Finally facing up to issue of under-taxation

 

Brian Lenihan this week signalled a willingness to reverse his party’s irresponsible policies, writes GARRET FITZGERALD

I AM glad that the issue of under-taxation is at last being seriously discussed. Throughout this crisis there has, of course, been some pressure to increase taxation on those with higher incomes, eg more than €100,000 a year. But there has been an astonishing silence about the much more striking fact that, by comparison with the rest of the developed world, Irish under-taxation is in fact more marked at much lower income levels.

This is the consequence of measures introduced earlier in this decade, when, in a grossly irresponsible way, it bought two successive elections by a series of moves to relieve a large part of our population of most, or in many cases all, of their income tax liabilities. Without any care for the future, the government left the consequent huge gap of billions of lost revenue to be temporarily filled by ephemeral capital receipts from the short-lived and fatally damaging housing bubble that they had foolishly stimulated.

Last Tuesday Brian Lenihan belatedly faced this issue, telling the Dáil that the Government will, after all, bring forward policies in the budget that “will ensure that the burden of adjustment is spread as evenly as possible . . . Having 50 per cent out of the tax net is not viable if we want to fund the range of services that we expect.”

He didn’t add that his Government’s policies have also led to most of the remainder of our earners now paying only between one-quarter and one-half of the amount that people with similar incomes pay in tax everywhere else in the developed world – apparently without much complaint.

Of course, in this context it has to be recognised that efforts to restore a more normal level of taxation will be complicated by the extent to which, because of the housing price boom, an important minority of lower and middle-income earners are now locked into excessive mortgages, the interest rates on which are liable to rise within a year or so.

And it should not be assumed from the Minister’s Tuesday Dáil announcement that he intends to start the process of spreading the tax burden in 2010: instead he may intend in the budget three weeks hence merely to outline his intention to increase taxes in 2011 and thereafter.

With this announcement he has, however, given himself some leeway to find some of this year’s €4 billion adjustment through tax increases, if this should prove necessary in order to meet his fiscal adjustment target.

He might, for example, decide to remove the cap on social insurance payments in respect of income in excess of the present ceiling of €52,000. That would meet the public demand for higher tax payments by the better off, but without introducing a third, higher, tax rate.

Meanwhile, the position with respect to public sector pay seems to be that the Government, while firmly committed to securing savings of €1.3 billion in this area, may be willing to allow some or all of this amount to be secured by cuts in overtime, increments, and various allowances, rather than in basic pay.

The argument about public sector pay has proven extremely divisive in our society, partly because it has not been possible to measure the scale of this year’s pay cuts in the private sector – cuts that public sector workers are now being asked to match.

If it had been possible to show statistically by how much private sector pay this year has been falling, it would have been easier to win a measure of acceptance of the need for a parallel reduction in public sector pay. But although it is clear that there have in fact been significant cuts in pay in the private sector, changes by the CSO in the relevant statistical series have left us without accurate data on this key issue.

For, in the absence of adequate sectoral data we have been left with only an overall figure for pay – one that is too easily distorted by changes in the composition of the labour force. If, as may be the case in this instance, a larger number of low-paid than high-paid workers have recently left the labour force, such a change in the mix could have caused an apparent rise in average pay – even though at each individual pay level there may have been reductions.

Unfortunately, this serious defect in the statistical data was not tackled early enough, and it now seems unlikely that we will get accurate data on private sector pay trends until some time next year – long after the decision of public sector pay cuts will have been made in next month’s budget.

Finally, I am puzzled by the failure of both the media and the Government to publish the fact that, as reported in this column last week, the European Commission believes that, because of ground lost since the April budget, we now need to extend the scale of our fiscal adjustment from 6 per cent to 10 per cent of our GDP.

This crucial fact was obscured in the Government’s Pre-Budget Outlook document, which confined itself to saying that “based on the need to stabilise the deficit in 2010 and on developments elsewhere, the European Commission are now proposing for a number of countries including Ireland an additional year to adjust”.

That statement failed to convey the crucial fact that, rightly or wrongly, the European Commission now believes that since last April there has been a two-thirds deterioration in the scale of our fiscal adjustment requirement. Instead it conveyed to most people, irresponsibly in my view, an opposite impression: that the commission was easing its pressure on Ireland.