The Desert of the Irish Debate

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desert-2There is an old American saying:  if you have nothing to say, wrap yourself up in the American flag and recite the constitution.  In Ireland, today, if a politician, a political party, has nothing to say, no new ideas to advance, then call for tax cuts.  The current deluge of leaks in the media about impending tax cuts are not evidence of sources having something to say; it is evidence of how the debate over future economic and social strategy has been turned into a desert.

And what tax is being hammered?  The most efficient, transparent, potentially progressive tax we have – a tax that even an army of accountants acting on behalf of the rich can’t get around:  the Universal Social Charge.  It is called a hated tax, an unfair tax, an anti-entrepreneurial tax.  Everything that is wrong with our income tax system is blamed on the USC whereas the reality is that the USC has the potential to repair much that is wrong with our income tax system, distorted and misshapen by the myriad of reliefs, allowances and exemptions – most of which benefit high-income groups.

People have been put under pressure from the tax increases during the period of recession.  It was irrational to reduce people’s take-home pay when economic growth was falling, wages were being cut in real terms, working hours and income supports (e.g. Child Benefit) were being cut.  Between 2008 and 2012, the effective tax rate rose by 30 percent.  This was a major contributor to lengthening and deepening the recession.

Today, however, the issue is not ‘high taxation’; it is that people’s living standards are low by EU-15 standards.  The debate over cutting taxes, however, shows how incapable political parties are of addressing this issue.  Rather than admit intellectual impotence, they propose tax cuts – which will only exacerbate the very problems they are incapable of addressing.

Tax Cuts:  Giving More to Those Who Have More

Ireland has one of the highest levels of market inequality in the OECD.  As the recovery becomes embedded we are in danger of accelerating this trend.

USC Desert 1

Managers and professionals have experienced a medium-term increase in weekly income.  Not so other groups.  So how will USC cuts impact on this?  Negatively.  There are two ways to look at this.

USC Desert 2

As seen, cutting USC by 2 percentage points (reducing the standard rate from 7 percent to 5 percent) will maximise benefit to those on €70,000.  They will benefit three times more than those on low pay (€25,000) and nearly twice as much as those on average pay.  The benefit declines after €70,000 as this is the higher rate threshold – which I assume the Government won’t touch.

In nominal amounts, those on low pay would get €2.86 per week, rising to over €20 per week for those on €70,000 or more.

A more comprehensive estimate comes from the ESRI.

Robin Hood 2

This shows the impact of a USC cut equivalent to €500 million – close to the estimated cost of reducing USC by 2 percent.  It is highly unequal with the lowest income groups receiving very little gain and those at the top receiving the highest gain.

So let’s put this together.  Those on the highest incomes (managers and professionals average over €60,000 per year) with the highest increase in weekly income over the last four years are going to get the largest benefit from a USC tax cut.  Where is the equity in that (here you can find an analysis of the more ridiculous proposals to abolish USC)?

False Assertions

The Government claims it wants to help low-average income earners.  However, the greatest benefit goes to those on €70,000.  Those who earn €70,000 or more are in the top 7 percent of income earners.  This hardly represents ‘average’ income earners.  The fact is that 66 percent of all income earners earn less than €35,000.

They further claim that Ireland has a high level of personal taxation – especially among low-average income earners.  This is hardly the case – at least in the European context.

USC Desert 3

Just to note:  these are headline rates.  They take account of personal tax credits/allowances but not secondary relief (rents, mortgage, health insurance, pension contributions, etc.).  So these are not effective rates.  Overall effective tax rates show Ireland to be only a small amount below average EU tax rates – which suggests that income earners in other jurisdictions can avail of a number of reliefs.  However, this shows the trajectory of the underlying tax base and, so, is helpful.

Ireland is at the bottom of the tax when it comes to low-pay (55 percent of average pay) and second to the bottom when it comes to average pay.  The assertion that we are ‘high-taxed’ is not substantiated by the data.

This is not an argument to start raising taxes on low/average income earners.   We can eventually catch up to EU averages through wage increases maintaining indexation of personal credits and thresholds below average wage increases.  However, there is no argument for cutting taxes.

So What is the Argument?

The argument is to reduce Ireland’s high living costs – health costs, public transport costs, private rents, education costs.  This can only be done by ‘socialising living costs’.  Programmes such as increasing subsidies for GP fees, prescription medicine, back-to-school costs (e.g. making primary and secondary education truly ‘free’); and providing affordable childcare and affordable private rents – these can put more money in people’s pocket, provide security and raising living standards.

It is simple economics:  if you put more money into households who need childcare, watch childcare costs go up.   Between 2002 and 2008 – at a time of rising incomes – childcare costs increased by twice the rate of inflation; similarly with GP fees.  Now that incomes are rising again, we shouldn’t be surprised to see the costs of essential services that are purchased in private markets also start to rise.

So what people gain in tax cuts they will lose out in higher living costs.  What is needed is the establishment of efficient, equitable public markets – for health care, childcare, transport, and income supports for people in and out of work.  This doesn’t always mean direct state provision (community and non-profit childcare providers can be part of a public market) but it does mean substantial investment.   And none of this factors in the urgent need to substantially increase investment in our economic infrastructure –high-speed broadband, social housing, public transport, green energy, etc.

However, if we are start slashing taxes we won’t have the resources to fund these public markets and necessary investment.

We need a profound debate with new ideas and new proposals over the best way to raise living standards.  This will take hard work, sweeping away unsustainable assumptions and misleading generalisations.  This is not what we are getting.  We are getting a debate from parties and politicians with nothing to offer.

And when you have nothing new to offer, when you have run out of ideas – call for tax cuts.

Welcome to the desert that is the Irish debate over economic and budgetary policy.

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