OPINION: The poor and least well off will pay more tax as they spend most, or all, of their income
THERE ARE a number of reasons why the decision by Minister for Finance Michael Noonan to let us “keep our money” might leave us worse off. In his budget speech Noonan said that “wages and salaries in January will be no less than wages and salaries in December, so people will continue to have discretion on how they spend their income”. He laid heavy emphasis on this point as being central to why the Government had decided not to increase income tax.
His remarks echoed the sentiments of Taoiseach Enda Kenny two weeks earlier when he argued that targeting VAT increases over income tax in the budget would give people a “choice” about how to spend their money.
At first glance, this approach might appear to make us better off. According to this argument, we will still have the same amount of money to spend and, by making thrifty choices, we may be able to maintain the same standard of living.
But there are a number of problems with this emphasis on individual choice.
First, consumption taxes generally have a more regressive distributional impact than other forms of tax. People on lower incomes spend all, or most, of their incomes, and will attract more VAT as a proportion of their income compared to people whose higher incomes permit them to save.
The VAT change means that many ordinary items, including adult clothing, some food and telephone calls, will go up in price, even though basic foodstuffs and children’s clothing are zero-rated for this levy.
While the Minister is correct to say businesses pay a lot of VAT, studies show the vast majority of this sort of tax increase is passed on to customers.
In addition, the choice of the value added levy instead of income tax puts a higher burden on people who have lower incomes. Evidence presented earlier this year by Economic and Social Research Institute researchers bears this out.
They found the groups hardest hit from an increase in the standard rate of VAT to 23 per cent will be households in the poorest income decile, households in rural areas, six-person households and those containing a single adult with children.
In other words, people on the lowest incomes may have no choice at all but to lower their standard of living.
The impact of a budget is, of course, cumulative. And many of those who will bear the brunt of the latest VAT increase have already been hit by previous budgets.
For example, last month research presented by Tasc found that low-income groups in general, and lone parents in particular, were disproportionately affected by Budget 2011.
A second problem is the implied emphasis on “thrift” is not necessarily good for Irish business and jobs. Many Irish-produced groceries are branded, whereas the cheapest discounted groceries may be foreign imports. Thus, pushing people on lower incomes towards discount supermarkets or the cheapest products may not benefit Irish businesses.
A third problem is the focus on individualisation. In the guise of “giving people back their own money” (as the Tea Party movement in the USA describes it), such a policy makes a large number of assumptions about how the economy works while discounting the fact that people may be much better off working together and making collective choices.
For example, if childcare or healthcare were provided as universal public services, many people would be better off in real terms than they are when paying for private creches and health insurance.
Taxes on wealth, such as capital gains and property levies, would be less regressive than consumption taxes and have a more positive economic effect. Higher levels of social insurance should also be considered, in tandem with increasing the insurance-based benefits to those who are unemployed.
Central to European social democracy is the idea that paying taxes allows everyone to contribute into a shared pool of resources so as to provide the best possible services for all according to their needs.
There is a strong element of redistribution built into this model. For example, when those without children pay tax to provide childcare and education for those with children, wealth is redistributed towards families. But all of society benefits from the next generation being well educated, as they will be the workers and taxpayers of the future when the current generation retires and is reliant on them to maintain social services.
Conversely, the reality of individual choice can mean those on low incomes are left with no choice at all, if they do not have the means to provide for their needs and the needs of their children.
Dr Nat O’Connor is director of Tasc, an independent think tank dedicated to addressing Ireland’s high level of economic inequality. It is grant-aided by The Atlantic Philanthropies and also receives funding from the Joseph Rowntree Charitable Trust, as well as deriving income from consultancy work and also from individual donations