Wrong Bertie, the era of tax cuts is not over

Economics:The Taoiseach is wrong about one thing: the era of tax cuts is not over, not by a long chalk. Voters are disillusioned with the poor value for money obtained from public expenditure and figure that they can do a better job spending their own money, writes Marc Coleman 

Regardless where they stand on the spectrum, politicians are copping on to it. Since Pat Rabbitte's opening shots last weekend, the centre ground of debate has shifted decisively. There is no longer an argument over whether taxes should be cut or not. The debate now is whether to cut at the top or standard rate.

In addressing that debate, let us leave aside, but note in passing, two particular questions.

The first is whether - on top of VAT, stamp duty and a host of other State and local authority charges - anyone should have to pay half of their marginal income to the Government: together with PRSI contributions, this is effectively what our present higher rate requires.

The second is whether that higher rate should be paid on income levels that are so low one couldn't even afford to buy an average house.

As I said, let us leave those issues aside and concentrate on something more fundamental: the morality or immorality of cutting the higher, versus the standard, rate of tax.

As the best way of discussing moral issues is often a parable, here's one which has stuck with me ever since I heard it some years ago.

Once upon a time there were three neighbours, Jim, Tom and Mary, who were - on the surface at least - good friends. Every Friday for 10 years they had been going together to an expensive restaurant where the bill was a €100 per person. Jim didn't have that much money; he earned about €20,000 a year. Tom was doing a bit better on €50,000. Fortunately Mary was doing very well, bringing in €100,000. Being a good friend as she was, Mary didn't just pay her own €100 bill. Every week she threw an extra €100 to cover the wine and desserts. Tom and Jim paid the remaining hundred on a 60/40 basis.

It was an arrangement that worked very well until one day the restaurant owner came to their table.

"You've been such excellent customers of mine these past few years that I'd like to reward you for that," he said. "From now on, I'm giving you €60 off each bill."

They weren't long savouring the thought of this nice gesture before the trouble started. "We should distribute that €60 equally", said Tom. Jim said nothing. He was fortunate to be subsidised every week and knew it; he didn't want to start arguing about money. But Tom persisted: "Principles of social justice dictate sharing the €60 equally. In fact, we should go further; Jim should get most of it because he's the least well off."

Suddenly Mary felt uncomfortable. "That €60 wasn't manna from heaven," she thought to herself. "It's effectively giving me back some of the extra €100 I've been paying every week for the last 10 years."

It wasn't the money that bothered her, just the thought that even if she got all of the €60 back, she'd still be subsidising the others, she noted.

But something else bothered her, something in the tone of Tom's voice. Mary now realised that like her, Tom wasn't really concerned about money either, but about a principle, a rather ugly principle at that: the principle that success is something to be penalised for the sake of it.

Deep down, he was jealous of her success - jealous of anyone who was more successful than him, in fact.

She said nothing; the realisation rendered her speechless. Disgusted, she got up and left the table never to return, leaving €200 on the table for the last time. The Friday evening meals died a death: Mary wouldn't go; Jim and Tom couldn't afford to.

And the moral of the story? Assuming you agree that cutting rates of income tax is a good policy - you can't make a judgment call about whether to cut the standard or top rates of tax without answering one question: what share of the total income tax burden should be borne by those on the standard rate and those on the higher rate of tax?

Defenders of a higher income tax rate usually end up using the commonly accepted principle of progressivity; the idea that the more income you have, the more tax you should pay. The fact is that a single flat rate of tax is, by definition, already "progressive": the more you earn, the more you pay in income tax.

But even if we buy into the notion of a higher rate (increasingly it is being challenged; up-and-coming Slovakia two years ago introduced a flat rate of income tax), the second question arises: is it fair that about two-fifths of income earners in this State pay no tax? A further two-fifths pay tax at the standard rate, while a further fifth pay at the higher rate.

But it's when you consider that one in 10 taxpayers pays about two-fifths of all income tax paid in the country that these figures hit home.

Progressive income taxes are one thing, begrudgery of success is quite another.

Before the inevitable election debate about which rate of tax should be cut, let's first decide a few other matters: with the lowest tax wedge in the OECD, is cutting the bottom rate of tax an economic priority?

Do we really need a higher rate at all when a single rate ensures the principle of progressivity. And even if we do agree that a higher rate is justified, what is a reasonable income level for it to start being paid at and what is their fair share of the income tax burden? If we get that debate right, the issue of tax rates will solve itself.

If the left wants to exercise its thirst for social justice, it should propose a tax on wealth that is inherited without merit or effort. But it hasn't got the courage to do that. So instead, it begrudges a tax cut to those who live by their own sweat and who give a hugely disproportionate share of income tax revenue. Pathetic really.