ONE OF THE proud assertions made during Budget 2016 was that 700,000 people out of the total of almost 2 million at work will have been lifted out of the tax net.
That lifting more and more people out of it has been a feature of the last two budgets signals a return to the policies that saw fully 50% of income earners paying no taxes when the country’s finances collapsed.
When our economy collapsed, the tax base collapsed. Normal enough, you might say: The less economic activity, the less there was to tax. Our state fell over in a particularly bad way, however, because a substantial amount of the tax pillars that held the building up were rooted in sand.
We taxed transient, one-off transactions like house building and then used the money to pay for additional public sector workers who would have a 40 year career and a pension, or opened hospitals that will continue to function indefinitely. If the house building and other transient activity ever slowed down, the commitments could not be paid for.
Your taxes
The reason we got the property tax and water charges and why so many more income earners were brought into the tax net was a purposeful attempt to broaden the tax base to more stable areas. A property tax levied each year is favourable to a substantial stamp duty levied once on a house purchase. When the economy slows down, we still live in houses; even if we’re not buying and selling them as much anymore.
That might sound simple and obvious, but it marked a radical shift in tax policy in this country. To some people it also sounds unfair that we have purposefully built taxes that will continue to pay out even when times are hard. Unfortunately, it’s either tax people or cut spending dramatically.
Even then, as we learned, you can sometimes start from such a bad position thawhen doing both, you still end up in a humiliating bailout.
The broadening of the tax base to lower income earners was a part of the strategy to prevent absolutely wild swings in government revenue that had been tied to the most unstable parts of the economy.
During the recession
Even though unemployment shot up during the recession, at peak we still had 85% of people in the labour force at work. House building by that stage had fallen to less than 10% of its peak levels.
The idea that as close to 100% of income earners as is practicable should pay tax is not a bad one. It’s commonly practiced abroad. In France, someone earning €13,000 will pay roughly 2.5%, and in Germany north of 5%.
These are not exorbitant amounts of money, and it is part of the cost of having a functioning society. In Ireland these folks contribute 0% toward the running of the state, which puts the very state services that lower income earners might rely on the most at peril during hard times.
35% of income earners have been lifted out of the tax net, and this is considered a positive gain. Most parties want to continue lifting workers out, and you can see us heading towards 50% once again quite easily. What will we do, then, to pay for all that we need the next time there is an economic slowdown?
The economy will grow an amazing 6.5% this year. It will not sustain that pace forever, and as surely as there is sunrise there will be a recession some day in the future.
Low income earners
Will we then have to jack up taxes suddenly and drastically on low income earners as Brian Lenihan had to do? Probably. Rather than maintain a low percentage, broad tax base as is prudent we will forge on ahead and be delighted to see VAT and excise duties and other taxes that swing dramatically with our economic fortunes be the basis of spending commitments for the long term.
There are those who are calling for an even faster lifting from the tax net. One SIPTU researcher, Ger Gibbons, told the Irish Times that “The fact remains that the more you earn, up to a limit of €70,000, the more you will gain from these changes,” as if that was some sort of incredulity.
Well, of course the more you earn, the more you got back from the USC tax cuts… because, well, you pay more tax. The thinking from this and other sources seems to be that the mega rich on €50k need to suck up more taxes so that more and more folks can be lifted from the burden of taxation at all.
It is right and proper that we all contribute to the running of the state. Even if you’re an extremely well off person with private health insurance and the likes who avails very little of state services, you are buying a safe and fairer society through your taxes. If you’re not that well off, and are earning very little, you still should contribute something.
What purchase do people have on state spending if they pay nothing towards it? It’s not much of a coincidence that the parties calling for the biggest spending increases on the one hand are also trying to appeal to voters they would lift away from the burden of taxation on the other. Sure, let someone else pay for it.
Transient taxes on a narrow base of unstable or already highly charged areas leads to poor economic outcomes. We’ve figured this one out already. Let’s not forget the lessons a mere half decade later.
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