GERARD HOWLIN: Our tax base is too narrow to support our spending profile

With income tax we are dangerously out of kilter with the tax norms of countries we want to emulate, writes Gerard Howlin

“YOU can’t have a champagne lifestyle on a 7-Up budget son” was well-meant but astringent advice given years ago by a builder, who was doing a job for me. I had lost the run of myself, and he administered a dose of reality.

I can testify that he did a good job — a job that lasted. Regrettably, the days of being addressed as “son” are past. OAP status is still far away, but it’s eerily nearer now than the first flush of youth.

Interesting then to see that from today Simon Harris, the health minister, is reducing prescription charges for over-70s with a medical card by 50c per item from €2.50 to €2 as promised, and the monthly maximum regardless of the number of items from €25 to €20. That’s more like 7up than champagne for sure. And what sort would you be, if you begrudged it? It’s not like the health system has the money, but that doesn’t seem to matter. It will benefit 390,000 people 50c at a time.

Our tax base is too narrow to support our spending profile

From next week, a €5 per week increase in the old age pension kicks in for all pensioners, regardless of income. It’s interesting to look at the difference in tax paid by the old, compared to under-66-year-olds.

Dr Donal de Buitléir of points out that on €20,000 a single pensioner pays €535 less in tax per year. That excludes PRSI, because they don’t pay any. For a married couple over 66, on a joint income of €36,000, the differential rises to €4,716. Their income is effectively tax free.

It’s not champagne, but it’s a lot of return in terms of State services, from health to public transport, all of which require investment, and which the old depend on more. In fact, it’s exorbitant largesse, from a State that can’t afford it. Regrettably, it’s not exceptional asymmetry in our out-of-kilter tax system.

In other news, it seems those of us who paid our water charges are to be refunded. Bizarrely, no consideration is being given to seeking a refund from us to the State, of the €100 hand-out for a “water conservation grant”. This, with new regulations for pint-sized apartments which will be building blocks for future slums, were signature initiatives from former environment minister, Alan Kelly. He is gone, but the debris remains.

Our tax base is too narrow to support our spending profile

It seems we aspire to public services on a par with European norms, but unlike those other countries, we won’t pay a water charge. Fine Gael made a bags of it in government. Fianna Fáil, in opposition, baulked. The entire response was led by a brilliant, but destructive campaign by the Left. They pulled Sinn Féin into line first. Fianna Fáil wasn’t far behind and now it’s the new normal.

It doesn’t add up though. Being a tax haven for the old is a lovely idea. The notion of ‘free’ water is an enjoyable hallucination, but the fact is that our tax base is unsustainably narrow.

Property tax is another Irish giveaway. It was frozen until 2019. Michael Noonan wanted to clear the political runway for successful electoral take-off before polling day, and took an increase off the table. Local authorities, which provide local services, including for the homeless are left without adequate funds. In addition, councillors usually, though not always, further reduce the tax by applying the up to 15% leeway, they have locally.

Then, astonishingly last Christmas, those most prominent in the campaign against water charges, in coalition with several who left their palm prints on reductions in an already modest property tax locally, turn up as Santa Claus in Dublin’s Apollo House, fulminating about those left homeless on the streets. It was the point at which stupidity passed into hypocrisy. It invested new levels of indifference into the refrain of “hey, hey, we won’t pay”.

But all of that is just the small part of the iceberg visible above the surface. The bigger deal is that in the wonderland that is our tax system the top 50% of tax payers pay 96% of personal tax. And top, so you are clear, is everyone earning over €30,000 a year. The remaining 4% of personal tax is paid by 21% of income earners. Extraordinarily 29% who earn, pay nothing. It’s crazy!

Our tax base is too narrow to support our spending profile

Sure, those who pay nothing earn very little. But those who earn very little, depend most on services which in the future, like the recent past, will be the first and hardest hit in a downturn, because our tax base is too narrow to support our spending profile. As with water charges, and property tax, so with income tax we are fundamentally and dangerously out of kilter with the tax norms of countries whose spending habits and service levels we want to emulate.

Last Friday night at the Irish Tax Institute, its president, Mark Barrett, issued a prophetic warning when he said: “We cannot run a country in which a few companies are too big to fail, or in which too few people bear the burden of taxation.”

He quoted the IMF which advised us that “the tax base is essential to minimise the impact of potential shocks and to withstand the upcoming demographics-driven expenditure pressure on the health of public finances as well as to safeguard the current welfare system”.

The minister for finance was sitting beside him. On his watch the percentage of income earners who pay no tax has risen from 12% to 29%. Our take on corporation tax, which is at 15% of exchequer income, is at or above average European levels, is dangerously out of kilter too. The top 10 companies pay fully 40% of it.

Our tax base is too narrow to support our spending profile

Admittedly, a water charge was attempted but it has been aborted. Property tax has been frozen. And then there are the recesses of our Vat system where, astonishingly, half of goods and services successfully elude any charge. More importantly than any single specific is a creeping return to the culture that led to the crash.

That’s all before serious, but imminent, talk on public sector pay. It’s the largely ignored backdrop to what I predict will be angry talk about subsidies for public transport this week. And that’s not to mention what other affront will emerge from an inefficient health service, hostage to vested interests, but which paradoxically is relatively well-funded. It won’t stop demands for more money, in return for precisely no reform though.

‘Equal’ is the preferred Sinn Féin word. ‘Fairness’ is the one Fianna Fáil likes. Further left, there is an entire scrabble set of them. Overheard from Fine Gael’s internal conservation are ruminations about social justice and inclusiveness. As of today, some who are perfectly capable of paying, will pay 50c less for every prescription item. There is €5 for everyone in the audience from next week. Swathes of the population are excused from obligation. It’s unsustainable and uncompetitive. The algae is blooming on the pond again.


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