Notes on the Front

In the debate over the ‘tax package’ in the upcoming budget there is an assumption that the tax base should be further reduced, overall tax revenue should be cut, that hollowing out our tax base makes sense.  Tax cuts will be €1.5 billion.  All we debate is the composition of those cuts: income tax, VAT, inheritance, capital gains.

There is another, more progressive debate we should start; namely, how do we increase tax revenue by €1.5 billion, not cut. 

If we want public services and social protection on a par with other high-income EU countries, we need to raise more revenue.  A previous post showed that we would need to spend an extra €12 to €15 billion a year to match average EU spending.  The Irish Fiscal Advisory Council recently estimated we’d need to spend €14.5 billion to reach European averages. We either raise the money or do without the public services and suffer higher poverty. 

Other benefits of increasing tax revenue could include reducing inflationary pressures, reducing our reliance on unreliable windfall corporate tax receipts and building resilience in public finances by spreading the base.

Of course, if you talk about raising tax revenue, people immediately assume you will take money out of their pockets through income tax hikes.  However, an alternative approach was outlined in the Commission on Taxation and Social Welfare:

‘The Commission recommends that given the medium to long-term threats to fiscal sustainability, the overall level revenues raised from tax . . . as a share of national income must increase materially to meet these challenges. These increased yields should be obtained in a manner that minimises economic, social and environmental costs.’ (bold own)

What’s noteworthy about the Commission’s underlying principle – a material increase in tax revenue – is the buy-in it received across civil society.  The members of the Commission, while acting in a personal capacity, were associated with ICTU, IBEC, the Irish Tax Institute, Chartered Accountants Ireland, Enterprise Ireland, PwC, ESRI, Threshold, and the Irish Environmental Network.  This doesn’t mean that every Commission member agreed with every recommendation; but it does show broad support for the fundamental principle.

So what the areas where we can raise tax revenue with only a minimal economic and social cost?

• Capital and Wealth: inheritances and gifts, principal private residences, capital gains disposals
• Property and Land: commercial site-value tax, local property tax
• Indirect Taxation: Increase lower VAT rates
• Social Insurance: increase PRSI for employers, employees and self-employed
• Environmental: reduce tax fossil fuel subsidies, equalise excise on auto-diesel and petrol
• Income Tax: age-related reliefs, private health insurance, pension lump-sums

We can also add a review of all business tax reliefs to test for efficiency, deadweight and perverse outcomes.

Some of these proposals would be contentious and politically difficult.  For instance, the Commission proposes raising the VAT rates of 0%, 9% and 13.5% to 15%, though it excludes food.  Such increases would be regressive, impacting most on low-income households.  Yet, countries such as Sweden and Denmark have high VAT rates on essentials and, yet, have much lower poverty rates. 

Still, a platform of increased tax revenue would be a difficult political sell.  Progressive parties would face public scepticism and disingenuous criticism.  How can we overcome this?

First, turn the tables.  A simple question should be asked:  how are we going to improve our public services and enhance social protection (e.g. end both child and pensioner poverty) without raising tax revenue?  It is cynical and misleading for any political party to insist they can produce a strong social state while pursuing a low-tax, low-spend budgetary strategy.

Second, directly link a particular tax increase with a particular spending benefit.  For instance, free public transport would require a tax increase of €540 million.  Making prescription medicine for free would require a tax increase of €338 million. According to the Fiscal Council.  These costs could be met by restricting capital gains tax relief on the sale of principal private residences.  Still, there is no under-estimating the degree to which people would be suspicious of such ‘promises’. 

Third, progressive commentators, civil society groups and trade unions should publicly and frequently promote tax increases.  This would provide space for progressive political parties to respond to.  Changing the public debate is something all progressives should be involved in, not just political parties.

Does this mean that no tax should be cut?  No.  For instance, Inflation-indexing tax credits and tax bands could cost over €500 million.  Therefore, to achieve a net increase of €1.5 billion would require tax increases of €2 billion.

Ultimately, it is about truth and trust:  we need to tell people the truth.  We can’t have a strong social state without a strong and resilient tax base.  This requires tax increases.

And in telling the truth we may be able to win people’s trust – that we’re serious about promoting people’s living standards.