The €6 Billion Alternative

Government Ministers are floating all sorts of horror options (medical card fees, closing hospital  beds, cutting education grants and Child Benefit, etc. etc.) while at the same time insisting this is the only alternative to income tax increases. I’m not so sure.  So I thought it might be helpful to gather together the proposals put forward in four pre-budget submissions to see if there are other alternatives.  Does the Government have options to either savage spending cuts or income tax increases that would hit the living standards of low and average income earners?  Can the Government do something else besides degrade public services, hit social protection recipients and further depress consumer demand?  The answer is yes.

ICTU, TASC, Social Justice Ireland and Sinn Fein have put forward comprehensive, progressive and well-researched pre-budget submissions.  They all share the same principles:  end overall spending cuts, increase investment and tax high-income groups.  All four shows how this would work within the framework of the EU-IMF bail-out deal and how this would be superior in promoting growth.

Let’s focus on their taxation proposals, which are all backed up by data from the Department of Finance and Parliamentary Questions to the relevant Minister. 

Property and Capital Taxation

Wealth Tax:  both ICTU and Sinn Fein call for this tax.  Projected yield:  €500 - €800 million.

Property Tax:  TASC proposes a house property tax, with safeguards for low-income negative equity households.  ICTU also proposes a house property tax but it is far more modest with more reliefs for low-average income earners while SJI proposes a far site-value tax. Projected yield:  €800 million (from TASC).

Reform of CAT (inheritances, gifts):  three submissions propose various reforms to CAT – from reducing thresholds, increasing rates, limiting relief for business and agricultural disposals, etc.  Amounts to be raised also vary, though ICTU doesn’t put a final number on this.  Projected yield:  €165 - €194 million.

Capital Gains:  ICTU proposes raising the capital gains tax rate to 30 percent; Sinn Fein to 40 percent.   Projected yield:  €65 - €195 million.

Income Tax, PRSI and Universal Social Charge

Abolition of property tax reliefs:  three submissions support this common-sense proposal.  Projected yield:  €450 million.

Reduce interest relief for landlords:  again, another common sense proposal which three submissions mention.  There are differing variations of this reduction but they all would raise substantial amounts.  Projected yield: €350 - €400 million (though ICTU’s more dramatic proposed abolition could save up to €1 billion).

 Minimum Tax Rate:  ICTU proposes increasing the minimum tax rate for high incomes to 35 percent and reducing the threshold €100,000.  Projected yield:  €100 million.

Top Rate of Tax:  Sinn Fein proposes increasing the top rate of tax to 48 percent.  Projected yield:  €410 million.

Extend Universal Social Charge to Capital Income:  TASC proposes extending USC to capital income (capital gains and acquisitions).  Projected yield:  €200 million.

Adjust PRSI exemption for share options, shared based remuneration and capital gains. Proposed by Sinn Fein.  Projected yield:  €97 million.

Standardise discretionary tax reliefs, excluding donations to charity. Again, proposed by Sinn Fein, this would bring forward the long-term strategy of bringing all tax reliefs to the standard rate.  Projected yield:  €628 million.

Extend PRSI to capital income.  ICTU proposes that the PRSI 4 percent rate be extended to capital gains and acquisitions.  Projected yield:  €115 million.

Increase USC by 3 percentage points for incomes over €100,000.  Proposed by SJI, this would only affect PAYE taxpayers as the self-employed already pay 3 percent above the basic rate.  Projected Yield:  €50 million.

Pension Tax Reliefs

While TASC and Sinn Fein call for the standard-rating of pension contributions, ICTU opposes this but not in principle.  Instead, they call for such standard rating to be implemented only when an adequate universal state pension is introduced.  However, all four make proposals to limit pension tax relief.

Standard Rate Pension Contributions:  TASC, SJI and Sinn Fein call for this measure.  Projected yield:  €500 - €700 million.

Increase the rate of imputed withdrawal on Approved Retirement Funds:  both ICTU and TASC support this step.  Projected yield:  €25 million.

Reduce tax exemption for lump-sum pension payments to the level of the average industrial wage.  This proposal was put forward by TASC.  Projected yield:  €65 million.

Corporate / Business Reliefs

Corporate tax rate:  SJI and ICTU propose that a temporary 2.5 percent levy be put on corporate profits.  Projected yield:  €892 million.

Group Relief:  this is a relief available to holding companies that allow the losses of one company to be transferred to a profitable company, thus reducing their tax liability.  Sinn Fein claims this relief is abused and proposes its abolition.  Projected yield:  €450 million.

* * *

These are more tax reforms put forward by the four submissions:   tackle tax exiles by cutting the 183-day requirement should be cut to 90 days as in the UK (ICTU), tax on-line gambling (Sinn Fein),implement the  €200 car park tax originally introduced in Budget 2009 but never introduced (TASC), tax texting to bring in €40 million (SJI)

There are other measures which I could suggest:  subjecting the net capital gain from the sale of principal private residences to capital gains tax, with a small exemption threshold (Fine Gael suggested that a small rate on principle private residences would earn €250 million) and extending PRSI and USC to all gross capital income (which could raise over €500 million according to Department of Finance sources)

Leaving these aside, what is the total amount that could be raised through the measures outlined in the four submissions.

• Property and Capital:  €1.53 - €1.99 billion
• Income tax, PRSI and USC:  €2.4 - €2.45 billion
• Pension Relief:  €590 - €790 million
• Corporate Taxation:  €1.34 billion

• TOTAL:  €5.86 - €6.57 billion

So, approximately €6 billion and more could be raised in taxation measures that primarily impact on high income groups and the corporate sector.  And that doesn’t count all that could be raised. There may be some dispute about particular measures.  For instance, I would agree with ICTU’s comments on pension tax relief, though you could still go after reliefs for super pension-pots.  I’d be inclined to phase in TASC’s house property tax, tied to a tax on financial property, to limit the impact on demand in the short-term.  And I’m not quite sure about Sinn Fein’s proposal re: group relief, since in many cases this would merely bring forward tax revenue rather than permanently increase the tax take. 

But there are always differences over details. Further discussion could improve the proposals. And further investigation would no doubt reveal more tax measures to impact on high income groups. 

The main point here is that the authors of the four most comprehensive pre-budget submissions have uncovered a buffet of €6 billion and more in progressive tax measures.  Since these would be far less deflationary than the equivalent in spending cuts, it would reduce the deficit by a far greater amount – leaving more people at work and more money in the pockets of low and average income groups. 

€6 billion and more.

Now what was that about no alternative?

Comments

[Cian]

Do you by any chance have a reference available for the Department of Finance's figures for PRSI & USC on capital gains, and FG's figures on CG on disposal of the principal private residence?

[Michael Taft]

Cian - the figures for PRSI and USC on capital gains are extrapolated (per TASC) from the Department of Finance's estimates of Capital Gain and Acquisitions taxes. The estimate from Fine Gael is here on page 10: http://www.rte.ie/news/2010/1203/finegael.pdf