Government ‘should cut VAT rather than income tax’

The Government should lower VAT rather than income tax in the budget next week if it wants to give something back to the public in an equitable and sustainable fashion, the Think-tank for Action on Social Change (Tasc) has said.

Nat O’Connor, Tasc’s research director, said cutting VAT by 1 per cent - at a cost to the exchequer of €350 million - would help to kick-start the economy by boosting domestic consumption and the spending power of lower income households in particular.

Lowering income tax would only be beneficial to those earning enough money - particularly if the 41 per cent rate was targeted - to fall into the relevant net, he said. A cut of 1 per cent to the 41 per cent rate would cost €235 million, Dr O’Connor told the organisation’s pre-budget briefing.

Tasc says changes to tax rates and bands “disproportionately” benefit higher earners but that an increase in tax credits of €200 - at a cost of €260 million - would have the same benefit for someone earning €25,000 as €125,000.

Taoiseach Enda Kenny made clear earlier this week that the Government intended to act on the “burdensome” combined 52 per cent rate on higher incomes. He also said tax cuts introduced for middle- and low-income earners in next week’s budget would create an additional 15,000 jobs “over and above” what the current growth model would yield.

Dr O'Connor said it was an "implausible" argument to say such a move would create a fixed number of jobs. He said multinationals might declare they were going to move jobs to Ireland as a result of such a measure but "that might happen anyway" as Ireland is an attractive investment location.

He said the cost of a tax cut could be better used to build social housing, improve frontline service delivery or improve childcare options.

Cormac Staunton, policy analyst with Tasc, said the State, similar to the US, found itself in a “low-tax triangle”. This meant people relied on tax cuts because they rather than the Government covered the cost of many services.

“People still have to pay for school books in Ireland, which you don’t pay for in most countries, they’ll still have to pay for the doctor or prescription charges and this means that the cost of living is higher and people feel they can’t give any more in taxes,” he said.

Tasc said “far less” than the long-flagged €2 billion can be can be taken out of the economy in the budget and still meet the deficit target of 3 per cent of GDP.

It is proposing the introduction of a 48 per cent tax rate on incomes abover €100,000, which would make for a combined rate of almost 60 per cent when PRSI and the Universal Social Charge are factored in. Such a rate would yield €365 million annually, it says.

Tasc and employers group Ibec have been exchanging views on whether or not Ireland is a high tax economy, with the think-tank maintaining the State has the fifth lowest implicit tax rate on labour in the EU.

Asked if a 48 per cent rate would make Ireland a “high income tax country”, Mr O’Connor replied that it would “make Ireland a higher income tax country” but only one in 20 households would pay it.

Mr O’Connor said he did not believe such a rate would dampen interest in foreign direct investment and the effect of such a measure was “overstated” by organisations such as Ibec.

He said he disagree with business claims that the income tax rate is a disincentive to investment in Ireland. “Whey would they not look for tax cuts. They wouldn’t be doing their job if they were not...but it doesn’t mean we should give them to them.”

Asked if the think-tank found itself agreeing with the policies of any particular political party, Mr O’Connor said he felt it found a way to disagree with everybody on something.

“Our concern is that across the parties there is a lot of focus on which tax they could cut. One says property and water tax, another says the higher rate of income tax while others are focused on the USC in the middle. I don’t see any of the party giving solid figures on what the tax base should look like or how much is enough tax for Ireland,” he said.

“We’re still a low tax country. We’re not suggesting we become a high tax country overall but we are suggetsing that we need to safeguard the base because if go much lower in terms of tax and social insurance we begin to see the social contract unwind in terms of social transfers and public services.”