Cuts in direct taxes may be more noticeable, but the hard-pressed consumer would welcome any relief from stealthy increases in indirect taxes and charges, writes Marc Coleman, Economics Editor.
'Santa's little helpers" usually conjures up images of elves and sprites in a grotto workshop. At budget time it refers to the various examples of stealth taxation that can help a minister for finance to appear to give more away than he really is.
We might classify stealth taxation into two categories.
The first relates to tax increases that do not need to be formally sanctioned. In this case Santa's most important little helper is inflation and the impact it has on bringing taxpayers into higher tax bands.
The second relates to changes in the relative tax burden which have had a fundamental effect on our economy. These have been sanctioned, but they have occurred by osmosis without really being properly debated. This is not a case of stealth taxation per se, but stealth changes in tax policy.
The distinction is important. The first form of stealth tax is easily rectifiable by indexing tax bands. The second form requires a long-term debate about who should pay what share of taxation.
A clear example of the role played by inflation in determining the incidence of taxation can be found by examining the tax band structure.
The higher rate of 42 per cent of income tax kicks in at €29,400 for a single person, €38,400 for a married couple on one income and €58,800 for a married couple with two incomes. These are hardly high salaries any more - they are broadly consistent with average industrial earnings.
It wasn't meant to be this way. In the early 1970s, the top rate of tax only affected those on genuinely high incomes. Since then a far larger proportion of the population has been pushed into the higher tax bracket, partly offsetting the dramatic reduction in income tax rates.
Even in recent years, when inflation has moderated, the effect has been significant.
Since 2002, the percentage of taxpayers paying the top rate of tax has risen from just under 27 per cent to just under 33 per cent in 2005. The Government had promised to bring the figure to below 20 per cent.
Whatever changes in tax bands and rates are considered today, Brian Cowen is unlikely to achieve that goal. However, he could at least embrace the principle that from now, tax bands and credits should keep pace with inflation.
That way taxpayers will only drift into higher tax bands if their pay increases in real terms.
The principle does not just apply to income tax. The Small Business Forum has raised the issue of thresholds for VAT registration which have not been revised since 1994.
Apart from encouraging black market activity and casual traders, the thresholds are inconsistent with the Government's policy of encouraging small enterprise in the crucial job-creating service sector. They should be raised to levels that can be justified in a meaningful way and indexed at regular intervals.
One of the principal reasons why Ireland is one of most expensive countries to live in within the EU relates to the second phenomenon of stealth changes in tax policy.
The share of income tax as a proportion of total tax has fallen significantly, from 35.6 per cent in 1998 to a projected 29.6 per cent in 2006, but the burden of VAT has correspondingly risen from 26.5 per cent in 1998 to a projected 30.4 per cent.
Since last year the Exchequer has received more revenue from VAT than from income tax. This year VAT tax receipts are set to double corporation tax receipts.
On top of this, the Government has increased charges for public services in the areas of health, education and transport. Recent inflation statistics show that these have been significant contributors to inflation; without their effect and but for oil price increases, inflation in Ireland would be close to zero.
Taken together, Government-induced increases in indirect taxes have been a hidden contributor to high prices and, by extension, to the concern that gave rise to the Rip-off Republic programme.
The recent abolition of the Groceries Order showed that politicians are now more conscious of voter concerns about the cost of living, but whereas the impact of the abolition of the order will be long-term, reducing the rate of VAT could have a more immediate and perceptible impact on the cost of living.
The historical dilemma for politicians is that in spite of their quicker impact on prices, reductions in indirect taxes are not as politically noticeable as cuts in direct taxes. The cost of living is now so high that such measures could be seen as positive by hard-pressed consumers.
Finally, although not strictly a stealth tax, the rising share of total taxation accounted for by stamp duty may become a hot topic.
The share has doubled since 1998. There are two undesirable features to this. Firstly, in an age when labour mobility is becoming increasingly important and necessary for many people, this tax penalises those who must move house to avail of a new job. Secondly, the tax is a tax on transactions rather than on the wealth of a house.
The State provides no corresponding services to those who are moving house, so why should house movers be asked to pay tens of thousands of euro for the privilege of selling?
Brian Cowen made some welcome progress in this area last year by exempting first-time buyers from stamp duty for houses worth less than €317,500 and by lowering their liability for higher house price levels. If the Government heeds recent calls by the National Competitiveness Council to consider broadening the tax base, this would provide an opportunity to drastically reconsider the extent and relevance of this tax.
A comprehensive review of tax policy in Ireland should examine how the tax base is transparent and can deliver public services and tackle poverty in a way that least damages the productive potential of the economy.
In the short term, Brian Cowen cannot resolve these questions, but he can and should begin a process of indexing tax bands, thus ending the most flagrant type of stealth taxation by inflation.