The Trojan Horse

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As if we didn’t know, we now know what the Government’s intentions are regarding tax cuts:

‘Minister for Finance Michael Noonan has pledged to widen income tax bands as soon as the State can afford it to take people out of the higher tax bracket.  Mr Noonan said the biggest problem facing the tax system was the low level of pay at which people entered the higher tax rate. He said in Ireland people started to pay the higher rate on incomes of just €32,800 and this was far lower than in other EU countries.  “If I have the money that is where I will go. I would like to reduce the threshold at which people hit the higher rate,” he [said].

The standard rate tax threshold is the Trojan horse for the tax-cuts lobby.  It is true that in the Irish system people enter the top rate of tax at a very low wage level.

1

Here, we enter the top rate of tax at €32,800.  In all other countries, the threshold is higher; in Germany, you don’t enter the top rate of tax until €250,000.   So that picture looks pretty clear, doesn’t it?  Well, no because it is not the full picture. I will address the details of marginal tax rates on incomes in different countries in a subsequent post.

But to make a quick point – if Irish workers are ‘disadvantaged’ by entering into the top tax rate so early, why are taxes so low?  These are the headline tax rates (personal allowances only) from the OECD’s Benefit and Wages database.

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In Ireland, a single person on €40,000 a year is well into the top tax rate.  Yet, as seen above, the average personal tax rate is well below other countries.  As said, I will examine why this is so in a subsequent post.  But let’s put away the nonsense that we are an ‘over-taxed’ economy.

Let’s return to the demand to raise the standard rate tax threshold.  Who will benefit?  Relatively few.

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This is a crude approximation based on the latest breakdown from the Revenue Commissioners, but one that tallies with income distribution studies.  Nearly 75 percent of single persons would be unaffected by increasing the standard rate tax threshold – because they earn below €32,800.  For couples with one or two incomes, approximately two-thirds would be unaffected because their incomes are below the threshold.

In total, over 70 percent of income tax payers would be.  And this doesn’t count all households – the unemployed, pensioners, single parents, the sick and disabled.  When these are included, we can see that a policy of extending the tax threshold would have no effect on the overwhelming majority of people.

So only a minority would benefit – and this would come at a cost.  Increasing the threshold by which people enter the top rate of tax by €1,000 – from €32,800 to €33,800 - will cost €150 million.  Of course, some of that would return to the Exchequer through increased VAT, etc. but it would be inefficient.  Those on very high incomes could just as likely put it into savings – which would diminish the economic impact.

And those on high incomes would definitely benefit – everyone above €32,800 would benefit.  And households earning €100,000 would receive nearly 15 percent of the total benefit of increasing the standard rate threshold.

And what would the actual benefit be?  To extend the standard rate tax band by €1,000, the single earner would get €4 a week.

So here’s the question:  what’s the point?

  • Yes, Irish income taxpayers enter the top rate of tax at an early stage.  But even about that threshold the average tax rate is still low in comparison with other countries.
  • Over 70 percent of income taxpayers would not benefit because their incomes are too low.  When you add in all households the overwhelming majority of people wouldn’t benefit.
  • The cost is very high for a minimal benefit – and much of the benefit would go to very high earners.

We don’t need tax cuts (though there are issues of reform – I will throw out a few ideas in subsequent posts).  Middle income earners don’t need tax cuts.  I addressed this issue in a previous post:

  • We need wage increases:  an increase in the minimum wage, strong wage floors under the revamped Joint Labour Committees, more working hours, pay rises that that give emphasis to the low paid.
  • Households with children need affordable childcare (imagine the benefits from a reduction of childcare fees from €800 a month to €250 a month), truly free education including uniforms, bus transport, schoolbooks, hot lunches and an end to ‘voluntary’ fees.
  • We need free GP care and heavily subsidised prescription medicine, affordable nursing care for elderly relatives, stronger income supports such as maternity benefit, certainty in retirement income, subsidised public transport.
  • Households caught in the debt spiral desperately need relief.

None of these needs can be achieved through tax cuts.  Indeed, tax cuts will only exacerbate the situation because there will be less revenue to address issues that require substantial investment in income supports and the social infrastructure.

The tax-cuts lobby takes one piece of data – entry into the top rate of tax – and uses it as a ruse to further degrade our social and economic infrastructure; all to benefit only a minority of people.

That’s what this debate is about.

 

One Response

  1. 6to5against

    February 13, 2014 12:00 pm

    So IBEC, Noonan and Kenny all agree that we need higher rate tax cuts. I think what we have here is a societal consensus!