Cliff Taylor: Time to ditch pretence we can afford big tax cuts

Hidden away among the 500-plus pages of a report published by the OECD this week were some tables showing one part of the story of our economic crash. They show the extraordinary impact of conscious political decisions to slash income taxes in the run-up to the economic collapse.

The tax-take from the earnings of a single employee on average earnings fell from just over 20 per cent in 2000 to less than 14 per cent in 2007. For a two-earner couple, the income tax bill fell from 14.5 per cent in 2000 to 7.7 per cent in 2007.

By the advent of the crash incomes taxes here were, on any measures, way below the international average. Now, after the tax hikes of recent years, we are more or less back to where we were in 2000. No other major country on the OECD list went through this extraordinary cycle of tax cuts and hikes which we experienced since 2000. We were truly the specialists in the boom and bust cycle.

The tax-take on what the OECD defines as an average employee, now back at about 20 per cent of earnings, is still below the international average of 25 per cent. The gap is even larger for couples, particularly when child benefit payments are counted in the equation.

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However in Ireland it is almost a tale of two tax systems. The tax-take cranks up quickly as incomes rise. Employees hit the higher 40 per cent rate at just €34,550, just above the level at which the OECD calculates its averages.The Irish Tax Institute has calculated that once earnings reach €55,000, taxes on income exceed those of counties like the UK, US, Sweden and Spain, and the gap rises at incomes of €75,000 or more.

Squeezed middle

There has been a lot of rhetoric in the last few years about helping the squeezed middle, phasing out the universal social charge (USC) and so on. But the pressures on government spending are heating up and we can expect the tax promises from the last general election to be quietly shelved. We must assume that Minister for Finance Paschal Donohoe is serious when he says he wants to avoid the mistakes of the past. If so, he won't be trying to repeat the two-card trick of the early 2000s – cutting taxes and increasing spending on the basis of an economic boom which, sooner or later, will run out of steam.

Ireland’s taxpayers might be divided into three groups. Data published by the Revenue Commissioners this week shows that it takes earnings of just over €77,500 to be among the highest 10 per cent of earners. (The data is based on tax units which include single taxpayers and jointly assessed couples.) This group of about 250,000 taxpayers earns just over one-third of all income and pays not far off two-thirds of income tax.

Then there is the “squeezed middle”, earnings between €35,000 and €75,000, who earn about 46 per cent of income and pay about one-third on total income tax.

Finally there is the lowest earning half of taxpayers, the 1.25 million who pay 3 per cent of income tax and 6 per cent of USC. The low-income tax burden on this group is partly a legacy of boom-time cuts, where a big focus was “ taking people out of the tax net”.

There are holes and anomalies in the system – it is way too complicated and catches some middle-earners unfairly. But tax changes cost and the Government’s main priorities are now in using what scope they have to spend more, not raise less. It is time it ditched the pretence that it can afford any significant cuts in the tax burden as well.

Capital spending

It is only April and the Minister for Finance has already warned us that €2.6 billion in extra spending is slated in for next year. More than half of this will go on additional capital spending in areas like housing, roads, public transport, hospitals and schools.

At a recent Dáil committee, in response to a question from Sinn Féin finance spokesman Pearse Doherty, Donohoe was loath to put a figure on what further leeway would be available on budget day. However he said that – on current trends – it might be a bit over €1 billion.

A long queue is already forming to claim whatever additional cash is available, led by public sector unions demanding moves on pay equality for newer entrants and a host of other groups calling for better services. And with the Minister suggesting that not all the available cash will be used, there will be precious little left for tax cuts.

Donohoe has indicated that one priority will be a further increase in the €34,550 level at which employees enter the higher 40 per cent tax rate. This would be welcome, as it addresses on of the key anomalies in the system. But the days of big budget tax cuts are behind us. And political considerations will stymie any efforts at tax reform – in other words, increasing tax in one area and cutting it in another. For example, after the water charge fiasco, politicians are falling over each other to say how we must be careful not to increase people’s local property tax bills.

Our political debate is still trying to look in two directions – back to the old idea of “restoration” of the emergency measures and forward to the need to tackle areas like housing, central to people’s living standards. Perhaps a part of us still secretly hankers for the pre-bust party times and their low tax rates. Better, surely, to accept that they are gone.