Colm’s columns

Colm Rapple
Irish Mail on Sunday April 22, 2012

There are two key assumptions underlying the Government’s decision to impose water charges. The first is that the investment will yield a real return and the second is that, as a revenue raising exercise, charges are fairer and economically more effective than the alternatives such as higher income and wealth taxes.

Installing meters will not, of itself, create any wealth. The meters will be imported and the employment gains could be equally achieved through other capital investment programmes that would certainly yield a real return. There is a wide range of possibilities from insulating homes to improving flood defences. But the obvious alternative would be to use the money that will be spent on installing meters, on improving the current water supply infrastructure, plugging many existing leaks and providing for future needs.

It’s not that we are short of water.  Britain has a population ten times larger, a land mass only three times larger and far less rainfall. It gets by.  With a little investment we should have potable water to spare for the foreseeable future. But the only possible gain to be derived from water meters will be reduced consumption.

But will that produce sufficient savings to even cover the costs of installing the meters, yet alone yield a real return?  I very much doubt it. Instead of paying for water through general taxation, we’ll be paying through water charges. We will certainly end up paying more for less. We’ll be using less water but having to bear the extra cost of the meters, their installation and maintenance, and the bill collection scheme.

Incidentally, the sophisticated domestic bill system operated by Bord Gais, which will be running the new water board, is part of its energy retail division that’s up for privatisation.

Part of the rational, according to Taoiseach Enda Kenny, is to broaden the tax base and lessen the need for extra taxes on income.  To a well-orchestrated chorus, he regularly repeats his opposition to what he describes as taxes on work as if there is general agreement that income taxes are the worst possible alternative.

But the truth is that we are still not a heavily taxed society. There is ample scope for taking more in tax from high-income earners and from the wealthy without eliciting adverse economic consequences.

According to provisional figures released by the Revenue Commissioners income taxes took only 14.4% of our gross income last year. That was up from 13% in 2010.

That’s an average across the board and, of course, many paid a far higher proportion of their income in tax. But many paid less. The tax system is progressive so that the higher your income, the higher the percentage taken in tax.  But at the top of the pile, there were 117 taxpayers who declared incomes in excess of €2 million last year. Their total income was over a billion – an average of €8.6 million each – and on average they paid only 34% in tax. The 519 taxpayers on annual incomes of between €1 million and €2 million paid 27%.

Those opposed to higher income taxes ignore these effective tax rates, preferring to zone in on the top marginal tax rate of 52% which doesn’t take account of basic tax credits or the many still generous concessions available particularly to higher earners.

Many taxpayers pay tax at 52% but only on the very top slice of their income. It’s made up of 41% tax, 4% PRSI and 7% Universal Social Charge.  But nobody pays anything close to that on his or her total income.

Those with incomes of between €40,000 and €50,000 paid 11.6% of their incomes in tax. The effective tax rate rose to 20% for those on incomes of between €90,000 and €100,000 and to 25% for those on between €150,000 and €175,000.

The continuing, erroneous, claims that we are a high taxed society are likely to do more harm to the economy, than any extra taxes on high income and wealth ever would. Historically we are paying far less tax now than we have done in the past. The tax take is currently about 38% of national income, well down on the peak of 45% hit in 1983 when incomes above €10,000 were taxed at 65%.

That compares with 48% in Denmark, 43% in Belgium and Italy and 46% in Spain.

They’re global tax figures but the claim that higher income taxes would put us at a severe competitive disadvantage in attracting foreign investment. Tax and social welfare costs are very low on Irish employers compared with their EU counterparts.

One way of measuring this competitive advantage is to compare how much it costs an employer to provide a worker with take-home pay of €100. The OECD has done the comparison for single workers on the average wage.

It Ireland it cost €143, the lowest among the EU countries. The comparative figure for Belgium is €224. It’s €196 in France and Germany, and €165 in Spain.

Neither of the assumptions being used to justify water charges holds water.

Colm Rapple

The gap between rich and poor is widening. The top 10% of households enjoy average gross incomes at least 19 times higher than the income of the poorest 10%. The rich pay more tax, but even taking that into account, they still have €14 disposable income for every €1 available to families on the lowest rung of the income ladder.

The poorest 10% of families were surviving on weekly incomes of €174 in 2010 while the richest 10% had €2,276 to spend each week out of pre-tax incomes averaging €3,222.  In other words they had disposable incomes, after tax and other deductions, of €123,000 a year.

That’s an average. Some of those households, and there are about 165,000 of them, had disposable incomes well in excess of €123,000 a year. Some had less but all of them had gross annual incomes of more than €110,000.

Those at the bottom paid little or no direct tax, of course, but those at the top were keeping almost 72% of their gross incomes. That’s far from a penal tax rate since households on average, taking all income levels into account, paid over 18% of their incomes in tax and PRSI that year.

These figures emerge from the annual Survey of Income and Living Conditions published by the Central Statistics Office during the week.  It relates to 2010 and confirms a growing chasm between rich and poor and it’s not only between the very top earners and the very poor. The incomes of the top 20% were 5.5 times higher than the bottom 20% in 2010. That had widened from 4.3 times in 2009.

Adjusting for household composition, the incomes of the lowest 10% fell by 26% in 2010 while the incomes of the top 10% rose by 8%.  In broad terms, the higher your income, the less you lost.

There is little doubt that the gap widened even more last year and will widen further this year. That’s the inevitable consequence of rising unemployment and a regressive budget.

This year’s budget imposed a particularly harsh burden on the less well off with the ESRI estimating that the lowest 40% of income earners are suffering losses of between two and two-and-a-half per cent this year while higher income earners are down only about three-quarters of a per cent.

It’s little wonder that the €100 flat household tax has been widely viewed as inequitable. That’s why some people have decided that they won’t pay but this latest CSO report confirms that there are many households who simply can’t spare the money.

It reveals that there are an increasing number of households suffering deprivation in that they cannot afford a basic acceptable standard of living. They may not be in grinding poverty, very few people are, but they are living from hand to mouth and missing out on some goods and services that most people view as essential.

The CSO uses a list of 11 indicators. Can the household afford to eat meat at least every second day, adequate heating, warm coats, strong shoes, an outing at least once a fortnight, and new clothes. Can they afford to have friends in for a drink or meal once a month, buy presents at least once a year and replace worn out furniture?

More than one-in-five households, 22.5%, suffered two or more of those enforced deprivations during 2010. That was up sharply from 17.1% in 2009 and 13.8% in 2006. One-in-two single parents fall into this category with a similar proportion unable to afford adequate heating.

A significant number of these deprived households are undoubtedly living in rented accommodation and therefore exempt from the Household Charge. But there has been a disturbing increase in the proportion of better off households who are suffering deprivation.  Over19% of households that were not considered to be at risk of poverty because of their income levels, were suffering two or more enforced deprivations in 2010. That was up from 13.7% in 2009.

Overall, 24% of individuals said that they were in arrears with some payments and just almost one-in-two said that they could not afford to meet an unexpected expense. That was defined as a bill for €1,145 or more.

Despite all that, it is undoubtedly true that most of those who are liable for the household charge could find the money to pay it if they wanted to or had to. But for all too many households it has been, or would be, at a heavy cost in terms of what the €100 could alternatively be used for.

At the other end of the scale, it’s clear from these CSO figures that there are many households who won’t notice the loss of €100.  It’s also clear that this study should be compulsory reading for all government policy makers. It highlights the harsh micro-economic realities that many people have to live with, realities that those who conceived the flat rate household charge were obviously ignorant.