laughing at me for paying tax, and is looking forward to more poor people paying more tax to pay for his tax breaks.
The idea that PAYE makes one feel like a citizen doesn’t really stand up to the evidence. Up to the 1980s, the vast majority of farmers didn’t pay any tax, and again, there was no sense on their part of they being somehow disenfranchised as a result. I mean, from 1922 to 1982, were farmers non-citizens?
On the contrary, Irish farmers used their political and social clout to ensure they continued to avoid paying tax for as long as they could. No sense at all of being a half-citizen. At the same time, the PAYE sector which paid up to 80% of all tax, did not feel like super-citizens for doing so, just saps.
As far as how public money should be spent - again farmers in the past and the very rich today have very strong views on how public money (to which they did not and do not contribute) should be spent: it should be spent on them.
Comment by: Colin Quirke
Jul 12th 2010 at 09:07
You are right Conor, and I hate making the idea of citizen and tax payer some how equivalent, or the current political habit of presenting it as a group whose interests conflict with and are superior too the rest of the population. Even worse the government and other large parties will then claim to represent the interests of this put upon tax payer. We currently discuss NAMA in terms of its impact to the tax payer, and the burden this has placed on them, which is only half the picture.
Paying tax certainly doesn’t contribute to a feeling of citizenship, but I was trying to argue that it might contribute to a (legitimate) feeling of ownership of public money. Public money in this country is frequently and flagrantly wasted. Most spectacularly when it is called public private partnership and public assets and income are given directly to private interests. No one seems to care.