Cliff Taylor: Why we need to broaden the tax base

The debate now raging about whether anyone should pay for water in Ireland is framed as being about the risk of breaching European law. Europe won’t like it if we don’t pay, we are told, and we will likely breach European legislation and be fined.

Haven’t we got past the time when we have to blame Europe for everything nasty? Right through the bail-out programme we were told tough measures were implemented because the troika made us do it. Nothing about the fact that a massive hole had appeared in our public finances. Now, having waved farewell to the three amigos, the water debate is still being framed in the context of what Europe is telling us to do.

We can’t ignore this, of course. But the fundamental reasons to pay water charges is to fund investment in our water and waste infrastructure. A second benefit would be to widen the tax base.They are the kind of dull but important reasons that carry no clout in the era of “ new politics”.

The mess that was made of the establishment of Irish Water opened the way for a political movement to coalesce around opposition to the charges. It was about a lot more than water, providing a lightning rod for those who wanted to object to the programme of austerity. But it was about water too and the political fudge in the agreed programme for Government between Fianna Fáil and Fine Gael appeared for a while this week to threaten the stability of the Government.

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Vague assurances

Another fudge may get us through this time. But nobody seems to be talking about long-term investment in water and where the funding will come from, beyond vague assurances that it will be funded from general taxation – like everything else. It is all about what Fine Gael, Fianna Fáil and the independents on which the Government relies can live with: the lowest common denominator that keeps everyone on board.

The point of the whole Irish Water exercise was to create a self-funding entity that would be able to borrow independently, replacing the old local authority system. This would ring-fence cash for investment. Now this plan lies in tatters amid controversy over the way the organisation was established, claims that privatisation was the long-term aim and the cry that “we are already paying for water”. While the buoyancy of tax returns should pay the Irish Water investment bills for the moment, there is no guarantee this will continue. And we saw from the financial crisis that the first area to get hit when spending has to be cut is public investment.

The amount of money water charges would have collected was not enormous in the overall context of the exchequer finances. But potentially moving the funding of water investment off the State’s balance sheet was significant. And as well as threatening long-term investment in waste and water, what is happening here is part of another trend. The tax base is gradually narrowing again increasing the risk of pressure on the public finances if economic growth slows.

Property tax

A key reason this is happening is the apparent political impossibility of collecting any new tax or charge, or raising any existing one. As well as the water charges, just look at the local property tax. The level of the tax is now fixed until the end of 2019 – despite soaring property prices – and the exemption on first-time buyers of houses built since 2013 is creating ridiculous anomalies. Rather than becoming a part of a new, more stable tax base, the charge could now gradually wither away, or even face a legal challenge due to its anomalies.

The second reason the tax base is narrowing is the political fixation with gradually abolishing the universal social charge (USC). When it was introduced in 2011, the USC was levied on pretty much all incomes. Now anyone earning €13,000 or less does not pay and the burden is being lowered for all.

Remember that the USC catches income exempt from income tax itself, as it takes no account of special tax reliefs and also includes categories such as occupational pensions, thus being an effective collector from high earners.

Overall, more than one-third of earners now pay no income tax and about 30 per cent pay neither income tax nor USC. Of course everyone still contributes via indirect taxes on the goods and services they buy, but the base of taxes on incomes is being narrowed.

Income tax

At the other end of the spectrum, some 140,000 taxpayers are paying more than 45 per cent of all the income tax and USC – some €9 billion in cash terms. This represents about 18 per cent of all tax revenue collected. Meanwhile the top 10 corporate income taxpayers now pay more than €3 billion annually.

We are reliant for almost €1 in every €4 collected in taxes on a relatively small number of companies and individuals whose incomes could be significantly affected by a downturn or changed foreign direct investment (FDI) patterns.

In contrast, water charges and property charges are more stable sources of revenue. They provide a buffer when economic growth slows or stops. The European Commission, IMF and the Irish Fiscal Advisory Council have all warned about the narrowing of the tax base. But the " new politics" dictates that this is ignored.

Meanwhile the old argument about how water and waste investment will be funded is also now forgotten. The political reality, we are told, is that no new water charges are possible. The “other” reality is that this fiasco will surely lead to more “boil water” notices, unfixed leaks and pollution in the years ahead.