Pension levy and the back of an envelope


The unions were right to refuse to be railroaded into signing up to the pension levy, writes FINTAN O'TOOLE.

THEY ARE making it up as they go along. Even last week, when the Government finally seemed to be acting decisively and “doing something”, it had only the vaguest notion of what that something was.

The public record shows that, from the Taoiseach down, our leaders did not understand the so-called public service pension levy that is the main plank of fiscal policy.

Most of the blame for the failure to agree on this levy has been loaded on to the Irish Congress of Trade Unions. But how can anyone agree to a complex proposition when those who are putting it forward have not thought through one of its most basic aspects? We already know that the actual proposal for the levy came extremely late in the talks process, giving no one any time to access fully its implications.

What is now clear, however, is that the unions were right to refuse to be railroaded into signing up to the levy. They were right, not because some scheme along these lines is not justified by the current crisis, but because what they were presented with has all the hallmarks of a back-of-an-envelope exercise. One of the most fundamental aspects of the proposal seems not to have been considered by the Government at all.

The issue in question is pretty basic. Is the levy a percentage of a worker’s entire income, or of that income after tax and PRSI? The answer to this question is crucial. It determines the amount of money the levy will raise, the impact on the real take-home pay of those affected, and the fairness of the scheme as a whole. The only possible conclusion to be taken from an examination of the public record is that the Government simply did not know the answer, not just on Monday night when the proposal was put to the unions, but on Tuesday when it was unveiled in the Dáil.

When the levy was announced, the Labour leader Eamon Gilmore immediately understood the significance of this basic question. He asked Brian Cowen in the Dáil: “Will the pension levy be on the gross income figure or on the net figure or will people pay the levy and then pay tax on the levy that they have already paid?”

He didn’t get an answer, so he asked it again – twice.

Eventually, the Taoiseach gave an answer that could not be clearer: “Yes, it is on gross income. It is on full income.”

The levy, in other words, is a percentage of the worker’s full income before tax. This was not a slip of the tongue. We know this because the Taoiseach also gave figures for the revenue to be raised by the levy: €1.4 billion in a full year. To get this figure, the levy would have to be charged on gross income. So, like it or not, the Government’s policy was definitively and decisively stated.

Except that this wasn’t the policy at all. Within a few hours of the Taoiseach’s definitive reply, Dermot Ahern was on RTÉ 1 television’s Prime Time. Gilmore raised the issue again. Ahern said “In relation to somebody who’s on €50,000, the levy, gross, will be €3,150 but net, it will be somewhere in the region of €2,100. So in effect, they will only be paying €2,100, when you net off the tax.” So the levy isn’t on gross income, as the Taoiseach stated, but on net income.

There are just two possible explanations for this flat contradiction. Either the Taoiseach, and the Department of Finance who presumably gave him the €1.4 billion figure, were completely mistaken. Or the policy changed within a few hours of its announcement. Either way, we are in deep trouble. We have a Taoiseach who completely failed to grasp his own major policy initiative. Or policy is being made up as the Government goes along.

Whatever way you look at it, the so-called pension levy (it is actually not related at all to pensions) is now a complete mess. Firstly, the levy on net income will raise €900 million rather than €1.4 billion – a hole of half a billion.

Secondly, a proposition that was already unfair in its targeting of a specific group in the economy is now grossly more unfair. The burden on the lowest paid public servants – cleaners, porters, sanitary workers – is now proportionally much greater.

Because she pays tax at lower rates, a worker on €35,000 will be levied about 6 per cent of her income, while her boss on €300,000 will pay just 5.4 per cent.

How can we justify taking €1,300 a year from someone earning €25,000, while, on the same day as the levy was announced, Brian Lenihan told the Dáil that just one tax shelter – interest relief for landlords – cost the exchequer €1.4 billion in 2006 and 2007, the same sum as that supposed to be raised by the levy? When he also told the Dáil that he has “no plans” to change the regime for so-called tax exiles?

The Government may be making policy by sticking pins in rows of figures, but isn’t it remarkable that the pins never pierce the most pampered flesh?