Rebalance taxes to fund better services

Comment: The recent paper, Tax cuts did not create the Celtic Tiger, published by the Irish Congress of Trade Unions (ICTU) has been widely criticised and misinterpreted. The view that tax cuts generated the Celtic Tiger is not based on fact.

On the contrary, it was the economic boom that generated the opportunity for tax cuts. The cuts in taxes were too late to have any appreciable impact on economic performance and, indeed, when the largest tax cuts were introduced, growth fell (although not because of the cuts).

The economic boom generated the opportunity for tax cuts. The additional 665,000 at work - a massive increase of 56 per cent in just a decade - paying income and very high spending taxes, the soaring profits, the location of transfer pricing-induced profits in the State and booming economic activity gave the Government the revenue to cut income taxes.

But income taxes were not reduced in a serious way until the very end of the boom. The cuts in these taxes and the introduction of the low 12.5 per cent tax on companies were too late to have any appreciable impact on economic performance.

In our analysis of the role of the tax cuts, the data demonstrate clearly that the tax cuts came only at the end of the boom. We examined the reductions in top income tax rates, in the overall income tax take, the reductions in the corporation tax rates and found little or no correlation with the strong economic growth of the Tiger years.

An analysis of the movements in various tax rates, combined with changes in tax credits, bands etc, is summarised in a review of effective income tax rates, based on Revenue statistics. It shows that, while there were some reductions in income taxes in the 1990s, they were small. The real substantial reductions came at the very end of the Celtic Tiger period of high growth.

This is most clearly and dramatically demonstrated in the chart of the effective rate of income tax on the average taxpayer in the State (the effective rate here is the total tax paid as a percentage of total income from all sources, for all categories of taxpayers). It shows that the effective rate did decline in the 1990s, but not by very much.

It was 23 per cent in 1991/92 and only fell to 21 per cent by 1999/2000. The last year of the boom was 2000 when GNP growth was more than 10 per cent. By 2001, growth had fallen to 3.8 per cent and to near zero in 2002.

But as the chart shows, it was only after 2000 that the most dramatic cut in income tax was made, when the effective rate for all taxpayers fell in 2002 to 15 per cent. For average industrial workers, the fall was more dramatic - the effective tax rate fell to 11.3 per cent having been close to 22 per cent only five years earlier.

In a recent economic opinion on the ICTU tax paper in Business This Week, Mr Jim O'Leary of the University of Maynooth stated that part of our core argument is that too much is being extracted from workers in income taxes and spending taxes.

It is correct that spending taxes, which make up 46 per cent of all taxes (and this excludes the many stealth taxes), bear disproportionately on workers and we also believe that, with many top earners paying little or no income tax because of the many property-based loopholes and the exemptions for certain businesses, the progress of the income tax system is dulled.

However, we do not argue that income taxes are too high. Our analysis shows that income taxes are now quite low. The OECD also confirmed this in a recent comparison of taxes. A 12 per cent effective rate on average earnings is not a high rate of income tax. If the avoiders, evaders and exiles contributed to the coffers, then we could pay for far better public services and maybe even reduce the high taxes on spending.

Noble economics prize winner Joseph Stiglitz, speaking in Ireland in July, argued that low taxes were not critical in the development of the Celtic Tiger and were now becoming an impediment. "All the evidence is that the low-tax, low-service strategy for attracting investment is short-sighted," he warned. "Far more important in terms of attracting good businesses is the quality of education, infrastructure, services."

He warned that the race to the bottom in tax competition between governments is also short-sighted because each country can be outbid by another.

If Ireland is to use its new wealth and high incomes to build a decent society for all its people, it will have to rebalance taxes to fund better public services. However, most people are cynical about the whole tax system because of revelations of the millionaires and high earners who legally pay little or no tax, the hundreds of millions hidden in offshore accounts, the low taxes on companies, exempted sectors, property-based schemes which distort economic activity, the tax exiles who refuse to contribute to the country which made them rich, the zero taxes on wealth, the very low taxes on inheritances and the high taxes on spending and the explosion in stealth taxes.

If Mr Cowen addresses these issues in the Budget, he would raise the additional taxes needed to build a more equitable society and a more effective economy. He could also fund better public services without having to raise income taxes on low and middle income earners.

Paul Sweeney is economic adviser to the Irish Congress of Trade Unions and author of Selling Out? Privatisation in Ireland, published last week.