The exclusive focus on cuts rather than on increases in income tax is a serious mistake, writes GARRET FITZGERALD
ALMOST THREE-QUARTERS of our tax revenue derives from a combination of excise duties, VAT, and income tax. But in the decade between 1997 and 2007 the proportion of national output raised in the form of income taxation – which bears more heavily on the well-to-do than on the less-well-off – was steadily reduced, eventually by one-third.
The tax burden was thus neatly shifted to expenditure taxes (VAT and excise duties), which, in contrast to income tax, bear somewhat more heavily on the less-well-off – for people with lower incomes spend almost all of their income – and fall less heavily on better-off people who can afford to save. This shift in the tax burden made our already inequitable society even more unjust.
Moreover, as the huge cuts in income tax were largely financed from stamp duties and capital gains tax deriving from the housing bubble (an essentially temporary bulge), our capacity to maintain public and social services was hugely undermined by this grossly irresponsible bout of populist tax-cutting.
This policy, pursued without any serious criticism or even comment by most economists – or indeed by trade unions – has led to a situation where the majority of our taxpayers last year paid income tax at rates that are between one-quarter and one-half of the rates charged on such incomes in every other western European country, and in the USA. Only at higher income levels do our tax rates now come anywhere near those of other western European levels, although still about one-quarter lower than elsewhere.
As a result of this under-taxation, I estimate we are short some €4 billion in tax revenue. That is why we are being forced to go well beyond necessary changes in public sector numbers and pay rates by also being asked to accept anti-social cuts in our already grossly inadequate health and education services.
The relevant facts on our under-taxation are set out in the accompanying table, which presents data on income tax plus PRSI paid by employees last year. (The percentages of incomes absorbed by income tax and PRSI are, of course, 1 per cent higher today because of the new levy).
These figures are based on data furnished by governments, and they cover three income levels, ranging from two-thirds to one-and-two-thirds times the average wage. Precise figures for the average wage are not given, but last year average income here must have been close to €40,000, so in this table we are looking at incomes of about €27,500, €40,000, and €67,500.
It will be seen that at the €27,500 income level the tax plus PRSI paid by a single person last year was less than one-third of the average western European rate and no more than half at the €40,000 level. A one-earner married couple with an average income paid only one-quarter of the European tax rate. However, at the €67,500 salary level our tax rate last year was about three-quarters of the western European average.
In the light of those comparative figures it is clear that a large part of our present budgetary difficulties derive from the fact that, in respect of taxes on income, we are grossly under-taxed.
Now, I accept and strongly endorse both the need to reduce wasteful expenditure, including excessive public service pay, especially at the higher levels, and also the need to cut excessive numbers of staff in some sectors. All this has to be faced; we cannot continue any longer in denial about the fact that in both the private and public sectors we have been paying ourselves too much.
But we have also been taxing ourselves too little. And what I find absolutely unacceptable is that because of what seems to be universal cowardice about the need to tackle our unsustainably low level of income taxation – in most cases at a level which no other developed country in the world would ever even contemplate – we are currently prepared to tolerate cuts in our health services that threaten the lives of our people, including in particular our children, as well as some cuts that will weaken our already grossly under-funded education system.
At the time the April budget was being drawn up, the Government seemed correctly to have identified, and been prepared to tackle, this problem – for it announced then its intention to impose an additional €2.5 billion in taxes in 2010. It was that decision that made it possible to reduce the spending cuts to be made next year down to a manageable €1.5 billion.
However, by the end of the summer the Minister for Finance had abandoned this approach, announcing that he proposed to do nothing whatever about our huge revenue shortfall. Instead he has proposed to almost treble the spending cuts he had proposed last April. Why am I the only person to have challenged this policy reversal?
I hope that this stark exposure of the scale of under-taxation will now prompt some belated discussion of this crucial issue.