Labour's proposals appeal to a larger bloc of voters, but a small minority would still be a big success for the PDs, writes Marc Coleman, Economics Editor.
Using the words "auction politics" might be stretching it, but there is definitely upmanship going on in relation to the tax proposals of Labour and the Progressive Democrats. That Annie Get Your Gun song springs to mind: "Anything you can do I can do better/I can do anything better than you."
Labour will cut the standard rate of tax by two percentage points, they said two weeks ago. Now the PDs have decided that any tax Labour can cut, they can cut deeper. If cutting taxes for those on lower and middle incomes makes sense for the Labour Party, cutting taxes for those on middle-to-high incomes makes sense for a party whose constituents are among the best paid in the land.
Unlike Fine Gael or Fianna Fáil, neither Labour nor the PDs have aspirations to be parties of mass appeal. Michael McDowell knows that his policies don't have to appeal to everyone. They don't even have to appeal to a majority. Appealing to a minority of the electorate will do just fine, so long as that minority exceeds the PDs' present poll rating of 1 per cent of the electorate. And in theory - and assuming they are not put off by PD policy in other areas - they will.
Labour's 2 per cent cut off the standard rate - costing just over €1 billion - appeals to a very large number of voters, some 1.4 million PRSI workers who pay tax at the standard rate of tax and at higher rates. For a single earner on the average industrial wage, the benefit was worth about €680 per year. For all but those on the very highest incomes - over €100,000 a year - this beat the Government's commitment to cut the top rate of tax from 41 to 40 per cent hands down. Until Sunday, that is.
On top of that Government commitment, the PDs now say they would also reduce the top rate of tax - not by 1 but rather by 3 percentage points over the period of the next government. They will also match Labour's commitment on the standard rate euro for euro.
Those on very low incomes will benefit only marginally more under the Progressive Democrats' proposals than under Labour's. Furthermore, they will have to wait until 2012 for those benefits if the PDs are in government, whereas Labour have promised to implement their proposals by 2009. However, the vast majority of income earners just below, at or above the average industrial wage will gain substantially under PD income tax cut proposals relative to Labour's plans.
And although he hasn't ruled it out, Pat Rabbitte will not precommit the Labour Party to indexing income tax thresholds and tax credits if elected to government. The PDs have promised to increase the standard rate band for a single person from its present €34,000 a year level to €50,000 by the year 2012. In addition, tax credits will be increased so that a singler earner on €20,000 a year and a married couple on €40,000 are removed entirely from the tax net.
Indeed, so great are the proposed benefits to higher income earners from the PD rate cuts that some might question them on equity grounds. A single earner earning about twice the industrial average wage, €65,000 per year, will gain about €5,000 by the year 2012 - almost 10 times the gain for someone on €25,000 a year. Expect a hot debate on this contrast as we approach the election.
Another hot debate is likely over the PD approach to the housing market. Labour has proposed supporting first-time buyers and those trading up for family reasons by using a State fund. The Progressive Democrats have promised to exempt first-time buyers from stamp duty and to ensure that higher rates of the duty only apply to the portion of the house price above the relevant threshold (at present, once the price of a house rises above the threshold for a higher rate, that rate is paid on the entire price of the house).
For a party that accuses Labour of auction politics, the PDs are showing far more largesse towards the electorate than the Labour Party. Where the Labour Party's proposals will leave government revenue in 2012 €1 billion lower than if those proposals were not implemented, the PDs will leave it €5.4 billion lower.
If PD policies - assuming they are implemented - have a cost, it is likely to come in the form of extra public expenditure forgone. Unlike Labour, the PDs can afford to alienate public sector workers. Even so, if PD forecasts underpinning their proposals are correct, current Government spending will still rise €20 billion between 2007 and 2012.
And if there is a catch in the PD plans, this is where it lies. PD assumptions are for 8 per cent growth in nominal GDP - the value of goods and services produced in the economy each year (in illustrating its own proposals, Labour used a more prudent figure of 7 per cent).
PD assumptions here are still in line with ESRI forecasts and not wildly optimistic. But the PD tax plans also assume that revenue will grow by 10 per cent more than the rate of nominal economic growth.
As shown in the table, revenue growth has been broadly in line with economic growth. Only in the property boom years since 2003 has it substantially exceeded it. Without this boom revenue growth would have fallen short of economic growth. In some years - 2001 and 2002 - it has been significantly lower.
Last year Michael McDowell warned that the "cranes would fall from the sky" if Labour were elected to power. If his plans on tax are to be implemented, he had better be sure they stay upright.