In leaner times it is the better off who should make a greater contribution, writes Noel Whelan.
THE DEPARTMENT of Finance has confirmed that tax receipts for the first five months of 2008 are €1.2 billion below projections.
The ground is already being laid for an argument in the coming months about where public expenditure cuts could be made, what programmes should be suspended or which projects could be postponed.
No consideration appears to have been given to whether the current, temporary difficulties in the public finances should be addressed by tax increases.
Incomes in Ireland are currently under-taxed. The fact that Irish workers are the lowest taxed in Europe was emphasised this week by Brendan Butler of Ibec, not in response to the publication of the exchequer returns but during the debate on the Lisbon Treaty.
He illustrated his point with some interesting figures. We have 2.1 million workers in this country, a third of whom pay no tax. A further third pay between zero and 20 per cent and the top third pay between zero and 40 per cent. According to Butler, the average tax paid by a worker in Ireland is 14 per cent whereas the equivalent figure in Germany is 38 per cent.
Ireland's low income tax rates have contributed to the economic boom of the last 15 years and no one can argue for a return to the high tax rates of the 1980s. However, given our newly constrained public finances, it is time to ask whether cuts in income tax rates have gone too far and whether, at a minimum, a temporary increase in the top rate of income tax in next December's budget would be appropriate.
In the 2007 budget Brian Cowen announced a cut in the top rate of income tax from 42 per cent to 41 per cent. He did this under pressure from Bertie Ahern who was seeking to placate newly-elected PD leader Michael McDowell. He did so because he was flush with tax receipts from a property boom then at its height. Cowen suggested that a further 1 per cent cut would be made in the 2008 budget.
Falling tax receipts last December led Cowen to abandon that cut. Now that this year's tax returns look set to be much more disappointing, the cut to 41 per cent should also be revisited.
In the lead-in to last year's general election a peculiar consensus emerged about income tax policy. All the main political parties promised tax cuts and all, including Labour, promised cuts in the top rate. Having sold themselves as tax cutters before the election, all parties would have credibility problems if they were now seen to support income tax increases.
However, these pre-election promises were premised on projected growth rates of about 4 per cent. Most commentators now predict a growth rate of less than half that. The slowdown in the US economy, the international credit crisis and rising oil prices combined with difficulties in our own property market have caused a dramatic slowdown.
The economic situation has been transformed and, to paraphrase Maynard Keynes, now that the facts have changed, the parties should change their minds.
When the public coffers were bloated we had the luxury of lower income tax for the better paid. In leaner times it is the better off who should make a greater contribution to the tax take.
The most efficient and equitable way to achieve this is by increasing the top rate of income tax. Most of our public spending goes on health, education and social welfare so any cuts in these will inevitably hurt those most in need. Tax increases, however, will impose on those who are better able to pay.
Fine Gael's Richard Bruton has a point when he suggests that savings can be made through greater public sector reform and more efficient public expenditure. The Government itself acknowledges that there is room to cut public sector spending without having too severe an impact on frontline services. However, it is dishonest to suggest that efficiency drives alone can plug the deficit opening up in the public finances.
Similarly, Labour's Joan Burton is right to focus on high-rollers who use tax relief or non-residency exemptions to ensure they pay little or no income tax. However, it is delusional to think that there exists some crock of gold in unpaid taxes from the very wealthy that could resolve all our difficulties.
Ireland is close to the government borrowing limits with which we must comply. Therefore hard decisions must be made on either the tax or spending side of the balance sheet. The public must be more realistic about the level of services which the exchequer can afford and public sector workers need to be realistic about wage levels.
In the longer term the recently established Commission on Taxation may suggest a more radical overhaul of our tax base.
In the meantime, we should ask those on higher incomes to pay more.