They aren’t going to raise income tax again – are they?

ESRI points to big gains from increasing income tax rates – close to €1 billion annually

Paschal Donohoe: The Government’s tactic is to push the discussion on what happens to tax and welfare  to a new commission on the subject. This is due to report in summer 2022. Photograph: Julien Behal

Paschal Donohoe: The Government’s tactic is to push the discussion on what happens to tax and welfare to a new commission on the subject. This is due to report in summer 2022. Photograph: Julien Behal

 

We have reached another turning point on tax. We had the Irish tax-cutting era before the financial crash hit in 2008, then big tax hikes to pay the bills afterwards.

Then came a period from around 2013 onwards when our tax bills more or less held steady – and soaring corporate tax revenue paid for a lot.

Now, emerging from the pandemic, we are heading back to an era of higher taxes – with the better-off likely to be in the firing line. The Fine Gael promise to abolish the USC is long forgotten.

Surely they can’t increase the personal tax rates, you say, having specifically ruled it out in the programme for government?

Corporation tax receipts are likely to be hit by talks on global reform and up to €3 billion in taxes could be at risk from the electrification of motor vehicles

As the Economic and Social Research Institute (ESRI) pointed out in a report this week, income tax and VAT are two places where big amounts of revenue can be raised.

Whatever way you actually do it – via higher rates, changes in tax credits ,changes in PRSI or whatever – it is difficult to raise large sums without hitting people’s incomes. It isn’t going to happen in the next Budget – but sooner rather than later your tax bill is rising.

This is not new tax to “pay for” the pandemic. The head of the National Treasury Management Agency, Conor O’Kelly, said this week that he was not “too worried” about the explosion in public debt caused by the pandemic. Ireland has been able to borrow the money at rock bottom rates.

This isn’t a free pass, of course, and we don’t know where interest rates will be when the borrowings have to be refinanced. It does limit room for manoeuvre. But a revival in growth as the pandemic fades will boost tax revenues and reduce emergency spending, and this will cut borrowing.And there are some encouraging signs that the economic bounce-back could take hold quickly.

To understand why taxes will have to rise, we need to look elsewhere. A big, permanent increase in day-to-day Government spending is now underway, only in part related to the pandemic. The big State is back in fashion. And the Government can’t just keep pushing up this kind of spending, year after year, without finding ways to pay for it.

Some of this increase in spending will be driven by the fallout from the pandemic, reflecting the ongoing impact on the health service and the continuation of a greater level of social welfare supports in areas like sick pay.

There are other pressures on the Government too. The Irish Fiscal Advisory Council has said that more than €5 billion in additional spending in this year’s budget is not directly relating to the pandemic, while in the years ahead the ageing population will cost a lot of money.

Meanwhile there are uncertainties about future revenues. Corporation tax receipts are likely to be hit by talks on global reform and up to €3 billion in taxes could be at risk from the electrification of motor vehicles. Some of the broadening of the tax base after the last crisis has already been chipped away.

Higher income

So where will the additional tax revenue come from? The ESRI points to the big gains from increasing income tax rates – close to €1 billion annually if the 20 per cent rate went to 21 per cent and the 40 per cent rate to 41 per cent. Higher -earning households would be worst hit. Raising VAT rates by one point would bring in €690 million.

There are alternatives, of course, though raising big sums is difficult. Internationally the trend is towards hitting higher earners, who have been less affected by the pandemic, and businesses.

Imposing higher income tax rates on those earning over €100,000, or a withdrawal of tax credits from this group, are both possibilities. An increase in PRSI – on employers and employees – seems likely, though as the ESRI points out, over-65 year-olds don’t pay this levy and it would hit younger people worst hit by the pandemic.

Wealth tax will come on the agenda, though the bulk of wealth in this country is accounted for by family homes and politicians have not even been able to agree a sensible way forward for the local property tax.

Raising inheritance tax is another way to tax wealth – and another political red-button issue. Cutting pension tax breaks could lead to a revolution in the private sector, looking enviously at the pension arrangements in the public sector.

And then there is corporation tax. There is still some way to go in the corporate tax talks at the OECD, but a recommended global minimum tax rate of 15 per cent may now be on the cards. As this will not be obligatory – and there may not be EU agreement to mandate it across the Union – Ireland may face a choice to stick at the 12.5 per cent corporate tax rate or increase to 15 per cent.

Faced with this choice,increasing to 15 per cent would surely be the right call. It would be vital for reputational reasons and would raise tax for the Irish exchequer, which would otherwise be levied elsewhere. In turn this would help to offset other losses which the Irish exchequer faces from the corporate tax reform process.

The Government’s tactic is to push the discussion on what happens to tax and welfare in future to a new commission on the subject, being established by Minister for Finance Paschal Donohoe. This is due to report in summer 2022.

The idea is to present this as a package to the public – here is what you will get, and here is how it will be paid for. But the link between public spending and tax has been well and truly broken in the Irish debate. And so the politics of what lies ahead post-pandemic is going to be interesting and more than a little fraught.

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