Labour's innovative tax and housing initiatives do not quite add up, writes Marc Coleman, Economics Editor
Who are the winners, who are the losers, can we afford it and is it good for the country?
Every policy proposal from any party with some hope of getting into government will face those four questions. With a scheme that has wrested the initiative from the Government and put the last Budget in perspective, Pat Rabbitte has become the first party leader to run the gauntlet. If elected to government, Labour proposes cutting the bottom rate of tax from 20 per cent to 18 per cent. Moreover, in an innovative - if not exactly clear - proposal, Labour will help house buyers by setting up a Housing Assistance Fund.
Since 1987 the top rate of tax has come down from 60 per cent to 41 per cent and the bottom rate of tax from 35 per cent to 20 per cent. Of the 34 percentage points by which tax rates have fallen in the last 20 years, only one percentage point - the cut in the standard rate from 27 to 26 per cent in 1995 - occurred under a Labour government. This is not because the Labour party has opposed cutting taxation; rather, Labour has always held firmly to the view that raising tax thresholds and increasing credits are a better way to reduce the tax burden.
Unlike cuts in the top rate of tax, these help everyone, and unlike cuts in the standard rate of tax, they help prevent workers from drifting into the higher tax bracket as wage inflation drives up their income levels.
With Valentine's Day around the corner and opinion polls suggesting that voters might find all this worthiness a bit dowdy, Labour is putting on a bit of sex appeal.
The appeal may be widespread: winners from Labour's tax proposals would include 1.4 million PRSI workers who pay tax at the standard rate of tax. For a single earner, and assuming Labour keeps the standard rate tax threshold at its present €34,000 - just below the average industrial wage - the proposal would amount to a benefit of about €680 per annum.
Of these 1.4 million PRSI workers, approximately 0.5 million - those earners who pay tax at the top rate - would benefit from the present Government's promise, if re-elected, to cut that top rate from 41 per cent to 40 per cent.
The "losers" from Labour's proposal are only losers when one considers this alternative policy. They are those very high income earners - about one in 10 people in the labour force - who earn in excess of €100,000 a year. With higher taxable earnings in excess of €70,000 or so, a gain from a 1 per cent cut in the top rate of tax would exceed the gain in the 2 per cent cut in the standard rate, albeit only slightly for most of them.
The equity of Labour's policies are a matter of subjective assessment. Just as it argues that income should be more equitably distributed, so Labour also argues that tax cuts should be more equitably distributed.
A caveat to this logic is that the top 10 per cent of income earners pay about 40 per cent of the entire income tax bill. One could argue that some disproportionate lowering of that excessive burden would be justified but, as far as the Labour Party is concerned, there is little gain in doing so. In political terms, Labour's new strategy makes absolute sense.
Of course some will not benefit from Labour's proposals. They are the two in every five workers who pay no income tax at all. They gained substantially from increases in tax thresholds and credits under the last Budget - which effectively removed workers earning below the minimum wage from the tax net - so all parties may be calculating that this constituency is in no immediate need of attention.
The irony is that this policy moved the Government significantly closer to the approach of the Labour Party. If the Labour Party is shifting from its traditional policy approach of raising income tax thresholds and credits, it is probably because the Government has implemented it already.
It is the sheer size of the cut - a full two percentage points - that raises the next question: is it affordable? On a stand-alone basis, the cut will cost €1.04 billion a year. While very large tax cuts can actually stimulate tax revenues by boosting the economy, this usually only applies when rates were originally quite high.
Without any compensating measure to offset this lost income, Labour's proposal would tend to worsen Ireland's budgetary position each year by about one percentage point of Gross Domestic Product - the standard measure for public housekeeping.
What might those compensating measures be? Again we come back to Labour's traditional policy of raising tax thresholds. As a means of cutting taxation, it has ditched such a policy in favour of cutting tax rates. But as outlined above, the abandoned policy has another purpose: preventing workers on the standard rate of tax from drifting into the higher tax rate.
Despite piling criticism on the Government for failing to do this in the past, Labour has not clearly committed to the automatic indexation of thresholds. By leaving standard rate bands where they are, the €1 billion cost of the cut could be clawed back in the first three years of government.
But even if this doesn't happen, Labour's planned tax cut won't deal with another chronic problem that most low-income earners have: inability to buy a house. Despite half a million houses being built under the present Government, Labour has pointed out that waiting lists have doubled. To solve that problem, it plans to set aside €2.5 billion in public funds, to be managed by the National Treasury Management Agency. Using the interest from that fund - about €100 million per annum - Labour plans to allow local authorities to co-finance house purchases for deserving first-time buyers or those who need to trade up for family reasons.
Both the Central Bank, in its latest quarterly bulletin, and the National Competitiveness Council, in its annual competitiveness report, have identified the key problem underlying the non-availability of affordable housing in Ireland: the chronic lack - and consequent high price - of zoned land in areas where people want to live.
Depending on the criteria for eligibility, Labour's plan could help 5,000-10,000 house buyers to meet their mortgage payments annually. But it will not solve - and may even worsen - the key problem causing such high house prices in Ireland: too much money chasing too few houses.
And there is another problem. Given years of unbudgeted surpluses in recent times, Labour argues that these measures will be affordable in the future. But this may be holding hostages to fortune. In their many press releases responding to the growing bulge in State coffers, both Labour and Fine Gael were quick to point out the dependence of that bulge on a boom in house prices and construction activity. From a position where it was worrying about it, Labour now seems happy to assume that this boom will continue.