Higher taxes are an essential if State services are to be maintained and improved
Colm Rapple
Irish Mail on Sunday, October 26, 2008
It’s about time we recognised and accepted that the tax cuts went too far. Opposition politicians may like to pretend that the Government’s financial difficulties can be overcome by simply eliminating waste and cutting back on public sector employment. But, if they were honest, they’d demand higher taxes. Such honesty could well yield high dividends from an electorate whose confidence in the political system has been badly shaken.
Of course, there is scope for eliminating waste but any attempt at cutting back on public sector employment could be very costly in terms of redundancy payments and, more importantly, service levels.
But it became very clear during the week that State services are valued and that the attempts to force an American style free market health service onto the Irish people has about as much support nation-wide as the now defunct PDs have. Yet the Government, despite all the reversals of the past week, are holding on to that free market ideal.
The Exchequer is now going to save so little money from the removal from the over-70s of their current automatic right to a Medical Card, that the failure to abandon the proposals entirely reflects either a bull-headed refusal to acknowledge public opinion or, more likely, an ideologically based drive against the concept of universality in the health service.
The claim that the cost of providing free medical care to the over-70s is not affordable in the longer term doesn’t stand up to scrutiny. Of course, it will cost more as the population ages but it’s a cost that most people seem willing to bear for the security of knowing that they will definitely have access to medical care in their latter years.
So where do we raise the taxes now? I suggested some options in this column last week. But it’s time for the politicians to nail their colours to the mast. It’s no good saying that they are against cut-backs in this area or that area without explaining exactly how they would raise the money needed to eliminate the need for such cut-backs.
It’s easily forgotten that the top rate of income tax was 42% until January 2007. So we can’t attribute any part of our Celtic Tiger successes to the 41% top rate that we have enjoyed now for less than two years. Indeed it could be claimed that that tax cut pushed us into recession. Of course, that’s stupid but no more so, than attributing the Celtic Tiger years to a policy of cutting taxes. It has been well documented now that the rapid economic growth came first, the tax cuts later.
There was a case to be made for not raising taxes next year in an attempt to maintain business and consumer confidence. But if the aim was not to damage confidence, then the Government went the wrong way about it. They could hardly have damaged confidence any more than they have.
So why didn’t they increase the top rate of tax back up to 42%. It’s only an extra one percentage point, the same as the new income levy and it would only apply to the top slice of income and only to about a third of all taxpayers. But it would have yielded almost €300 million in a full tax year.
It mightn’t be a very popular suggestion but it may be that the standard rate of tax was also reduced too far. It has been as high as 35% in the past but was 24% in the late 1990s. It was reduced to 22% for a couple of years and has been down at 20% since.
Increasing the rate by just one percentage point to 21% would raise over €600 million a year.
So increase both rates by just one point to 21% and 42% would have provided the exchequer with over €900 million. Set that against the €100 million that the original Medical Card proposal was suggested to save.
Wouldn’t it be great if some politician actually came out and said that he or she favoured higher taxes.
If they are fearful of recommending higher taxes on income, they could always recommend higher capital taxes. Why not a small levy on holdings of wealth as an adjunct or alternative to the small levy on income.
Or why not an increase in the rate of Capital Gains Tax. Brian Lenihan raised the rate from 20% to 22% in an effort to claw back some of the €180 million that he gave to developers by reducing the stamp duty on transfers of commercial property from 9% to 6%. That Capital Gains Tax increase is going to yield €160 million in a full year. A further increase to 23%, equivalent to the new rate of DIRT to be charged on the interest on even small savings, would raise about €80 million.
Making capital gains subject to the same tax regime as income would possibly raise hundreds of millions of euro. There are plenty of choices there for politicians and others opposed to the Government’s plans who want to do the honest thing and propose alternatives to the many spending cuts that were hidden away in the small print of the budget.
There’s a lot more hidden in the spending estimates that are normally published well before budget day but this year were published with the budget. Details of some of the cuts, those affecting farmers for instance, were not immediately evident but have since emerged. And we ain’t seen nothing yet.