As a new year beckons it is time to take stock. Following a winter of civic protests and what is hopefully the beginning of the end of fiscal austerity (for now), hopes have lifted and recovery seems to be around the corner - at least for some. But, nobody can be sure what lies ahead - politically, socially, economically whether here in Ireland or across Europe and the world. The speed at which events can unfold from the Crimea to Greece and from the price of oil to collapse in interest rates on government borrowing. History teaches us that what people most fear very often doesn't happen and the very thing that people didn't see coming happened. The term and concept of 'systemic risk' comes to mind. Others might refer to the internal contradictions of capitalism. If the present course is maintained 2015 should see, in the Republic of Ireland, further increases in employment and output as measured by GDP or GNP. Yet, the value of wages is still falling and household disposable income is still not rising. The implementation of tax cuts in the coming weeks will be welcomed by many. The arrival of property tax and household water charges will not. However, it is not clear how the Government will 'pay for the income tax cuts announced in Budget 2015.
If the past is anything to go by, a hallowing out of the income tax base coupled with a downward movement in taxes on capital and corporate profits such as happened over many decades will leave the Republic of Ireland vulnerable to future shocks. Moreover, it is far from clear that the Government has a clearly thought out strategy on how taxes should be reformed and at what level they should be pitched to pay for social goods and services like health, education and affordable homes. Coincidentally there appears to be a pro-cyclical tax-cutting dynamic which has run according to a regular ten-year cycle since the 1970s:
- abolition of domestic rates and motor tax - 1977 coupled with a non-targetted 'Keynesian stimulus'
- a shrinking of social spending in key areas (notably local authority investment in social housing) and a reduction in taxes - 1987
- promises of more tax cuts leading to slashing of capital gains tax from 40 to 20% - 1997 and later
- promises of cuts to the top income tax rate - 2007
it now seems inevitable that political contests in the Republic of Ireland will center on how best to cut tax (a fair tax cut if you please!) and not around whether taxes - as a whole - should be maintained, lowered or raised. The momentum to cut taxes is based on the following 'Self-Evident Truths' that are deemed to be beyond question or critical investigation:
- income tax is too high for all earners but especially for top earners who pay most of the total income tax bill
- the 'marginal rate' is much too high for those who pay the top rate
- and the higher rate kicks in too early.
- Ireland has 'the most progressive income tax system among OECD countries'
- by cutting taxes Government raises consumer confidence and encourages people to work harder ot supply more hours of work (this is known as the 'Laffer Curve' effect in economics and is cited as a matter of faith by many politicians even though the empirical evidence is at best weak)
All of the above lines are more than familiar to anyone following the debate, such as it is. Yet, there is an alarming lack of empirical, historical evidence to test these claims. The NERI will continue to explore these issues and, later this month, will provide a discussion paper on how Ireland (North and South) could move towards a different kind of economic and social model more akin to what prevails in other Northern European small and open economies. The puzzling aspect of debate - or lack of it - in Ireland is that many people do not make any connection between our relatively poor social infrastructure where education, health and childcare are concerned, and about which many complain, on the one hand and on the other hand the unquestioning devotion to a 'competitive' low tax model where corporation, capital, income and social insurance taxes are viewed as potentially harmful especially when set at something akin to normal Northern European levels. Taxation is seen as 'confiscation' by the State. The State is seen as something alien, inefficient and extortionate. The aim of good politics and responsible citizenship, according to this view, is to pay as little tax as possible (and by implication) keep the State as lean as possible. Yet, a comparison of estimated income taxes paid as a proportion of total taxable income indicates that income tax payers are paying significantly less, today, than they were in 1997 (Charts 1 and 2)
Chart 1 Effective Tax Rates for single persons in 1997 and 2014 (% of total income)
Source:Source: Micheál Collins "Taxation" Chap 4 in The Economy of Ireland: National and Sectoral Policy Issues, ed. John O'Hagan and Carol Newman (Dublin: Gill and MacMillan, 2014), Page 98.
Some caveats are in order at this point:
- The data shown in Charts 1 and 2 refer to estimated tax payable assuming a PAYEE employee on full PRSI as reported by the Department of Finance. Tax includes 'income tax', health levies and USC. The usual tax credits and bands are applied.
- Tax reliefs such as health, pension and other items are not included. Therefore the estimates of tax paid, in the Charts, is an over-estimate. The extent of the gap between taxes actually paid and notional effective tax is likely to be greater as income increases.
- Chart 2 shows the same information for a jointly assessed couple (splitting their income 65/35%.
- Incomes rose significantly between 1997 and 2014 meaning that there were relatively more people on an income of €15,000-€30,000 in 1997 than was the case in 2014.
- No account is taken, in these Charts, of taxes paid by households in the form of excise and VAT on consumer goods. These are considerable and when taken together with income tax mean that the taxation system as a whole extracts a fairly high proportion (between 20 and 30%) of income. Readers are referred to other recent research by Dr Micheál Collins on this website.
Chart 2 Effective Tax Rates for jointly assessed couples in 1997 and 2014 (% of total income)
What is striking about these charts is that:
- overall tax paid, in 2014, by those on incomes of €30,000 is around 18% for single persons in the above example and 6% for couples (the actual amounts paid will be less due to exclusion of tax reliefs in the above examples).
- Notwithstanding an increase in various income taxes (relating to USC, PRSI and income tax) following the Crash of 2008 income taxes actually paid, in 2014, were much lower than they were in 1997.
- Were it not for USC and PRSI contributions, the total of income tax paid by individuals or couples in 2014 would be extremely low for incomes below €25,000. As a future Blog will show the Republic of Ireland is fairly unique internationally in this regard (although it should be pointed out that a distinguishing feature of what I call The Irish Social Contract is greater income and wage inequality compared to most other countries partially cancelled out by 'heavy-lifting' by the State through taxes and social transfers to even out disposable income - an issue I will return to in the future).
None of this adds up to a 'crushing burden' or 'crucifying' tax burden (to use phrases thrown about in recent days) where hard pressed workers and families are concerned. It is true that average to below average income households are extremely hard pressed. However, this is not because of the amount of income tax households are paying on income but, rather, because wages are lower than in most other Eurozone countries and the cost of living is high and the 'social wage' is very poor (e.g. education, health and childcare) and indirect taxes and other charges hit households in the form of VAT or the costs arising from waste collection, water later this year and property tax on homes. It is also likely that high-income households pay less, on average, in income taxes than in most other countries using the OECD tax-benefit calculato 
r. For the details of how OECD uses standard assumptions on unemployment benefits, social assistance, family benefits and in-work benefits see http://www.oecd.org/social/soc/benefitsandwagestax-benefitcalculator.htm A crucial point not captured in the OECD calculations is the way tax expenditures (on pensions, health and other items) are used creatively and legally by high-income earners to lower their tax bills considerably compared to the somewhat notional rates shown in the OECD calculation). it is not know if well-off households in Ireland benefit more from such reliefs than other countries. One way to find out would be to abolish 'income tax' entirely and apply a progressive banded USC rate on ALL incomes and ALL persons. Then we would have a truly transparent and meaningful progressive income tax system to pay for public services used by ALL citizens - rich, poor and in between.
And what do international comparisons show? Using the OECD calculator we see that the Republic of Ireland is an outlier:
Chart 3 refers to average income for a single person. Let's take a couple well above the average income (Chart 4). Ireland is still well below European and OECD norms.
* It is assumed that one earner is at 167% of the average industrial wage while the other is at 100%.
Finally, let's look at a couple on 200% the average wage (Chart 5)
* It is assumed that one earner is at 200% and the other at 167% of the average industrial wage.
In a future blog I will extend the analysis to more OECD countries (it is laborious because each country has to be calculated for each household type). I will also look at the case of low-paid workers.
Someone needs to join up the dots between the short-term (from here to the next General Election in the Republic), the medium-term (from here to the early years of the next decade) and the long-term (the next 30 years). Effecting significant change to society will require a long-term strategy and one which can attract support because it works better than what we have now. Part of that strategy is to figure out how a dynamic and enterprising economy aiming at full employment and adequate incomes for all citizens can provide quality public goods and services.
Focusing on a short-term tactic of trying to boost disposable household income through tax cuts especially for those below the average may be well motivated. However, it is not compatible with a joined up short-medium-long term strategy to create a different economy and society - one that works for people and in which people can work. The best way to 'put more money' into people's pockets is to create employment, raise wages, raise skills, invest in the 'social wage', raise productivity and drive entrepreneurship and innovation across the business economy. In this way better public services can be generated and poverty and homelessness abolished in the medium-term.
Tax cuts will not deliver on these goals.
Analysts, policy makers and civil society organisations need to tell the truth and do what is right. This will pay off in the short-term as well as the long-term.
A lengthy quotation from an article written by the late Dr Garret FitzGerald for the Irish Times in early 2008 ('Public services make a shabby contrast with national wealth ') seems appropriate as we seem to be heading down the same cul-de-sac of tax cuts 'common sense' thinking (Dr FitzGerald also wrote for the same newspaper later in 2008 about the 'foolishness of tax cuts' revealed by the end of the asset boom):
Why is it that, with a level of income higher than that of 22 of the 27 EU states, our public services fail to look after children in need or to care for the ill and the old; fail to make any serious attempt to rehabilitate our prisoners; and fail to ensure access to clean water - not to speak of failing to provide efficient competitive public transport, just to mention a few of our more obvious public service deficiencies? After all, over the past half century our political leaders were remarkably successful in securing much faster economic growth than anywhere else in Europe, moving Ireland from the poorest of the dozen countries in the northern part of Western Europe to becoming one of the richest. Given this success, why have our governments failed so miserably to deploy the vast resources thus created in such a way as to give us the kind of public services we can clearly afford and desperately need?
O why indeed?