Tuesday, 28 April 2015

Five Alternatives to Tax Cuts

The Spring Statement will be announced today and the expectation is that there will be a heavy reliance on tax cuts for higher earners. Last week, Cormac Staunton wrote this Opinion Piece in the Irish Times, outlining five alternatives that would reduce economic inequality and help people far more than tax cuts could.

Cormac Staunton: In a recent column in The Irish Times, Patrick Logue identified certain experiences that made someone part of the “squeezed middle”.

You are a member of the squeezed middle, he argued, if you struggle to make ends meet despite having a good job and a decent salary. You are a member if you are not yet feeling better-off despite an upturn in the economy. You are a member if much of your income is spoken for almost immediately after you get paid. And you feel that despite paying taxes, you are getting very little in return.

In many ways this is a more accurate description of being in the “squeezed middle” than the Government’s description, which defines it as someone earning between €33,000 and €70,000 per year.

There is great irony to this definition. First, this represents the top third of all of those with an income, minus the top 10 per cent. Revenue statistics tell us that two-thirds of tax cases have an income of less than €35,000, and only 10 per cent are above €70,000.

Second, as the ESRI has shown through its assessments of national budgets from 2009 to 2015, the biggest losses from budgets have been felt by those at the top and at the bottom. So the “squeezed middle” are neither in the middle, nor are they the most squeezed.

By focusing only on this income group, there is an overwhelming belief that the best way to help is through a series of tax cuts. We have already seen changes to income tax rates and bands and reductions in USC that benefited this group. We are now faced with further cuts, as well as proposals for tax breaks for childcare and caps on property tax.

While tax cuts always sound attractive, looking again at the frustrations of the squeezed middle, we see perhaps why tax cuts aren’t having such a positive impact on how people feel about the recovery.
Changes in income tax and USC in last year’s budget gave people between €400 (for someone on €33,000) and €750 (for someone on €70,000 and above). That’s about €30 to €60 per month.

That’s not insignificant, but the frustrations felt by those in the “squeezed middle” go beyond the cash that they have. There is a sense, borne out in Patrick Logue’s article, that people are constantly putting their hand in their pocket for GP fees, for childcare, for school activities, for fuel and energy bills.

Instead of tax cuts therefore, what people really need are things that will directly improve their lives. Here are five suggestions the Government could consider in order to make a real difference. As well as “giving back” more than any tax cut could, these investments would benefit everyone in society, not just those with the highest incomes.

  1. Invest in universal healthcare: If healthcare were universally available there would be no need to put off going to the doctor for the sake of €60. That doesn’t mean everything has to be free for everyone, but charges in the system should not discourage people from seeking care. There would also be no need to have private health insurance, unless you wanted super-luxury care. As it is, expensive private health insurance is seen as a necessity, not a luxury. It doesn’t have to be that way.
  2. Invest in education: If we had greater investment in education we could subsidise school transport, provide after-school activities and even supply free schoolbooks. This might really give people a sense that there is “free” education.
  3. Invest in public transport: Transport is a huge cost, whether you’re reliant on a car or you use regular public transport. Dublin has one of the least subsidised public transport systems in Europe and outside Dublin there is huge scope to improve public transport and make it cheaper for commuters, and make people less car-dependent.
  4. Invest in care services: There are many public investments that don’t benefit everyone directly but help people at particular points in their lives. Even if you don’t use them, knowing they exist can make you feel better off. For example, if you aren’t worried about the high cost of childcare or about an elderly relative on a hospital trolley.
  5. Invest in the world around us: People might feel better off if they felt the recovery was bringing improvements to their environment. This could mean investing more in public parks and playgrounds, safer streets and quality cultural activities.

Of course, all of this would have to be paid for. While we are constantly warned that our taxes are too high, the reality is Ireland’s tax base is well below the European average. And despite the increases in recent years, our income taxes are among the lowest for advanced countries. This was confirmed again recently by the OECD in its annual Taxing Wages publication.

The frustration that people are feeling is not because taxes are high, but because they are too low to provide sufficient tangible benefits in return. And because they are constantly dipping into their pocket to cover this gap, people don’t feel that they get value for money, and therefore aren’t feeling the recovery. This is the high cost of low taxes.

Improving public transport, health services and education are long-term investments, and should not been seen merely as costs. The money that people save by not putting their hand in their pocket for essential services, will be spent in the local economy, which will have a huge positive benefits on local businesses and jobs.

Rather than simply using the recovery as an excuse to give tax cuts, we should consider investing more in creating a better society. Perhaps then we will all start to feel a little less squeezed.

Cormac Staunton is Policy Analyst with TASC – Think-tank for Action on Social Change

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