Colm’s columns

Colm Rapple
Mail on Sunday, 10th August 2008

Tax increases are definitely on the agenda for the December budget. It’s not a novel idea although it may seem so after the tax cuts of the Celtic tiger era. The plain truth is that we went too far with the tax cuts and at this stage, increasing taxes is a much more sensible option than cutting spending on social services or on essential infrastructural investment.

Those are the choices which are now facing finance minister Brian Lenihan as he prepares his first budget.

Of course, the wrong mix of tax increases could greatly worsen our economic prospects. Impositions on the lower and middle-income groups would obviously be reflected in wage demands whether they eventually get formulated through a national pay deal or a free-for-all.

But there are many people in well paid secure public and private sector jobs who are riding out the recession quite comfortably. Having done very nicely out of the boom years, they are well able to handle a year or two of static or even slightly declining incomes. And while their assets will have dropped in value, they are not going to be forced to sell. The equity market is already on the way up again and, in due course, the property market will follow suit.

These recession proof individuals will gain the most from the upswing and can’t complain too much if asked to pay a little to ensure an easier passage through this bad patch for the less fortunate.

There are many solutions to the Government’s budgetary difficulties. There’s obviously scope for judicious cutbacks that wouldn’t adversely affect State services or curtail future economic progress. But that type of fat trimming is always opposed by the public servants and is difficult to achieve.  It will take more than that to solve the problem.

There is reason to hope that some of the budgetary gap will be bridged by taking a holiday from contributions to the National Pension Fund and/or by getting the fund to invest a small part of its massive resources in infrastructural projects that would otherwise have to be funded directly by the Exchequer. But that may not be enough either.

There is plenty of scope for borrowing a bit more. But the Government seemed very anxious not to exceed the EU imposed borrowing limit of 3% of national income. So in the end it may come down to a choice between raising extra taxes or imposing spending cuts that will impact on the level of public services and benefits.

The case for raising taxes in such a situation is overwhelming.

The simplest option would be to simply raise the top level of income tax. Over the past ten years it has been reduced from 48% to 41% and there is a commitment in the programme for Government to reduce it further to 40% “if economic resources allow”.

They clearly don’t. Alongside that commitment, in any case, is one to reduce the standard rate from 20% to 18%. That’s not possible either.

Neither commitment should have been made. It’s very obvious that tax rates have been reduced too much. They should be at a level sufficient to fund public services not only in the good, but also in the bad years.  This is the time to create a tax base that will be sufficient to meet our needs through thick and thin. It will be time enough to talk of tax cuts again when all our capital infrastructural needs have been met.

If the 41% rate was raised to 45%, the Exchequer would benefit by over €1,100 million a year. To put that in context it would in one fell swoop make up about a third of the amount by which this year’s overall tax revenue is expected to fall short of target.

It would affect some middle income earners. A single person currently pays the top rate on anything over €35,400 but, of course, the higher the earnings the greater the imposition. So someone on €40,400 would only pay an extra €200 a year in tax while someone on €150,000 would pay an extra €4,584.

That seems fair enough and the bottom threshold could be raised or else a new high rate of tax could be imposed only on incomes above a higher level, fifty, sixty or seventy thousand. Only about 15% of taxpayers declare incomes in excess of €70,000 but they account about 35% of all declared income.

The unions could hardly baulk at such a development given their new found commitment to favouring the lower paid. The decision by the private sector unions to look for a flat rate increase of at least €30 a week for all lower paid workers stands in stark contrast to their willingness last time around to cave in to employer opposition to flat rate increases for anyone.

Perhaps it reflects a recognition by the union hierarchy that they will need the support of the lower paid in a free-for-all industrial relations climate, while they could effectively ignore them in national agreements.

But that’s a by-the-way. If there is a willingness to share the current burden equitably then some form of extra progressive taxation is clearly an option. If not an increase in the top-rate of tax, then maybe abolishing the current €50,700 ceiling on PRSI contributions. Indeed the Programme for Government promises that linked to a cut in the rate from  4% to 2%. But why not abolish the ceiling and not cut the rate.

The Programme does also commit the Government to “building an equitable tax system” and to “maintaining a sound budgetary position which encourages economic growth”.

This entry was posted on Sunday, August 10th, 2008 at 5:37 pm and is filed under Budget comment, Economics, Pay, Tax policy. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.