The Commission on Taxation and Social Welfare’s recommendations should be at the centre of a progressive programme to increase resources for a strong social state. While there will be disagreements over this or that proposal, the broad thrust of the Commission report is progressive and substantial.
The Irish Fiscal Advisory Council has estimated that the main recommendations could raise up to €15 billion though the range of revenue yield could vary considerably (they helpfully provide an excel sheet of their estimates here). The Fiscal Council stated:
‘In many cases, there are no ready-made costings available for the measures proposed by the Commission. The Commission also tends to give general guidance rather than suggested rates or other specifics.’
So these are not precise or final estimates. However, they show the potential to transform the social state.
Depending on how one interprets the recommendation, the estimates could be higher or lower. But they do contain proposals which, however interpreted, could cause some controversy, even among progressives. Let’s go through some leading recommendations.
(a) Land and Property
There are two main proposals in this category.
- Site-Value Tax: this tax would be applied to all non-residential property and replace commercial rates. It would raise €1.9 billion
- Local Property Tax: The Commission recommended a ‘material’ increase in the property tax. The Fiscal Council interpreted this to mean raising the tax to one of the highest levels in the EU – nearly six-fold, raising €2.9 billion. Whatever about the economic and fiscal efficiencies this could produce, Fiscal Council’s estimate is probably a political non-starter. But we shouldn’t assume that a six-fold increase was what the Commission had in mind. It could be significantly lower but still constitute a ‘material’
(b) VAT
The Commission proposes increases in VAT rates. The Fiscal Council interpreted this as increasing goods and services that are currently zero-rated or taxed at 9 or 13.5 percent to 15 percent. This would raise €2.5 billion. Of course, one does not have to support increasing all such goods and services (e.g. food) and one could combine this with a reduction in the standard rate.
Progressives would rightly point out that increasing VAT would be regressive, hitting the lowest income groups the hardest. However, it should also be noted that many countries with much higher VAT rates have lower levels of poverty and deprivation. That’s because they channel this revenue into income supports. So a high VAT rate is not necessarily opposed to anti-poverty strategies.
(c) Capital and Wealth
There are two big items here.
- Restrict or Remove the Exemption of the Sale of the Principal Private Residence from Capital Gains Tax: In short, if I sell my house (my home), any ‘profit’ I earn will not be subject to capital gains tax. This is a major tax subsidy and has no basis in equity – not if one believes that all income, regardless of source, should be taxed. The Fiscal Council estimates this could raise up to €1.1 billion, though estimates could vary significantly.
- Inheritance Tax: a range of revenue-raising measures (transfer of assets subjected to capital gains tax, reducing tax-free thresholds, reduce tax reliefs) could yield up to €1.3 billion.
These measures are likely to be highly progressive.
(d) Environmental Measures
This category includes measures which the Government is already committed to; increasing carbon tax, for instance. Another large item in this heading is the removal of tax-based fossil-fuel subsidies over the long-term. Given that Ireland has the second highest-level of fossil-fuel subsidies in the OECD, as noted by the Commission, means that this measure goes beyond the fiscal and cuts to the heart of strategies to achieve climate justice.
(e) Social Insurance
It is well known that Ireland has a weak social insurance system compared other EU countries. Driving up revenue from this source will be key to funding a strong social state. In this regard, the Commission proposals are a little disappointing.
- Currently, employees earning below €352 per week are not subject to the 4 percent employee PRSI contribution. However, once they exceed that threshold, their entire income is subject to PRSI. The Commission recommends that a lower nominal rate (e.g. 2 percent) be applied on earnings below the €352 threshold. Yield: €500 million.
This would impact exclusively on low-paid and part-time employees. While there is an argument in terms of fiscal sustainability and reciprocity (employees don’t start paying PRSI until they reach €352 weekly earnings but they can access social insurance benefits upon reaching €38 per week), introducing a new contribution rate would be penal given Ireland’s low-pay status. This recommendation can only be phased in when a new collective bargaining regime becomes operational – so that low-paid and part-time workers have the bargaining power to help maintain their net income.
The other big item is the increase in self-employed PRSI from the current 4 percent to the employers’ rate of 11.05 percent. This is in keeping with the recommendation from the Commission on Pensions. This would yield €800 million.
However, it is disappointing that the Commission didn’t propose substantial increases in employers’ PRSI to finance a strengthening of social security measures such as in-work family supports, short-term unemployment, illness and disability supports. To given an idea: employers’ PRSI would have to double to reach the EU average – or about 10 percentage points. While we may not need that level of revenue given the relatively low-level of pensioners, each percentage point increase would yield over €800 million.
(f) Income and Corporate Tax
The Commission didn’t propose any substantial changes to income tax, apart from phasing out tax relief on private health insurance as Sláintecare is implemented. This measure makes up over half of a relatively low level of revenue-raising measures.
Another disappointment, however, is the Commission's failure to tackle some of the regressive and inefficient tax subsidies available to the corporate sector. Leaving aside the vexed question of Ireland's low corporate tax rate, the Commission’s support for such subsidies are justified on neither economic or social grounds. In this regard, NERI’s Dr. Tom McDonnell, a member of the Commission, refused to endorse the chapter on corporate subsidies, writing:
“Chapter Nine ‘Promoting Enterprise’. . . set out a series of recommendations that endorse and support a range of very generous tax expenditures and low tax rates for enterprises and/or high earning individuals. While in some limited and special cases these types of reliefs may individually have an economic justification, they also breach the principles of vertical and horizontal equity, are highly regressive, reduce transparency, and are at odds with tax justice and solidarity principles. Individually they are problematic, albeit perhaps, in some cases, defensible. Collectively they undermine the approach taken in the rest of the Report. In my view, the overall balance between fairness and potential efficiency gains is not achieved. This imbalance is compounded by the recommended retention of other generous tax expenditures on capital transfers described elsewhere in the Report and also by a rate of employer PRSI that is low by Western European standards.”
When progressives are debating the Commission proposals, they should bear this dissent in mind.
* * *
The Commission proposals are challenging: increases in property tax, VAT, PRSI on low-paid groups. But there are considerable variations possible and the Fiscal Council’s estimates are only one interpretation. However, the broad thrust of the Commission’s proposals is:
- Progressive: half of the proposals relate to capital, wealth, and property.
- Efficient: tax increases on capital, property and consumption have the least impact on economic performance.
Most of all, it puts to rest the idea that substantially increasing overall tax revenue would hit income taxes. The Commission shows this is not the case.
There is a reason the Tánaiste was quick to rubbish the Commission’s proposals. They would impact mostly on high-income, high-wealth households – a key constituency in Fine Gael’s political base. It also showed that a high-tax economy is not necessarily a high income-tax economy, undermining an ill-informed criticism of a strong social state.
Progressives need to put their own ‘interpretation’ on the Commission’s recommendations, using the Fiscal Council estimates as a starting point. But the debate will get ugly and, in many cases, downright dumb. Fine Gael’s Cllr. John Kennedy wrote in the Irish Times:
“Throughout the report, there is a heavy emphasis on “redistribution” and in the case of the recommendation on capital acquisitions tax [inheritance tax], this sentiment borders on being an example of bona fide Marxism which is rare to see in such a commissioned report.”
Geez.
So let’s champion the Commission report, if only as a starting point. Let’s debate the particulars. Let’s improve on some of the recommendations. Let’s address the omissions and shortcomings (in particular, employers’ PRSI and corporate subsidies). But let’s not allow the report to be side-lined, gather dust, consigned to an historical waste-bin.
It has the potential to build a strong social state in an economically efficient way. Isn’t that what all progressives want?
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