Expect more pain on Budget day as the tax burden rises again, warns Cliff Taylor, Economics Editor
George Bush senior suffered when he reversed his famous pledge: "Read my lips, no new taxes." The Government here is determined to avoid the political flak from reversing the massive tax-rate cuts of its first term in office, but it still needs extra money. The answer is being found in new charges and levies, higher indirect taxes and, more importantly for all our pockets, in creeping tax increases.
Sweeping tax reductions were central to policy during the first-term Fianna Fáil/PD coalition. The two income tax rates were both cut by 6 per cent and the capital gains tax rate was halved to 20 per cent. Presenting the Estimates this week, the Minister for Finance, Charlie McCreevy, again outlined his philosophy, including his belief that the Government's key job was to maintain the economic gains of recent years.
"The litmus test of this administration would be to hold on to what we have gained," he said, adding later that "unless wealth is created, there is nothing to disperse".
And Government ministers - particularly the Tánaiste, Mary Harney, and McCreevy himself - are adamant that low tax rates will be maintained. In a speech a couple of years ago, Harney put the philosophy in a few sentences.
"Low tax rates stimulate economic activity," she said. "Low personal tax rates reward people for working. Low tax rates encourage people to move off welfare and into paid employment. In short, low tax rates work."
So low tax rates we will have. The only problem comes when the Government needs more money. The traditional way of raising extra revenue is to put a penny on the standard rate of tax. This is not seen as an option by this Government. Nor will it countenance a rise in corporation tax, as the 12.5 per cent rate here is seen as central to our drive to attract foreign investment.
Cue higher indirect taxes and the "stealth taxes", all the other ways that the Government takes a little more out of your pocket. These come either directly, through the likes of higher passport charges or A&E costs, or indirectly, through the consequences of Government action. For example, higher costs for hospital bed nights push up health insurance, while lower funding for local authorities knocks on to rising commercial rates and waste charges. One way or another they help the Exchequer to spend a little less cash at a time when resources are tight.
The latest Estimates contain €91 million in new "stealth" charges. Coming on top of last year's batch, this will annoy many people and raise the question of whether it really would be more politically damaging to increase income tax rates. More pain will come on Budget day through higher excise duties, though to keep down inflation McCreevy is unlikely to go as far as last year, when rises added almost one percentage point to the consumer price index.
However, the real one to watch is the income tax system. Last year McCreevy failed to adjust tax credits and bands for inflation. This is the ideal tax increase as you don't even have to announce it, thus avoiding the political flak of being the Government that pushed up the tax rates. Not adjusting the system for inflation automatically increases the tax take, mainly because wage increases push more of people's income into the higher 42 per cent rate.
Because of this, the percentage of taxpayers liable to pay tax at the higher rate has risen from under 28 per cent last year to 30.5 per cent this year, bringing 50,000 more people into the higher rate. This probably saved the Exchequer - and cost taxpayers - €350 million in a full tax year.
The giveaway pre-election Budgets of 2001 and 2002, combined with wage increases under the national programme, led to a 20 to 25 per cent rise in real take-home pay for most people at work in those two years. The tax system will not be providing any income boost next year, however. Already €83 million is pencilled in from imposing PRSI and the 2 per cent health levy on benefit-in-kind payments, and the likely revenue here may be a good deal higher. And since fully indexing the income tax system for inflation would cost a hefty €500 million, the income tax burden may rise again next year, even if McCreevy is able to be a little more generous than last time around.
The tax burden won't be cut in Budget 2004 - the only question is how much the Minister is going to try to raise on Budget day on December 3rd.