Fine Gael has supported Labour's promise to cut the standard tax rate by 2 per cent if the parties win the general election, despite strong criticism last night from the Government.
Under the plan, which would cost €1,023 million annually in lost revenue, the standard tax rate would fall from 20 per cent to 18 per cent over two years. Labour said it did not intend to cut the top rate of tax, currently at 41 per cent.
Despite sharp Fianna Fáil attacks last night, both Labour and Fine Gael insisted that the tax pledges can be afforded, with Fine Gael saying that it was "very happy" with Labour's move. "It is a very reasonable proposal," said a spokesman for Fine Gael leader Enda Kenny.
Mr Rabbitte's decision to propose tax cuts has significantly altered the landscape of the coming election campaign, since the Government clearly had been ready to charge that Fine Gael and Labour would increase taxes, despite prior pledges not to do so.
In the December budget, Minister for Finance Brian Cowen cut the top rate of tax from 42 per cent to 41 per cent, and promised to cut the top rate by a further percentage point if Fianna Fáil and the Progressive Democrats are re-elected.
Sharply attacking the Labour proposal last night, Mr Cowen said it was "an incredible 'road to Damascus' conversion" and an admission by Mr Rabbitte that he has "lost the argument on taxation".
He said that since 1997 the Government had cut tax rates, widened tax bands, introduced tax credits and created a minimum wage.
"This has meant that two out of five workers are outside of the tax net altogether and 80 per cent of all income earners now pay tax at effective rates of 20 per cent or less," the Minister for Finance said.
"These tax policies have helped create 600,000 jobs in the last 10 years. All of these tax changes were opposed by Labour in opposition. It is simply not credible that Mr Rabbitte and the Labour Party will now implement a policy approach in government that they have opposed so strongly for the past 10 years."
Minister for Enterprise, Trade and Employment Micheál Martin weighed into the row, accusing Mr Rabbitte of having been the "most consistent opponent" of tax cuts.
Although he was in favour of lower taxes, Mr Martin said Labour's promises, combined with its plan to create a €2.5 billion fund to help young homebuyers, could threaten State spending. "Fianna Fáil won't get into auction politics.
The specific details of the Labour tax pledge had not been formally agreed with Fine Gael, although senior Fine Gael figures were aware in advance of the move and the two sides have held several months of detailed talks to shape a joint economic policy to be released closer to the election. However, Mr Rabbitte drew a distinction between the status of the pledge to cut the standard tax rate, and Labour's "five commitments for change".
By the end of the lifetime of the next government, Labour has pledged to provide 2,500 more hospital beds in clean hospitals, one year's pre-school education for all children, more neighbourhood gardaí, the abolition of the carers' means test and help for those trying to buy a home. Telling TV3's The Political Partythat he did not want to speak for Fine Gael, Mr Rabbitte said: "I think Fine Gael will be minded, very similarly minded, that's my expectation but I don't want to commit them to that."
In the first public declaration of support for the Labour tax move, Fine Gael TD Fergus O'Dowd told RTÉ's The Week in Politicsthat Fine Gael was "absolutely" in agreement with it. "It helps working families on low to middle incomes to cope with cost increases," he said.