Sinn Féin would hike taxes on the better off. Is that good or bad for the economy?

As it prepares for its hoped-for leadership of government after the next general election, Sinn Féin has gradually but steadily moved many of its economic policies towards the centre ground. This is as much to do with language as with actual policy. The most notable shift has been its embrace of the FDI sector – it will need the tax revenue to continue flowing from the big US players to pay for its spending plans. All parties will have looked at the latest corporate tax figures for October with some concern.

For Sinn Féin, the balance of retaining its existing support base while not frightening off potential newer voters provides some interesting choices. If Sinn Féin’s policies don’t retain a socialist edge, then what is its USP?

These choices are sharpest in the area of tax. And it is clear that the party is doubling down on one thing – it will significantly increase the tax take from better-off sections of the population, which it largely defines as those earning over €100,000. The current buoyancy of the public finances would have allowed it to fudge some of these choices. But it has decided not to. And sources say that the party has been clear on this with the big multinational players – it will not move on personal tax.

Sinn Féin in government would mean significantly higher bills for the better-off – through taxes on income and wealth – to help pay for a reduction for those on below-average earnings, particularly via more cuts in the USC and also the phasing out of the local property tax.

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The political calculus for the party here is a willingness to hit a relatively small number of already heavily taxed higher earners hard, to pay for relatively modest gains for a large number of lower earners. It is an interesting contrast with the more catch-all parties who try not to upset any group of voters too much.

The economic issue is that, if an Irish government really does want to hit the rich, then the less economically-damaging way to do it is to hit wealth via higher taxes on capital, land and property, rather than more tax on income. This was a central point of the Commission on Tax and Welfare, which reported last year, leading Fine Gael leader Leo Varadkar to say that some of its recommendations were “straight out of the Sinn Féin manifesto”.

Sinn Féin’s plans do indeed contain the kind of higher taxes on capital that irked Varadkar, as well as income tax measures. It wants to increase the take from inheritance, increase capital gains tax paid by higher earners and take aim at the tax reliefs on what it dubs “gold-plated pensions”. It has called for examination of a wider wealth tax. Here the direction of its policies, if not all the details, are in line with the commission proposals.

These ideas will prove controversial heading into the next general election. Inheritance tax is a particularly hot-button issue for Fine Gael and Fianna Fáil. But personal tax is where the real battle will be fought. Sinn Féin may have pulled back its policies here a bit – in 2016 the party was looking for a 7 per cent levy on incomes over €100,000. Now the proposal is a 3 per cent “solidarity” levy on incomes over €140,000.

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But by also proposing to withdraw the main universal tax credits gradually on incomes of €100,000 (for a single employee), its proposals would mean a significant squeeze on higher earners. These credits are worth €3,550 a year to a single PAYE employee or self-employed person and the plan would be to phase out this benefit as incomes rise over €100,000. Combined with the 3 per cent surcharge on incomes over €140,000, this could, for example, increase the income tax bill on someone on €170,000 by about €4,500 a year, or more in the case of a family. Add in a reduction in pension relief and even the better off would notice this one.

For Sinn Féin, this is a numbers game. There are fewer than 150,000 “taxpayer units” – single earners or jointly assessed couples – who earn more than €150,000 a year - and another 200,000 who earn between €100,000 and €150,000.* The party will reckon that most of those won’t vote for it anyway. In contrast, there are some 900,000 earning between €20,000 and €40,000 who would get the biggest proportional benefit from the proposed USC changes.

Looking at the spread of wealth, the other Sinn Féin tax target, more than 50 per cent is estimated to be held by the top 10 per cent of the population – again not likely to be Sinn Féin voters. And populist policies, such as the phasing out of the local property tax, may be a bad idea, but will appeal to many.

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The big question with piling extra income taxes on the better off is the impact on competitiveness and inward investment. How serious this would be is hard to know. Ministers have long been warned by the FDI lobby about the risk of hiking personal taxes or doing away with the special tax breaks for senior FDI executives moving here. And those earning over €100,000, who account for a little over 2 per cent of all taxpayers, already pay close to one third of all income tax in what is a progressive system.

Personal tax is certainly a factor for big companies here, and they will see it as increasing the cost of operation in Ireland, as many try to offer roughly similar take-home pay across different locations. And from their point of view, Ireland is already an expensive location.

The second issue is the impact on the tax base. The USC was introduced in 2011 as a way of keeping the personal tax base as broad as possible and taking a little from everyone. It was chipped away at once the Troika left, removing many lower earners from the USC net. The Sinn Féin policy would continue this trend, meaning more and more of the reliance for income tax would rest on a relatively small number of high earners, at least some of whom are mobile. And many of these are employed by the very multinationals who pay a lot of our corporation tax.

The idea of having a wide tax base is a rather dull economic concept that will not win any votes. But the financial crash showed the dangers of a tax base too reliant on volatile taxes. Now we have worrying trends in corporate tax and a political mood – across a number of parties – that wants to chip away at wide and efficient taxes such as the USC, or the local property tax. The unreality in the debate here, fuelled by the surge of corporation tax, just seems to go on and on.

* adjusted from original version to take account of updated data and make clear basis of figures