INSIDE POLITICS:While there is now broad agreement on the need to raise taxes, exactly how to do it remains divisive, writes STEPHEN COLLINS.
THE COUNTRY’S political leaders finally appear to be getting the message that old-style adversarial politics is no answer to the desperate economic problems now facing us. There is growing support for the view that a new budget to raise extra taxes is urgently required but developing a political consensus beyond that will not be easy.
There are two fundamental problems. The first is that while there is broad agreement that the State needs to raise more tax revenue just to survive, there are very different ideas about how the burden needs to be spread and who should pay more.
The second problem is that Fianna Fáil seems in no mood to bring the Opposition into real decision-making while Fine Gael and Labour want an election to win power, not a deal in the Dáil to underpin Fianna Fáil.
The scale of opposition to the Government’s public sector pension levy both at a political and industrial relations level shows just how difficult it can be to get broad agreement on what is clearly a necessary and patently fair measure.
The rejection of the levy by the trade unions, particularly those representing the lower paid, is understandable, even if it is not justified. The political Opposition is a different matter, as those who condemned the measure in the Dáil were purposely missing the central issue.
As Cathal O’Loughlin, a director of the IMF, pointed out in this newspaper during the week, official figures show that pay in the public sector in Ireland is on average 23.5 per cent higher than in the private sector. Higher-ranking officials earn approximately 10 per cent more than their private-sector counterparts, while those in lower grades earn between 24 per cent and 32 per cent more. Asking public servants, who also have the priceless assets of job security and protected pensions, to make a sacrifice in current conditions is hardly unfair.
Yet the clamour raised by the unions and the Opposition has indeed convinced many public servants that they are victims of an injustice. The menacing tone of the comments made by the general secretary of the Garda Representative Association, PJ Stone, at the gates of Leinster House showed a mindset that is not open to rational argument.
One of the reasons the Government failed to get its point across was that it has not so far balanced the necessary decision on the pension levy with action to penalise the so-called “fat cats”. While it is arguable that measures such as revoking the passports of tax exiles would not raise extra revenue, something of that kind was necessary for symbolic reasons.
It would also have been better if the Government had made it abundantly clear from the beginning that those who misbehaved in Anglo Irish Bank would be hit with every penalty the State could muster and the names of the “golden circle” had been released into the public domain. The over-reliance on legal niceties has done the Government’s image severe and possibly fatal damage.
It is ironic that the Fianna Fáil politicians who destroyed Michael Noonan’s reputation during the hepatitis C controversy, because he relied on expert legal opinion rather than his own gut political instinct, should make the same mistake themselves.
What the controversy over the levy has demonstrated is that it will not be easy to get political agreement on new tax measures. The Labour Party and Fine Gael, to a lesser extent, have focused on the prospect of taxing the better-off while conveniently ignoring the fact that the better-off already pay the bulk of income tax while the bottom 40 per cent of income earners actually pay nothing.
The figures on this are quite stark. Just 6 per cent of the workforce earn more than €100,000 a year, yet they contribute 47 per cent of the tax take. The top 1 per cent of earners on €200,000 or over contribute 21 per cent of the total tax take. While people on such large incomes should certainly be asked to pay more in the current national emergency, the exclusion of the bottom 40 per cent of the workforce from the tax net is no longer sustainable.
In this country workers don’t pay any tax, PRSI or the income levy if they earn less than €18,000. By contrast, in Britain all income above €6,860 is subject to income tax at 20 per cent. Most EU countries follow the British example and bring workers into the tax net at a much lower income threshold than in Ireland.
At the press conference to announce the pension levy at the beginning of the month, Taoiseach Brian Cowen raised the question of whether the exclusion of so many from the tax net could continue. Any decision, though, to lower the thresholds will undoubtedly provoke intense opposition.
Similarly any increase in the basic 20 per cent rate of tax will also provoke outrage but the Government really has no choice in the matter. Every 1 per cent increase in the standard rate will generate an extra €535 million in revenue in a full year, compared to an extra €220 million for every percentage increase in the top rate.
To put that in context, when Albert Reynolds began the era of tax cuts in 1990 the bottom rate was 32 per cent, the top rate was 55 per cent and there was a middle rate of 45 per cent. Increasing the bottom rate back to the 1990 level now would raise €6.5 billion while putting the top rate back to the 1990 level would bring in over €3 billion.
Obviously such massive hikes in income tax are out of the question as they would destroy job prospects in the long term. However, even a 2 per cent increase in the basic rate would bring in over €1 billion while a 3 per cent increase in the top rate would raise €650 million. There is obviously a balance to be found between the need to raise a substantial amount of extra revenue and the danger of depressing the economy too much with the knock-on effect of damaging the prospect of job creation. In the longer term a widening of the tax base through measures like a property tax will have to happen but, in the short term, income tax will have to take the brunt, whether or not there is a consensus.