Dáil Éireann Debate, Tuesday - 27 May 2014
3. Deputy Joe Higgins asked the Minister for Finance how he reconciles the view that the income tax burden is too high on low and middle-income workers with the Government's policy of imposing new tax burdens on the same cohort, with the property tax on workers' homes and water charges; and if he will report on the income tax increases that would be equivalent to these new burdens for average workers. [23226/14]
View answerCan the Minister reconcile the view that the tax burden on low- and middle-income workers is far too high with the fact that the Government is imposing other savage taxes, including on people's homes and water? Can he explain the contradiction?
In restoring the public finances to a sustainable path this Government has striven to ensure adjustments to taxation are made in as growth-friendly a fashion as possible. At the heart of this endeavour is the principle that the tax system maintains the right incentives for people to work and invest. Research by the OECD has shown that taxes on labour tend to be more damaging to economic growth than taxes on consumption and property. This is due to the disincentive effect it has on decisions made by individuals to work and invest in their education.
Efforts to reduce the budget deficit and increase the stability of the tax system have been guided by the Commission on Taxation, which was established to review the structure, efficiency and appropriateness of the Irish taxation system. As part of its wide-ranging review, published in 2009, the Commission on Taxation recommended the introduction of a property tax and water charges. Property taxes are a valuable component of a tax system on the basis that they offer a stable source of revenue for the State and have limited effects on people's decisions to work and invest.
With the above principles in mind, research by the OECD has shown that Ireland has one of the lowest entry points to the higher rate of tax as a proportion of the average wage within the OECD area. The point at which individuals begin paying tax at the higher rate in Ireland commences at just above the average wage. This reduces the earnings of people at this point in the income distribution, contributing to lower economic growth through reduced labour force participation and effort. An increase in the threshold at which people begin paying the higher rate of income tax would lessen the burden on people at this point in the income scale and increase economic activity.
Until the recent introduction of the local property tax, Ireland was one of the only countries in the OECD not to have a property tax. The lack of a stable source of revenue in the tax system during the recent recession placed significant strain on the public finances. The introduction of the local property tax has helped restore sustainability to the public finances while minimising the effects on people's decision to work and invest.
Additional information not given on the floor of the House
Finally, it is important to emphasise that incremental changes to a tax system should not be viewed in isolation from the tax system as a whole. Efforts to reduce the budget deficit by this Government have been guided over the period by the best available research from the OECD, the Commission on Taxation and others to achieve a sustainable budgetary deficit in as growth-friendly a way as possible. Comparing individual aspects of tax policy decoupled from the wider impacts of the existing tax system or the changes made to it over the course of fiscal adjustment can give misleading implications of wider tax policy effects on people and the economy.
As regards the request of the Deputy concerning the income tax increases which would be equivalent to the local property tax and water charges for average workers, it is not possible to be specific. Any required yield to be obtained from the income tax system could be achieved by many routes, including a reduction in personal tax credits, reductions in the standard rate bands, increases in the rates of income tax, reduction of the threshold for the universal social charge, reduction of the bands for the USC or increases in the rates of the USC. If the Deputy wishes to posit a specific alteration to the tax code in order to achieve a certain yield, I will be happy to have my officials, in consultation with the Revenue Commissioners, calculate the relevant outcome.
I am concerned about the effect on the lives of ordinary working people. The Minister has not answered my question on this. The reality is that, for workers on modest incomes, the property and water taxes will in a short period amount to anything from €1,000 upwards. This is a massive new austerity burden on their shoulders. At the same time, the Minister pretends to make a virtue of easing income tax. Does he not understand the total contradiction as far as working people and ordinary people generally are concerned? To obtain the stable revenue the Minister speaks about, why does he not turn instead to the big corporations whose scamming of the taxation system is an international scandal? We should tax the wealthiest in society rather than putting the burden on working people.
One gets less of what is taxed most. If everything is piled on income tax, there will be fewer people working. What I want is to change the tax base in accordance with the best advice available to make it more work-friendly. That means broadening the tax base and introducing taxes such as property tax. The view of anybody who comments on tax is that this is the proper way to proceed. It is not true to say that low-paid workers are totally burdened by the amount of taxes they pay.
For example, 850,000 low paid workers pay no income tax at all; therefore, the Deputy's analysis is not correct.
That is pathetic; they do not pay tax because the Minister could not with any decency demand tax from them to allow them to have some kind of a decent life. Those on low and middle incomes do pay tax. I agree with having a progressive income tax system, but, while those on low and middle incomes cannot take any more, the Minister refuses to tax wealth. Based on 2012 figures for the big corporates, for example, and the fact that the effective tax rate has conservatively been estimated at 8%, an extra 1% would bring in €525 million, which would hardly be felt by the big corporates. Equally, a progressive tax on the highest income earners earning over €100,000 or €120,000 and a tax on wealth would yield substantial resources that, when invested, could remake this broken economy and create tax buoyancy generally. Broadening the tax base, away from income tax, through the two taxes the Minister has imposed has left ordinary working people worse off, not better off.
Our tax approach seems to be effective in the labour market because approximately 1,200 net jobs a week are being created and have been created for the past 17 months and the projections are that this level of net job creation will be maintained. It is a long-standing commitment across the main parties that the 12.5% corporation tax rate will be maintained and the Government is committed to it also. This is essential to our job creation programme, the flow of foreign direct investment into the country and something like 300,000 jobs that are dependent on the foreign direct investment. The Deputy is incorrect to say the effective rate of corporation tax is 8%. The most recent study was conducted by Professor Seamus Coffey of UCC, together with officials in my Department. They made an analysis of all the work done in recent years to come up with a figure for the effective rate of tax and their figure is 10.8%, a very high effective rate of tax on a nominal rate of 12.5%.
