Tuesday, 14 October 2014

Budget 2015 and Proportionality

Nat O'Connor: Without a doubt, some of the analysis of Budget 2015's income tax measures is going to focus on proportional change rather than absolute or real income changes, which repeats a misleading bias from the Celtic Tiger years that permitted the gap between high and low incomes to grow.

It would NOT be fair if someone in the Top 10% ends up paying less tax than someone on the Minimum Wage, but it is highly likely that this will be the case. But it will be disguised as someone on low wages getting a bigger percentage tax cut than someone on a relatively high income. The focus here is on the misleading concept of 'proportional' or percentage income changes.

Currently, a single person on the Minimum Wage has a gross income of €17,500 and pays €744 in income tax and USC. Assuming he or she earns the same amount every week, no PRSI is payable. A single person in the Top 10% has a gross income of €50,000* and pays €15,131 in income tax, USC and PRSI.

* Note: you can confirm that single people are in the Top 10% of earners from €50,000 upwards (add males and females in Revenue Table IDS20 here). For everyone, including couples, the threshold is €75,000 to be in the Top 10%.

For example (calculation below), someone on the Minimum Wage might see their taxes cut by 5.2 per cent, but that means €39 in real terms. Conversely, someone in the Top 10% might see their taxes cut by 2.7 per cent, but that means €411 in real terms - in reality, nearly nine and a half times more money.

We know that 'the market' does not allocate pay fairly. For example, the UK New Economics Foundation have a report about the low pay but high social value of hospital cleaners and childcare workers, versus the high pay but lower social value of City bankers. Part of the role of taxation is to compensate for market inequalities.

As TASC show here (slide 3) Ireland has the highest pre-tax, pre-transfer income inequality in the OECD (i.e. we are the most unequal among all developed economies). But Ireland's tax and transfer system currently manages to get income inequality down to below EU average levels (slide 5).

'Proportional' tax cuts - such as those described below - will disproportionately benefit the better off in real terms, and that will weaken the ability of taxes and transfers to reduce income inequality in Ireland.

Let's take three proposed policies: (1) move the USC threshold from €10,036 so that it does not kick in until €12,000; (2) move the higher rate income tax threshold from €32,800 so it kicks in at €33,800; and (3) reduce the higher income tax rate from 41% to 40%.

Our person on the Minimum Wage has a gross income of €17,500. He or she would now pay €39 less USC, which is a tax reduction of 5.2 per cent.

Our person in the Top 10% has a gross income of €50,000. He or she would get the same €39 reduction in USC, but also would pay €372 less income tax for total reduction of €411, which is a reduction of 2.7 per cent.

Of course, it is easier to give larger amounts of money to smaller numbers of people. But that is not a justification for doing so! It is probably not possible to give much more to all low earners in this budget, as there are so many of them. But there are economic and social reasons not to worsen the income inequality gap by giving more money to higher earners.

As TASC has argued in its pre-budget commentary, using any surplus for public services that benefit everyone equally would be the best use of the money. But the partisan push for tax cuts means that outcome isn't going to happen.

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