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Taxing times – redux June 11, 2015

Posted by WorldbyStorm in Economy, Irish Politics.
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Colin Murphy continues a run of good pieces in the SBP, this time focussing on tax, albeit one doesn’t have to agree with all his analysis. Still, he starts with an odd anecdote:

Lenihan introduced the USC (and the income levy that preceded it) for ideological as well as pragmatic reasons. He thought the poor should pay more income tax.
His views were shaped by his experience of the bin charge strikes in his constituency in the late 1990s. The protesters then “regarded the state as alien precisely because they had no sense of ownership”, he believed (as recalled by his former adviser, Cathy Herbert, in Brian Lenihan: In Calm and Crisis).

Really? Well then why did he think that offloading waste collection services to commercial parties would somehow increase that ‘sense of ownership’? Surely it would do anything but given, as those of us who have direct experience of this new disimproved private collection service know, there is no democratic oversight, let alone control of those entities.

Now, bad and all as waste collection charges are, surely retaining such services – paid through charges – in the public sector would have engendered a greater sense of ownership?

Anyhow:

The coalition has since sought to portray the USC as part of the penal legacy of the previous administration, and has removed more than 400,000 of the lowest-paid from it.
This is short-termist. The emphasis on reducing income tax is part of a system that is effectively a fraud on lower-income groups: in the long run, this tax burden will simply be replaced by indirect taxes (such as water charges), which weigh heavier on people with lower incomes.

I’d agree with that.

And – slightly tangentially – that dovetails neatly with the waste collection point above too. All those indirect taxes and charges break connections with people and providers – they actually increase the sense of ineffectuality and lack of control, again because these third parties that provide them are unnameable to democratic control.
He continues:

The idea that people on low incomes shouldn’t pay income tax is one of the shibboleths of the left. But a shibboleths of the right is the claim that the less well-off barely pay tax at all.

Is that entirely true? I’d have thought that for large tranches of the left there’s a recognition that all should pay tax but those on lower incomes should pay lower taxes. But he is right too about the point as regards perceptions on the right.

People with less money spend far more of their money on things that are subject to indirect tax – primarily Vat and excise. The result is that poor people contribute roughly the same proportion of their income in tax as rich people.
According to work from last year by economist Micheál Collins, based on the CSO’s household budget surveys, the poorest 10 per cent of households (with an average income of €10,000) pay just over 30 per cent of their gross income in total tax. The richest 10 per cent (with an average income of €155,000) pay just under 30 per cent in tax.

And Murphy is on a roll:

That latter figure exposes another shibboleth: the “52 per cent tax rate”. It is often said that this high marginal rate is inefficient and unfair.
It is inefficient – in theory. Taxes on labour reduce productivity; high marginal taxes are a disincentive to doing extra work.

But he debunks the idea fairly comprehensively:

…the impact of the marginal rate on the vast majority of people is minimal. According to work by the think tank TASC, just 15 per cent of income tax payers pay the marginal rate on more than a quarter of their income. Due to tax credits, reliefs and breaks, effective tax rates (ie tax actually paid) are far lower than the marginal rate. At an income of €67,500, a single person pays (on average) 34 per cent tax, according to TASC.
Discussion of tax often elides the difference between effective tax rates and marginal tax rates.
This suits the interests of the higher paid, because it fosters a perception that the marginal rate has a far greater impact on ordinary people than it actually does, and therefore that middle-income earners have a shared interest in reducing it

And then onwards to this:

Which is where the great shibboleth of our time comes in: the “squeezed middle”. Michael Noonan defined this as people earning €32,800 to €70,000. Though the phrase “squeezed middle” has apparently dropped out of favour, that income band has stuck as the anchor of debates on tax policy.
But Revenue statistics based on tax units suggest that the middle-income range is something like €25,000 to €40,000. By contrast, tax units earning €50,000 are in the top quarter of earners.
Tax measures targeted at those earning €32,800 to €70,000 have a far greater impact on those in the upper half of that range. Noonan’s “squeezed middle” is effectively the upper-middle, cloaked in common-man rhetoric.

All of which Murphy uses to sort of support the USC due to its transparency. I see the point he is making, albeit I’m not sure that’s the place I’d start if I was going about reconfiguring the tax system in the ROI. Still, and all, a refreshing analysis of an area where there are indeed far too many reactionary perceptions, and worse again policy approaches.

Comments»

1. 6to5against - June 11, 2015

Two things:

Firstly, isn’t ‘shibboleth’ a lovely – and underused – word?

Secondly, I wonder if the debate about what constitutes the ‘middle’ misses out on lifetime variations in earnings. 25k to 40k sound about right overall. I think the median income is something like 35K. But that figure would include many who are either young or old: part-time workers in shops and/or the retired and semi-retired. This would include people who either will earn more later in life, or who did earn more in their prime earning years.

That doesnt invalidate their inclusion in the calculation of a median of course, but i wonder what the median income is for those in their middle years who are supporting and raising children. I suspect it would be significantly higher, though not anything like 70k.

None of this is to defend the squeezed-middle nonsense of Noonan’s rhetoric.

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2. EWI - June 11, 2015

I have heard at least two left-wing ‘Irish’ economists, familiar to most people here, make the point to audiences that they would support the USC continuing and ideally replacing income tax (which is honeycombed with exemptions for the rich).

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WorldbyStorm - June 11, 2015

What’s your thoughts on it? Could it be a feasible replacement?

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EWI - June 12, 2015

I can’t see why not. And Labour should be advocating for same.

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3. Ed - June 11, 2015

That point about Lenihan’s view of the bin charge protests is one to cut out and keep, a really startling insight into the way these people think. Mass demonstrations in working-class communities against double taxation and the privatization of waste disposal, and how does his brain process this information? ‘If only these people were paying more tax, they wouldn’t be unhappy’. No whisper of a suggestion that the state might actually do something to encourage a sense of ownership, like providing decent public services (maybe even waste disposal too). You can imagine Lenihan’s successors processing the water charges movement in exactly the same way: ‘Clearly, these people are unhappy because we don’t make them pay fees when their children go to school. All my friends pay fees for their children to go to school, and they’re very happy with the state; you’d never see them out protesting. Tremendous sense of ownership there.’

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WorldbyStorm - June 11, 2015

It’s unbelievable on one level and all too believable on another.

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WorldbyStorm - June 11, 2015

You’re really onto something too re the attitude to expenditure of income. It becomes a virtue in itself rather than for some merely something they can easily afford whereas others cannot.

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Ed - June 12, 2015

There’s a line Ferriter quotes somewhere in The Transformation of Ireland from a civil servant on the Department of Finance, discussing the idea of universal health provision (at some very basic level); he says something to the effect that for many people in Ireland, not being able to pay for a doctor out of your own pocket involved ‘a loss of caste’ and it would be a great pity to let that attitude die out. I don’t think the mentality has changed at all.

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4. Joe - June 11, 2015

Watching telly last night. There’s a programme coming up (another one) about the life of Mr Lenihan. Cancer is an awful thing for any person and their family to have to go through. But this nostalgia for the man just makes me want to puke. And puke more. The da was a bullshitting buffoon, the son was Minister for Finance when the government made shit of the country. Then he died young and he’s some kind of lost prophet. Pass the sick bucket.

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Liberius - June 11, 2015

The attempts at deifying Lenihan are really tedious, this is a man for whom getting sound ‘advice’ involved rocking up to David McWilliams’ house in the middle of the night. Death is a tragic fact of life, but an early one shouldn’t restrict sober judgement of a person’s merit, or lack thereof.

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WorldbyStorm - June 11, 2015

Agreed. I think it’s a human response to have sympathy but that doesn’t mean we have to park critical faculties or pretend he or anyone is beyond critique and sadly but correctly quite some critique.

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