Stealth taxes: The charge betrays a misunderstanding about the term, writes Marc Coleman, Economics Editor
Reacting to the Budget yesterday, Fine Gael accused the Government of having introduced 45 stealth taxes during its lifetime.
Fine Gael were referring to taxes such as stamp duty on credit cards, which was introduced in the 2003 budget in reaction to a slowdown in tax revenues.
The accusation betrays a misunderstanding of stealth taxation. Stealth taxation is not any particular tax. Rather it is something that happens when any tax with a threshold - a threshold that defines when one becomes liable for the tax at a standard or higher rate - fails to keep pace with the variable, most appropriate for defining that threshold. In contrast with an explicit tax increase, such as stamp duty on credit cards, which was debated and scrutinised in the Dáil, stealth tax allows governments to get more taxpayers into the tax net without too many people noticing.
Like radiation, stealth tax is invisible. But like radiation it is also detectable. A day after its last budget, the present Government's record in this area can be traced by looking at how key thresholds have moved between June 2002 and the present across a range of key taxes.
Those increases can be compared with how the variable used to define that threshold has grown. Income tax is the obvious example. Between June 2002 and last June, average incomes have risen by around 25 per cent. Yesterday's Budget brought the standard rate band for a single earner up by 20 per cent compared to 2002. Being less than the rise in average incomes, this means that significantly more income earners are now paying the higher rate of tax.
In fairness to Brian Cowen, his brief period as Minister for Finance - just over two years - has significantly made up for the lack of indexation in previous years. On the other hand, this back-ended timing of indexation may reflect the drawing near of an election and a fear that action in earlier years may simply be forgotten at the ballot box.
More than any other variable used as a threshold for taxation, house prices have witnessed phenomenal growth. In contrast with income tax, the Government has made no attempt whatsoever to keep thresholds in line. Despite a 58 per cent rise in the average national house price between June 2002 and the middle of this year, as measured by the Permanent TSB /ESRI house price index, the lowest rate of stamp duty, 3 per cent, still kicks in at a house price of €127,000. When first set, an average house price was well below this threshold and average house buyers were never intended to pay any stamp duty. As the national house price rises towards €400,000, purchasers of an average house now face a rate of stamp duty of 6 per cent.
By contrast, in the case of Capital Gains Tax, the Government has been vigilant to act. In 2002 the threshold for exemption - which applied to individuals aged over 55 who dispose of qualifying businesses or farming assets - was €476,250. A rise of 14 per cent in the general price level, as measured by the Consumer Price Index, would suggest that this should have risen to about €540,000 by the middle of this year. Before yesterday's Budget, the threshold stood at €500,000. At a cost of €7 million next year, Mr Cowen yesterday increased the threshold to €750,000.
In the case of the increasingly important services sector, the threshold for turnover above which a business was liable for VAT was €25,500 in 2002. Before yesterday it had risen to €27,500. Full indexation up to this year would have raised it to €29,000. As with the Capital Gains Tax exemption threshold, Mr Cowen did more than achieve full indexation, upping the threshold to €35,000 for services (equivalent increases were also announced for VAT on the supply of goods).
Obviously, the Government has been willing to index bands where the financial cost of doing so is small, or where the political cost of not doing so is high. Capital Gains Tax and VAT are examples of the former category. Income tax is an example of the latter. The huge cost of indexing stamp rules means it definitely doesn't belong to the former category. Having refrained from any indexation in stamp duty yesterday, the Government will find out in six months time if it belongs to the latter.