Favour taxes over spending cuts, urges think tank

The Government should protect employment levels and domestic demand by maintaining total expenditure at 2012 levels in December’s budget.

To pay for this, revenue should be increased by 1% of GDP through higher taxes on incomes more than €100k and a wealth tax, the Nevin Economic Research Institute (Neri) says in its autumn review of the economy.

Neri, which is funded by ICTU-affiliated trade unions, says the Government’s priorities in the budget should be to maintain current levels of investment in capital programmes, invest in a new stimulus programme aimed at key infrastructure, and protect the incomes of the most economically vulnerable households.

The Government has put the burden of budgetary adjustment on cutting expenditure rather than increasing taxes. Neri disagrees with this Director Tom Healy said there was evidence to suggest that tax measures over expenditure had a more positive impact on the economy.

The Government plans to shave €5.85bn in total spending over the next three budgets, which would reduce spending from 44% of GDP to 39%. This would put Ireland at the bottom of league tables in terms of spending on services and social supports.

Neri wants the Government to maintain spending at 44% of GDP in the December budget and increase revenue to 36.5% of GDP.

Specifically, Neri wants the cancellation of €550m in public spending cuts and a cancellation of the planned €1,300m cuts to current spending — leaving savings of about €400m through the Croke Park Agreement. Under its plan, Neri would increase State revenue to €60.8bn or 36.5% of GDP in 2013.

Mr Healy said the outcome would be the same as the Government’s adjustment path: They would both end up with a general government deficit of 7.5% at the end of next year.

To pay for this, Neri proposes tax hikes on the better off. It estimates that 433,000 “tax cases” earn over €100k each year. The effective tax rate on the income bracket is 21.48%, which would be subject to a 1.5% increase under Neri’s proposals.

Neri’s other revenue-raising measures include the abolition of a series of tax credits and tax relief for the wealthy: A wealth tax on assets that would generate €200m in 2013, raising capital gains tax to 40%, introducing a site value tax, and abolishing many of the reliefs on corporate tax profits. Over the longer term, Mr Healy said the Government would have to increase the corporate tax rate from its current low 12.5%.

The Neri report will form the basis of ICTU’s pre-budget submission.

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