It’s an age-old political cliché: as soon as State coffers begin to fill up, the knee-jerk Government reaction is to dish out some gravy to the electorate in order to win votes.
The kite-flying to date from the Minister for Finance ahead of Budget day suggests there will be a move to ease the tax burden on middle and higher earners. It may come in the form of cutting the top rate of income tax by 1 per cent, or widening the tax bands to take more out of the higher tax bracket.
Either way, it will be a costly decision that may prove popular in the short-term – but could well prove short-sighted in the long-run.
These tax cuts will cost in the region of €160 million and will benefit a small minority of earners – just 17 per cent or one-in-six. The justification offered is that Ireland has some of the highest tax rates in Europe and it’s now payback time for those who have shouldered the heaviest burden during the recession. It’s a convincing sales pitch – but it’s inaccurate in a number of ways.
First, Ireland is a low-tax country by European standards. We have only three-quarters of the European average tax-take. Research by the think-tank Tasc shows that in Belgium, Germany or Denmark, a person on average wages pays more than twice as much tax as in Ireland, in addition to higher local taxes and charges.
Revenue Commissioners’ data shows the most that high earners pay in income tax is, on average, about 30 per cent – well below the 41 per cent top rate of tax. Add in the Universal Social Charge and PRSI, the actual tax paid is well below the 52 per cent marginal rate that’s so often quoted by those in favour of tax cuts.
Second, those who shouldered the heaviest burden are surely those who lost their jobs. Many have faced a catastrophic drop in income. Large numbers are now reliant on welfare or are back in the workforce on significantly lower wages and trying to make ends meet. Cutting the top rate of tax will do nothing for these workers.
There is an automatic assumption, however, that top-rate tax cuts are what’s demanded by the electorate. So, here’s a choice:
Given that cutting the top rate tax cut or widening bands for higher earners is likely to cost €160 million, here are other options which would cost a similar amount of money and benefit wider society.
What would you choose?
* Free pre-school: An extension of the free pre-school by a further year would cost just over €160 million and provide early years care and education for 65,000 children. If implemented, it would remove a key barrier facing parents who want to rejoin the workforce, given that childcare in Ireland is the most expensive in Europe. In the process, it would boost the economy through more taxes and lower welfare.
* End long-term homelessness: By providing more move-on accommodation and support, we could ensure long-term homeless people no longer ricochet between emergency beds and hostels. It would give vulnerable people a chance to re-build their lives, rejoin society and reduce the cost burden on the State.
* Free GP care for under-18s: The Government estimated that free GP care for the under-sixes in 2014 would cost €35 million – so extending it to all under-18s is likely to cost in the region of €160 million. These kinds of free services benefit all of society and would improve health outcomes for families who are struggling to make ends meet.
* Improve services to those at risk of suicide: We had the highest number of suicides on record in 2011. An additional €160 million could fill vacant mental health posts, roll-out 24/7 crisis supports nationally, and improve access to the kind of community-based multi-disciplinary services that make a key difference in the lives of those in crisis.
* 1 per cent cut to top tax rate: This option, or a widening of the top tax-rate band by €1,000, would cost in the region of €160 million. It would benefit 17 per cent or earners, according to the Department of Finance.
Opinion polls consistently show the electorate is happy to see investment in vital services – such as health, education and transport – instead of tax cuts. Yet many of these services are limping along following years of austerity.
Some Government ministers and interest groups such as the Irish Tax Institute are in favour of tax cuts partly on the basis we have to compete other countries competing with Ireland for foreign direct investment.
They’re right: low tax countries like the US rank highly in the top-10 of global competitiveness according to the World Economic Forum. But so too do higher-tax countries like Germany, Finland, the Netherlands and Sweden. The message? Higher taxes and strong public services can support a strong and competitive economy.
So, it comes down to a choice. Do we want to compete with countries like the US and other countries in a race to the bottom on personal taxes which leaves us with weak health, education and other public services.
Or do we try to deliver the kind of vital services and supports that could form the basis of a truly prosperous society?
Carl O’Brien is Chief Reporter