Notes on the Front

If someone proposed doubling payroll taxes on businesses, a ton of rhetorical bricks would fall upon them (increasing costs, undermining competitiveness, blah, blah, blah). If that someone were to say that a doubling of payroll taxes would actually benefit Irish business, they’d be deemed just plain crazy. Well, let’s get crazy, then. Let’s get ‘run-though-the-streets-naked-shouting-at-the-top-of-our voices’ crazy.

For employers’ payroll taxes should be doubled. It would be good for living standards, good for employees. And most of all, it would be good for business.

Sometime before Christmas, David McWilliams stated that high housing prices were driving up wage pressures on employers (I can’t immediately find the link in the Sunday Business Post, but he says it all the time and he’s right). There’s nothing revolutionary about this: when prices increase, employees try to recoup the costs from their employers who in turn try to pass the costs to consumers (or get the Government to lower taxes), and on and on. But it’s not just housing.

People face a range of cost pressures. Here are just some (and this list is by no means exhaustive):

• Childcare
• Energy
• ‘Voluntary’ Contributions to Primary Education
• Transport costs (public and private transport)
• Pensions
• Health (insurance, GP visits, medicine, etc.)

You can add your own – the list is endless. For instance, two parents on an average industrial wage each could find crèche costs for one child coming to between 10% and 15% of their gross pay (before tax). Now add on pension contributions to a PRSA account – that’s another 10%-15% (though this will attract some tax relief). That’s somewhere between 20% and 30% of income and we haven’t even counted mortgage costs, never mind all those other little things that make life worth living (like food, which is rising dramatically in some categories).

So we can see how wages are driven upwards as a result of these costs. And even when they can score those increases (or the equivalent in in-kind benefit, like convincing their employer to take out health insurance for all the workers), this only keeps people’s head above water – while acting as a drain on employers.

So how do we break this vicious cycle? Well, we could provide some of these necessary services at cost through the public sector. Let’s return to childcare: a family in Dublin can pay up to €800 per month while a family in Hamburg will pay substantially less. Or healthcare: in most European countries GP services and medicine are free or heavily subsidized. These public services reduce the cost pressure on employees while at the same time providing higher living standards (some people here compensate for lack of free GP visits by not attending a clinic – and get even sicker, which can really bum out your living standard).

Of course, here’s the catch: to provide such services to reduce cost pressures requires a substantial increase in public expenditure which in turn require a substantial increase in, yes, that dreaded ‘T’ word: tax. Here’s where social insurance can come to the rescue – in some of the categories anyway.

Social insurance can be reformed to provide free health care, reduced childcare costs, earnings-related pensions, etc. But this requires a dramatic increase in social insurance revenue. Here’s where Irish business can step forward.

Irish employers enjoy the lowest rate of PRSI (payroll tax) in the EU-15 – by a long shot. They rank dead last in terms of contributions to the economy. It should be noted that France and Sweden – two countries which rank higher than Ireland on the Global Business Competitiveness Index – have payroll taxes more than three times higher than Ireland. So much for the ‘high taxes = reduced competitiveness’ argument. Even if we doubled Employers’ PRSI, Irish payroll taxes would still be substantially below the EU-15 average.

But what would the effect be on business? Would it drive out the multi-nationals? Would it close down businesses left, right and centre? Would it result in higher prices? Pretty much no to all three.

Doubling Employers’ PRSI would represent less than 1% of turnover in the manufacturing sector and about 1% in the non-financial service sector. These are pretty small potatoes, and if one considers that any doubling would be phased in (say, over a 10 year period) the annual effect would be miniscule. Even if, for instance, Irish retailers and wholesalers passed on the full increase to consumers (it’s not as if they would try to raise productivity or anything modern like that), the annual impact would be about 6 cents for €10 worth of goods (or 0.06%).

What’s the upside? First of all, a doubling of Employers’ PRSI would mean an extra €5.6 billion a year flowing into social protection measures. We could have universal health insurance, earnings-related pensions, childcare insurance through public service providers (so that we’re not subsidizing private profit), back-to-education schemes and enhancement of the current insurance programmes. The extra €5.6 billion would represent a 77% increase in the total funds available to social insurance. It could transform living standards and improve our competitiveness (especially through life-long education and training schemes).

For high-road employers – those progressive businessmen and women who understand that businesses prosper through society, and not just on an accountant’s ledger – there would actually be little increase in costs. They already incur pension and other in-kind benefit costs (health, childcare, sickness, etc.). If these costs were transferred to the Social Insurance Fund it would leave them in a stronger competitive position vis-à-vis low-road employers. These are the companies we should be encouraging.

Finally, by reducing living costs for employees (cheaper childcare, pensions, health provision), some of the steam in wage pressures would dissipate. This would result in lower wage costs for employers but higher living standards for employees. In other words, it’s about implementing a comprehensive ‘social wage’.

Would employers buy into this? Certainly not their representative organizations – IBEC, ISME, etc. But then their responses to every social and economic challenge were first drawn up in the Paleolithic period. The challenge for the Left is to go over the heads of these organisations and speak directly to employers and managers – a patient elaboration of the benefits of the social market. It will be a long tutelage, so the sooner we get started the better.

Crazy? You bet. Crazily common-sensical. But when you start to challenge the poverty of low-tax, low-wage, low-spend policies you can see a different and better way of doing business.

So now I’m just waiting for a bunch of employers to go running down my street shouting loudly – ‘Double our payroll tax! double our payroll tax!’

It’s so crazy that I’ve already got my door open in anticipation of joining them.