Christmas comes early for employers, high-income groups and right-wing ideologues. The Sunday Times (behind a paywall) reports on demands from Government backbenchers to introduce a mini-budget in an attempt to salvage the Government’s fortunes. And what would be the centre-piece of such an initiative? The race is on between Fine Gael and Labour backbenchers over who can make the most outrageous tax cutting promises, including the notion that the Universal Social Charge (USC) be abolished. Ho-ho-ho.
Let’s first deal with the idea of abolishing the USC. Who would be the greatest beneficiary?
As seen, someone on the minimum wage would get a boost of 2.2 percent in net take-home pay from the abolition of USC. This rises to over 10 percent for those on €100,000 and it gets even more lucrative for those on very high incomes. Abolishing the USC would be highly regressive – benefitting those on the highest incomes the most.
But this doesn’t tell the full story as the above refers to headline tax rates. High income groups can hire an army of accountants to avoid paying large amounts of income tax, inheritance and gift taxes, capital gains tax – exploiting a huge array of reliefs and allowances and other legal tax reduction strategies. However, that army is defeated when it comes to USC. There is no getting out of paying it. So, if anything the benefit to high income groups would be disproportionately higher than the chart above.
Let’s put this in Euros and cents.
Someone on the minimum wage would get €7 per week; at the higher end they would get over €350 per week (that’s right, a €16,000 annual tax cut). From my own, admittedly back-of-the-excel-sheet, calculation, over 46 percent of USC revenue comes from those earning €70,000 or above. Less than 10 percent of USC revenue comes from those earning less than €30,000. Guess who wins out in that tax-cut auction.
To be fair, some proponents of abolishing the USC claim that alternative means of getting revenue from high income groups can be introduced. This is simply not realistic. USC collects over €4 billion per year. That’s over one-third of what income tax takes in. How could you make it up?
- Increase the top rate of tax from 40 percent to 57 percent. That would do the trick (though as mentioned above, those who can afford accountants would be able to get around the high marginal tax rates).
- Abolish tax relief on pension contributions, health insurance and mortgage interest. However this would only bring in €1.5 billion – or 37 percent of the USC loss.
- Abolish PAYE tax relief. This would raise €2.8 billion – still, far short of the USC loss. And every worker above the income tax threshold would lose €1,650, wiping out gains for all low and average income earners.
- Increase VAT to nearly 30 percent.
There are other measures such as a wealth tax which the Nevin Economic Research Institute estimates could raise €250 and €500 million. You could toss in increases on capital income (inheritance, capital gains) but there’s a limit. Of course, there’s a real loss here. Instead of using the additional revenue from wealth and capital taxes to invest in social housing, education and health, we would only be clawing back a tax break that we gave to higher earners in the first place.
No doubt, (some) proponents of USC abolition would call for getting rid of many of the tax reliefs that benefit higher income groups. But yet they want to abolish the one tax – the USC – that does just that.
The fact is that USC abolition would inevitably lead to further cuts in public expenditure. And this is on top of the real cuts (after inflation) the Government intends to pursue up to 2018. The social state would be decimated. No doubt this would delight right-wing ideologues but for the rest of us it would lead to a further degrading of living standards.
Employers’ organisations would be delighted, too. IBEC ran a campaign all throughout 2014 focused on tax cuts as this would relieve wage pressure on the corporate sector. Cutting taxes is, in effect, a subsidy to profitable firms as employers can keep a larger share of rising profits.
To show the real problems consider this: personal taxation on Irish employees rose by 25 percent between 2008 and 2012, during a period of falling wages and cuts in income supports (e.g. Child Benefit). This was economically irrational and socially inequitable. However, even now:
- Personal taxation on Irish employees is still below the average of other EU-15 countries.
- But employee compensation is also below the EU-15 average.
- While consumer prices– even after an extended period of recession – remain well above the EU-15 average.
We are not over-taxed; we are under-paid in a high-cost country.
Here’s a question for those who advocate more tax cuts: don’t they read the papers? The ESRI’s report on the impact of Budget 2015 was covered widely. The Government spent nearly €650 million on tax cuts. And how did people fare?
This graph, showing the impact of 2015 budget measures on income decile groups, was taken from the recent ESRI report. The bottom 60 percent of households are worse off. And many that did receive gains – in the 7th and 8th decile – experienced only the most minor of increases. Most people’s living standards deteriorated despite the tax cuts.
There is a need to be honest with people. The projected growth rates of 5 percent are highly-flattered by ‘contract manufacturing’ – an activity which occurs outside the state but is counted in our national accounts because the activity is owned by an Irish-resident company; most likely, a multi-national. There are other components of our GDP growth which have little impact on the domestic economy such as the activities of the IFSC (as discussed here). The fact is that there is little room for unfunded tax cuts.
However, I am sympathetic to a call for a mini-budget. So let’s play a game and imagine that public finances allow some room for fiscal expansion. What would a progressive menu look like?
1. Increase the Minimum Wage by €1 per hour. This could benefit up to 300,000 workers. Businesses that can’t afford the increase in the short-term can go to the Labour Court and plead inability to pay, so this would only affect businesses that can pay.
2. Abolish Zero-Hour Contracts. Again, this would be a boost to the state’s coffers through higher tax revenue and reduced subsidies to low-pay employers.
These two measures would actually raise revenue for the Government – revenue that could be reinvested into boosting living standards. The impact on living standards for the low-paid would be more substantial than any tax cut.
3. Roll Out Affordable Childcare. A public service-based childcare system could reduce monthly fees by up to €500 per month – again, this is far more than any tax cut could achieve.
4. Freeze Rents. And even consider rolling them back to the price level at the beginning of the year.
This is not a long-term solution to the crisis in the private rented sector – but it is needed to prevent further cuts in living standards for people whose incomes, on average, are below the national average. In fact, this could be a mini-stimulus – the less I pay on rent, the more I can spend in productive economy.
5. Increase the Subvention to Public Transport and Slash Fares. If our subvention levels were at the EU average, fares could be cut by cut over a third we would still have enough money to expand transport services.
6. Abolish School Transport and Schoolbook Fees. This would be a big boost to households with children in school.
7. Drive Investment. In social housing, water infrastructure, and modern technologies (such as next generation broadband).
As the IMF has shown, this would also be a money spinner, reducing the debt burden in the medium-term.
And, of course, abolish water charges. It is curious that Government backbenchers are lining up to demand tax cuts and yet they support a new tax on water usage – a tax imposed on the 25 percent of the population who live in material deprivation.
This is one programme. Others might have better ideas. And if you crafted the programme right – basing it on rising wages and falling living costs – it might end up costing the Government very little as it would boost economic activity for all income groups and household types.
Ultimately, progressives must challenge the tax cut agenda but this won’t be easy. For too long we have reduced living standards to tax levels. We need to point out that people spend significant amounts of money on services that in other European countries are provided for free or at low-cost: healthcare, childcare, public transport, primary education. Reduce Irish costs to EU levels in these areas and living standards will rise.
So we need to get this message out: a tax-cutting agenda is a tax on living standards.
Progressives in all political parties, the trade union movement and civil society groups should, with one voice, reject the tax-cutting agenda. We may have different spending and investment priorities, we may differ over the best way going forward. But if the tax-cutting agenda succeeds, debates about investment priorities will be redundant as the available resources will be spent on subsidies to high-income groups and employers.
This will not be an easy debate to win but if we unite together we have a chance. The fortunes of the economy and society depend on it.