Tax hikes will ‘drive people into black economy’
As the EU/IMF/ECB assessors embarked yesterday on their latest check of compliance with requirements attached to their bailout loan to Ireland, they will be asking key questions about proposals being prepared to increase taxation measures.
The narrowing of income tax bands and lower tax credits were conditions of last December’s agreement with the troika but the Government is seeking clearance to find alternative measures.
Mr Quinn said he was drawing on his experience as a former finance minister in forming a view that we have reached a limit on income tax, when it comes to deciding the level of tax increases and spending cuts needed to bridge the public borrowing deficit.
“The general experience is that if you get high levels of taxation you start to drive people into the black economy,” said Mr Quinn.
He suggested it could lead to a two-tiered system, where people will not declare income or service providers and small business people would deal more in cash instead of tax-compliant VAT-receipted transactions.
“Belgium, for example, suffers from an enormous black economy because they have high levels of taxes, [although] they also have very high levels of good public services,” he said.
“So there is a balance and, in the space where we are at the moment of reducing our expenditure at a time when tax revenues have collapsed because of the disruption of the tax base by Fianna Fáil, it [needs to be] a mixture of the two,” said Mr Quinn.
There are differing views as to the split between tax increases and spending cuts that will be announced by Finance Minister Michael Noonan in the 2012 budget, but the minimum combined effect will have to be €3.6 billion.
Mr Quinn must reduce Department of Education spending by about €350m a year by 2014, in addition to a €170m cut that saw his non-capital budget reduced to €8.4bn this year. This is almost certain to require cuts to teacher numbers as 76% of education spending — or almost €6bn — is on pay and pensions. However, further cuts to school grants, reducing or limiting access to student grants or further restrictions to school transport can not be ruled out.
Mr Quinn expressed his opinions on income tax hikes in a recent interview with the Irish Examiner, but declined to give his opinion of other likely measures to hit citizens from next year.
“I don’t really want to get into that area because it’s not my responsibility, it’s a matter for Michael Noonan. Let’s see what he comes forward with in proposals [to the Cabinet] and I’ll tell them [my views],” he said.
