THE SPRING STATEMENT by the Ministers for Finance was a bit of a damp squib on the headline stuff, but the general intention signalled by the government is clear: taxes are coming down, and in particular the hated Universal Social Charge will be chopped down and more people will be lifted from the tax net.
As a staunch fiscal conservative and regular Joe Taxpayer, I’m looking forward to getting some of the cash I get out of the bed in the rain, wind and shine to go earn back into my pocket. But I worry that we’re heading back towards an old habit we fell into during the Bertie-Cowen years of narrowing the tax base to the point that it becomes dangerously exposed to shocks in the economy.
One really good thing about USC is that everyone understands it very clearly. It’s an almost-flat tax. I believe that if all tax was flat like it and simple to understand, and the government issued everyone a tax receipt at the end of the year detailing how their money was spent, folks would be a lot more reticent to call for ever-increasing government spending. Go one step further and pay everyone their gross salary and then make them transfer the tax over to revenue each month and I figure I’d make a lot more fiscal conservatives out of you.
USC will raise nearly €5 billion this year
The USC is a horrible tax that most people recognise as a temporary measure, for it was introduced as such by the late Brian Lenihan. That was wishful thinking on behalf of a Fianna Fail government we are all now aware was deeply out of its depth when it came to managing the economy. In the Ahern era we ran a low tax, high spending State with substantial increases each year. We’re never, ever, ever going back to that. It was fuelled by once-off transactional taxes related to a property boom that was out of all scale and proportion to what the economy could handle. We hired nurses and Gardai for 40 years, annual pay increase guaranteed careers with a pension at the end of it, and paid for it out of the building and sale of a house in one year; hoping that another house would be built and sold the next year.
USC will raise nearly €5 billion this year, and more in future years as folks return to employment. That’s almost 10% of what’s spent by government.
It is not a small or temporary wedge, and if it’s to be eliminated then either spending comes down (is it acceptable to say “LOL” in an article?) or other taxes go up. Cutting just 1% off the main 7% rate paid by most people would cost €370 million a year. To put that into context, the water charges half the country is having a conniption over will raise €271 million this year from households. The total room available for all kinds of tax cuts next year would just about pay for a 2% cut in this rate, whilst ignoring stuff we could be doing against other tax heads.
Eroding the base of taxpayers leaves the State exposed
Apart from cutting the headline rates, which is a welcome reprieve, the government is falling into the old habit of narrowing the tax base by lifting people entirely out of the tax net. This erodes the base of taxpayers and leaves the State reliant on other, less predictable, measures as in the past. When the crisis hit there was a massive number of earners who paid no income taxes and had little or no buy in to the financial health of the State.
There is a risk that with a property boom on the horizon to even just meet the demands of the market in the big cities, governments will be inclined to continue to lift folks out of the tax net entirely rather than deliver fair tax cuts to all earners. They will erode the tax base and we will return to the sort of situation where we could see €14 billion in taxes evaporate almost overnight, as happened in 2009 when the exchequer was reliant on property related transactions.
Frankly, low earners should pay tax. For a while there they paid little or none, but today almost everyone contributes something and this helps the financial security of the State. It’s not unfair – someone on €20k a year pays €2,005 in income tax, vs someone on €60k a year paying €19,685. Three times the earning, 9.8 times the tax paid by the person who is clearly better off. But the key thing is that the low earner is contributing something, and that is a safer bet for the financial health of the Exchequer than relying on transactional taxes from the once-off building of a house. Even when the economy collapsed, there remained nearly 2 million people at work and available to pay taxes when we reached the absolute trough.
Slapping more taxes on the rich wouldn’t solve these problems
There is this myth among the left-wing parties that by slapping higher taxes on higher earners, we can cut taxes for the low paid and increase spending to solve all our troubles in housing, health and whatever it is you’re having yourself. Every left wing group sitting in opposition wants to slap a higher rate of tax on people earning over €100,000. They ignore the fact that out of 2.1 million taxpayers, only 103,000 earn over that magic number.
The very top 1% of income tax earners already pay 21% of the income tax raised in the State. That’s a very, very narrow base of people to solve all your problems with; especially if you’re relying on them to hand in their passports rather than jet off elsewhere when the 60% rate of income tax kicks in.
Even the current government was a bit of a let down with its cut to USC last year, by capping it at €70,000 and effectively introducing a new band of tax above that rate. Essentially we’re not all to share in the recovery equally, and if you have the temerity to be successful then you are an ATM first and foremost.
If you want a functioning State, you’ve got to pay for it
We can’t rely on narrow tax bases to secure our future. The likes of the water and property charges are essentially broadening of the base. In the event a collapse comes again, they won’t evaporate the way stamp duty did. Folks might not like it, but again one must stress that government revenues collapsed from €50bn to €36bn in a few months between 2008 and 2009. If you want a functioning State, you’ve got to pay for it. Government spending dipped only a bit, in overall terms, and far more of the debt interest bills we’re paying today relate to deficits we ran to keep public spending up than it did to odious banking bailouts.
Personally, I think we ought to have a smaller state with lower taxes. But if ya’ll are dead set on keeping government spending north of €50bn a year in perpetuity, then we have to pay for it. And if you get your wish and USC is eroded till the point it disappears, and once again half the workforce pays little or no income tax, we’re setting ourselves up for another kick in the financial groin when the next, inevitable, economic shock hits us in future.
Aaron McKenna is a businessman on columnist for TheJournal.ie. You can follow him on Twitter here.
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