Monday, 25 August 2014

Budget 2015 and Tax Cuts

Nat O'Connor: Minister for State, Simon Harris, has joined the chorus calling for income tax cuts. His argument, as reported in The Irish Times, is that paying 41 per cent income tax from €32,800 is at a "low point". Changes would, he said, "incentivise work".

He added, the Government should "look at how could we incentivise people who are working to continue to work, to do the extra hours". From his European election campaign he claims that many people he canvassed were reluctant to work overtime because of the risk of entering a higher tax band.

As TASC has outlined in great detail, Ireland is a low tax country (tax 30.2% GDP versus EU average 40.7% GDP). Moreover, someone moving into the higher tax band of income tax only pays the higher rate on that slice of income above the theshold. So the total percentage tax paid is very low.

A single person on €28,500 pays a total of 15.9% of their salary in income tax, PRSI and USC combined. At €37,500, he or she pays 21.6%. At €45,000 (well over average earnings), the total tax paid is 26.1% (far beneath the marginal rate of 52%).

(Table 3 from page 5 here).

The argument that people are refusing extra work or extra hours just doesn't make a lot of sense. There is a clever play on words that says that you pay 52 cents out of every euro in tax for money earned in overtime. This is only true if you also argue that many of the hours you work in your basic time are completely 'tax free'. In reality, we pay tax on a weekly, monthly or yearly basis on the total we earn in that period.

Bearing in mind that married couples don't begin to pay the higher rate of tax until their income is between €45,400 and €65,600, only one in six pay anything at the higher rate of income tax (click here).

At 18.7 per cent, the actual level of tax paid by people on average earnings in Ireland is among the lowest in the Western world (see page 2 here). The OECD average is 26.6 per cent. In Belgium, Germany or Denmark, a person on average wages pays over twice as much tax as in Ireland, in addition to higher local taxes and charges.

The real question is who will pay for tax cuts? The likely answer is that people reliant on health services, education or social protection will receive less or pay more for services. This will deepen inequality, while also sucking demand out of the economy. Like as not, vital infrastructure spending will be further cut and delayed, which slows down Ireland's long-term economic recovery.

Ireland is already at the low end of all EU countries in terms of taxation. We cannot grow our economy by constantly cutting taxes, as this undermines the role of public services and infrastructure that are the fabric of society and the economy. The hope that Ireland will return to boomtime growth levels is unlikely to appear as a silver bullet to balance the budget. So a mature debate on tax levels and public spending is called for.

Given that, for example, the new Minister for Health is seeking an extra €500 million for the health budget, and there is still a gaping hole in the public finances, how will tax cuts be funded?