ESRI CONFERENCE:AN INCREASE of three percentage points in the tax burden would bring Ireland back to its position in the late 1990s when it was a highly competitive economy, an adviser to the Department of Finance said yesterday.
Jim O’Leary told a budget perspectives conference organised by the Economic and Social Research Institute that last year the now Governor of the Central Bank, Prof Patrick Honohan, had noted that in the late 1990s Ireland had been highly competitive.
“We know what works,” Prof Honohan had said. Mr O’Leary said the configuration of tax and spend Ireland had then could be seen as a rough benchmark.
He said tax and social welfare contributions were now “about three per cent below where we were in 1998 to 2000” and that might suggest “there is scope for increasing the tax burden by three percentage points.”
However he said policymakers would need to bear in mind what Ireland’s competitors were planning to do with their tax burdens over the coming years.
It was striking that many of these countries intended to reduce their tax burdens while also reducing their public debt.
On the issue of taxation and equity, Prof Brian Nolan of UCD told the conference that the distribution outcomes wanted from the tax system could be achieved. The problem was that it was not clear what outcomes were wanted.
Colm Kelly, of PricewaterhouseCooper, who is chairman of the Foundation for Fiscal Studies, said Ireland did not have a clear view on what kind of society it wanted to be in five or 10 years. Policy decisions needed to be put in a societal context.
Prof Nolan questioned whether now was the time for Minister for Finance Brian Lenihan to be introducing a universal social charge. Mr Lenihan wants the charge to replace PRSI payments, the health levy and the income levy.
Prof Nolan said the income levy had been introduced as a temporary measure but had worked well and had brought in tax in a progressive way. “I’m not sure that fixing that now is the best thing the Minister and his advisers need to be thinking about right now.”
Mr O’Leary did not respond to the point. Claire Keane of the institute suggested an allowance could be introduced to compensate those on lower incomes. The cost of such an allowance would have to be paid for by an increased rate for the social charge.
An exercise she, Prof Nolan and others had worked on showed the highest income earners gaining from the introduction of a charge, and the lowest income earners losing.
Ms Keane said this was because the income levy, which rises to 6 per cent on income over €100,000, is highly progressive.
Prof Nolan told journalists afterwards that he believed the tax base would have to be widened if Mr Lenihan was to achieve his objective of narrowing the deficit.
