Fine Gael push for middle tax rate is well worth considering

So now, Fine Gael has put the cat among the pigeons on cutting tax rates. A key part of its new tax policy is to reintroduce a middle tax rate at 35 per cent. This would be the tax on a single person's earnings between £17,500 (€22,220) and £50,000 and a married couple's between £35,000 and £100,000. Over these limits, the taxpayer would pay a marginal rate of the existing 46 per cent.

Although it is not claimed to be an alternative Budget for this December, the proposal is good politics in terms of the number of people who would benefit. Just 5 per cent of taxpayers, or 50,000 people, would pay the marginal rate of 46 per cent. Even they would benefit largely by the substantial widening of the bands in the Fine Gael proposal.

Labour's reaction - admonishing its erstwhile Rainbow partner for engaging in auction politics - was surprisingly stern, given that the three-tiered tax structure was floated by some unions during the summer. For Labour, the cut to 35 per cent was too vertiginous a dive and the rise to £100,000 too high a climb.

It is good economics to create incentives for married women to re-enter the labour force and to attract back many of the 190,000 emigrants or expatriates whom Forbairt estimates are willing to return. On Tuesday, the Central Bank, worried about potential or actual overheating in the economy (it's not clear which), endorsed tax reform aimed at expanding the labour force.

The opportunity for the Republic to do so is highlighted by the contrast with Sweden, which this week cut its income taxes. Its current 3.6 per cent growth rate - contrasting with a possible 10 per cent in the Republic - has prompted concerns there about overheating. Sweden already has a high participation by women in the workforce and cannot hope to attract many former emigrants back home, as the Republic can.

For all that is bold in the Fine Gael tax proposal, it confirms that the high marginal tax rate of 46 per cent is still a sacred cow. Although the words "surcharge" and "supertax" escaped his lips this week, Fine Gael's finance spokesman Mr Michael Noonan says the reason why the top rate has to be retained is to meet the requirements of social partnership. In other words, the unions wouldn't buy a tax package, albeit one which benefited their members, if the top rate of income tax were as low as 35 per cent.

So, it is the labour movement alone which stands in the way of altering the top rate of tax, not Fine Gael, Fianna Fail or the PDs (which together only hold 134 out of 166 seats in the Dail). The labour social partner cannot simply declare the 46 per cent cow to be sacred. This gives it the appearance of a punishment tax, an expression of envy, much more than reasoned progressivity.

An income-tax policy cannot evade the question of what the upper limit of income tax should be, simply by lumping a politically expedient high rate on a small group of top earners.

Our plans for a low corporation tax of 12.5 per cent by 2003 have given the impression of us being in the vanguard of low tax economies, but the level of personal income tax belies this.

Statistics cited in the National Competitiveness Council's 1999 report show that the Republic ranked 18th out of 26 OECD countries with our 1997 top income tax rate of 48 per cent. The top rate in Canada - not exactly a viciously, uncaring, capitalist winner-takes-all economy - was 29 per cent, in Luxembourg 30.3 per cent, in New Zealand 33 per cent, in Mexico 35 per cent and in Finland 38 per cent. The US and Britain where a lot of our emigrants are, have top rates of 40 per cent.

Attracting people home from any of these countries is asking them to make personal sacrifices for our economy, the same one which denied them jobs in the first place.

The divergence of rates shows that the 46 per cent rate is not the lowest possible equitable rate. Equity requires no particular lower limit for a top marginal income-tax rate.

A low-tax economy must mean low taxes on all earned income, whether it is earned by corporations or individuals. A low-tax burden on labour means a low-tax burden on earned income at all levels.

The best chance we have to solve problems of poverty, illiteracy and homelessness is when the economy is allowed to generate wealth and jobs. No amount of redistributive effort is as powerful as that. The 46 per cent sacred cow plays no part in sustaining growth, and does little if anything for social inclusion. Time for the stun gun for this cow.

Oliver O'Connor is managing editor, Fintel Publications