Budget 2019 and the tax base
Sir, – In the mid-1980s the United States started a trend which was followed internationally of reducing tax rates and restricting or eliminating tax shelters. This had the effect of broadening the tax base because income which previously could be sheltered was now subject to taxation, albeit at a lower rate. Ireland was late to that game and in recent years has taken the somewhat novel approach of severely restricting tax deductions while increasing significantly the nominal income tax rates (for this purpose let’s agree that the USC is an income tax).
Another approach to broadening the income tax base is to remove exemptions which previously meant that substantial numbers of income earners paid no income tax. One of the most striking features of the Irish income tax system pre-USC was that very substantial numbers of income earners did not pay any income tax. The introduction of the USC at graduated rates broadened the tax base by securing that income earners whose income was below the threshold for payment of income tax made a contribution through USC (the “U”, after all, means “universal”). The introduction of the USC resulted in payments from more than 500,000 people who had not paid the health or income levies which the USC replaced.
The abolition of the USC is a matter for political debate but one point is indisputable – its abolition would result in a very substantial narrowing of the tax base. And this is the case whether it is abolished in its entirety or, as has been happening, only for incomes below a certain threshold.
Let me touch on a related point. Before and during the last general election campaign we heard much from trade unionists and social justice “activists” in praise of the Danish, Swedish and more generally the Scandinavian model. This was presented as one where high taxes were accepted as the price worth paying for socially cohesive expenditure programmes.
That model appears to have fallen out of favour with the tax-and-spend brigade since it was pointed out that the most striking difference between it and our system is that workers on lower incomes pay substantially higher income taxes there than they do in Ireland.
This point was highlighted by the Irish Tax Institute in its recent pre-Budget 2019 report. An Irish worker earning €18,000 pays €480 in income taxes. The corresponding figures are €1,895 in the United Kingdom, €3,358 in Sweden, €3,886 in France and €4,679 in Germany. – Yours, etc,