Ireland Needs a Tax Strategy

Taxes are the price you pay for social services. You might think the price is too high, too low, you might think the service you’re getting is great, or rubbish, but there is no getting away from the need for someone to pay for these services. When it comes to tax, the first principle is NFMBPB--not from my back pocket, buddy.

Everyone wants someone else to foot the bill. The rich want tax breaks on the passive incomes their capital gains give them. The poor want to pay nothing because their disposable incomes are too low. They pay most of their taxes through VAT and other consumption-type taxes like excise duty.  The middle classes grumble about everything but put up with it and, in the end, do end up footing a large part of the bill, in particular those on over about 70,000 euros. Nobody likes the corporations and their low-low tax regime, except when they provide us with well paid jobs.

The Spring Statement is coming, and with it a sense of the kinds of tax changes we are likely to see in the forthcoming budget. Income taxes for those earning up to 70,000 are, for sure, for the chop. Intriguingly, we may also see a projection for tax policy changes over the next five years as well, a sort of party-political broadcast as well as a new addition to the policy-making landscape: a seriously committed medium term economic strategy.

This is really good news, and I hope it works for the government. For far too long fiscal policy was the result of about 6 weeks of lobbying by special interest groups and kites floated by the government through the media, with the result as chaotic as a process like that could be. A longer term view should constrain everyone involved in the production of fiscal policy by setting expectations correctly. But you know what? This is Ireland. So the chances of that happening are 50:50 in my view.

Back in 2007, the government took in about €60 billion in tax revenue. About €15.8 billion was income taxes. VAT got the government €16 billion, about €3 billion was capital gains taxes. Fast forward to 2013. As we showed the Troika the door, the government took in about €50 billion, €16.6 billion of that in income taxes, €10 billion from VAT and only about €0.3 billion in capital gains taxes. The fiscal picture is changing rapidly.

The word ‘fiscal’ comes from the Latin fiscalis, meaning purse. The Medium-Term Economic Strategy for 2014 to  2020 had a serious look at where the coins for the purse were going to come from. These coins were going to come from anti-cyclical taxes like water, property, and carbon, and less from income, VAT, and capital gains. The implication for policy were pretty clear--income taxes were going to head down while property taxes and the like would drift, inevitably, up.

This strategy is important to keep going. Ireland has gone bust 3 times since independence largely because of the composition of its tax structure. Our tax structure is still very strange.

An example of how strange this is comes from a recent OECD report on taxing wages, which showed married Irish couple with two children on an average industrial wage end up paying almost no tax. How? Tax breaks and child benefit combine to leave these families receiving almost exactly as much as they give in to the system. The average household income is about €52,000 in Ireland in 2014.

The median household income was about €38,000. Taking the median value, and thinking about the fact that there are about 150,000 households with incomes between €30,000 and €40,000, that’s a lot of people. There’s a lot of caveats you have to apply to the OECD’s analysis. The first is that the OECD didn’t look at things like the water or property taxes we now enjoy so much, or the value-added taxes we pay on items we consume. So while the households earning between, say, €30,000 and €35,000 are probably still net beneficiaries, those between 35 and 40,000 are not. The second caveat is that comparing tax structures across countries like the OECD does is fraught with difficulties. It’s almost impossible to compare like with like.

Despite these caveats we need to understand the exact structure of our tax system, where it comes from in taxes, and to whom it goes in transfers. Fiscal policy changes the answer to these two questions each year. A five year plan could give solidity to a tax strategy which is as fair as it can be and raises enough in tax to fund vital services.