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Income Tax is the Wrong Tax to Reduce.
Read more about: Progressive Democrats, Taxation 
Previously I talked about the PD’s tax cutting measures that they announced at their national conference. Now I do not dispute that tax cuts are good or that tax cutting is still a viable election strategy that people want and will vote for. The question I have is cutting Income tax the right tax to cut.
Already we in Ireland have one of the lowest tax burdens on income and enterprise in the world. This has helped drive Ireland’s economy. However we also have some of the highest stealth tax regimes in Europe. This is cause a hell of a lot of problems.
The big issue at the moment is the National Pay talks. The unions want more money and the business say that they don’t want to give them. The reason for both positions is the same. Rising costs. In Ireland inflation stands at about 3.5% which compared to the rest of Europe is high. When people in Ireland go on holiday to Europe they see the cheep prices and get angry. They come home and see the cost of living rising and they see their wages not and want to reverse those changes. Business to are seeing the productivity drop they see their cost’s rising and they are struggling in the face of international competion. Therefore business want to see wages remain the same and employees want to see wages rise.
A wage rise would see many business’s in trouble and cause a drop in productivity. This would damage Irelands economy as business go to the wall. Also if people can’t afford to live anymore that is not good for the country either. So what is the solution.
The government needs to get a hold of inflation, it is climbing and it should not be. In my opinion instead of cutting tax on wages they should cut VAT. A cut in VAT would reduce the cost of living. Damping the need for pay rises and benefit business. It would do a lot more for the coping classes then a drop in Income taxes would bring. It would effect a far greater proportion of their income then dropping the rate of tax would. Our tax is very much based on consumption so if people start saving instead of spending then we might be in a wee bit of trouble. Not only would a cut in VAT reduce the cost of living it would also boost investment and consumption as people will have more money to spend.
Another idea would be to abolish or greatly reduce stamp duty and replace it with capital gains tax on selling property. This would be an election master stroke. First time buyers would flock to vote for the party that would bring it in. However it is not clear what it would result with overall. True it would increase the demand for houses as more people could afford them. But would that result in demand causing rising prices, would developers be less likely to build and sell houses if they had to pay capital gains tax. Would this work? It is very debatable such a measure would work however the case for reducing VAT is a lot stronger. A cut in stamp duty is probably a better bet reducing what is making the coping class have to cope with.
But reducing VAT also has another bonus. Although about half of income tax is paid for by the top 10% of earners. Indirect taxes hit the lower earners more then it those the top earners. A recent combat poverty report showed that the bottom 10% pay 20% of their income on excise and VAT while the top 10% pay less then 10% of their income on excise and VAT. While much of the lowers 10% comes from excise on tobacco and alcohol which the bottom 10% consume proportionally more the top 10%. The VAT rate still effects them. Reducing the VAT rate would reduce the poverty rate. People on the lower incomes would be able to purchase the things they need more easily. Also people on lower incomes saving €10 are more likely to put that back in the economy thus furthering economic development then a high income earner saving €10 euros.
Cutting VAT would reduce the cost of living, be more beneficial to the economy, and be more beneficial to the lower classes. While I don’t disagree with cutting income tax. I think if the government is looking at €5 billion in tax cuts. Cutting VAT would be a better use
I would disagree.
By all means abolish Stamp Duty on residential property. But, instead of replacing it with a CGT assessment, it would be more equitable to base the tax on the gain made on the land, rather than the selling price of the property.
For example:
A property has an Insured reinstatement value of €100,000. It sells for €200,000. the difference is the value of the land. If land is registered and a basis valuation attributed, then it would be equitable to assess CGT on the gain on the land.
Again, assume that the same property had cost €13,000 and the land, at the time of purchase, was valued at €3,000. The gain on the house is €90,000 – the uplift in the cost of reinstatement. This would be free of CGT. The gain in the value of the land would be index linked with inflation (the current value of money) and the gain taxed at the same rate as
Stamp Duty.
Rather than reducing VAT, Income Tax should be abolished & replaced with a graded Consumption Tax (CT).
This would benefit the poorest sectors – as foodstuffs; basic clothing; basic services (Gas; Electricity etc.) would be zero rated.
Luxury goods (Motor cars; cigarettes; Alcohol etc.) would bear progressively higher taxation rates up to a maximum of, say, 500%. This shoould silence the Moaning Minnies and the Begrudgers, as spending inequities would be levelled. It might be argued that this tax could be evaded by purchasing from alow tax country abroad. But alredy there are controls on the importation of motor cars & the payment of VRT on the difference between the Irsih Price & the purchase price. This system could easliy be extended through the postal system; Customs & Excise etc.
It would also bring the Black Economy onside to contribute to the cost of Government Services.
At the same time, Coporation Profits Tax, which is riddled with loopholes, would be replaced by a Distributed Profits Tax (DPT). This would permit businesses to invest profits in expansion, leading to increased productivity & employment; cheaper exports & reduced bureaucracy and wasteful administration (completing Government Forms etc.).
A Consumption Tax is a tax as you spend – in contradistinction to PAYE – which can be a disincentive to productivity.
It gives the earner control over his spending, which will become discretionary. Savings will increase until funds are available for a target purchase (eg. a motor car), instead of the borrowing culture which has accumulated into Ireland’s Debt Mountain, now approaching €300 billion.
A DPT will remove all the sharp practices surrounding Grants; Pensions; Bonus Payments; Share Options; Surpluses arising on Voluntary Liquidations etc.
All cash payments, not directly attributable to the main business, would be regarded as a distribution and subject to an Exit Tax.
The present stealth taxes are a matter of concern, but much of the debate by the CPA & CORI is emotional & these people have no place at the table discussing the economy.
Equally, The Trade Union movement is sectoral & fails to see the Big Picture. Their focus is on outdated philosophies, concealed as a concern for the needs of their members. But the Beggs & O’Connors pay themselves princely sums & strut about, as though they had a useful contribution to make to the larger matter of the total economy, rather than their narrow concepts.
It would be preferable if the Union Movement was consolidated into Two Unions – one for the Services sector and one for all other employments. The Labour Court would be the Court of final Appeal & its decisons would be appellate.
Obviously, there are details which rquire fine tuning, but the concepts are valid & they ahve the virtue of simplicity & an avoidance of the Red Tape that is strangling industry with wasted hours of non-productive form filling.
It would be interesting if Simon & Co had any views on reform, rather than an empty debate on the Issues.
Well I guess their is a difference between reform and what is likely to happen. Personnally I think the taxation rate being proportional to age might be a good idea. http://www.irishelection.com/?p=182 But it will never happen.
Wulbeorn has some interesting reform idea’s if you want look through his archieve. his current one on his blog http://wulfbeorn.blogspot.com/2006/05/quick-tax-cutting-idea.html is to stop government spending on foreign aid. Also his most controversial was to deny the vote to welfare receipeants http://www.irishelection.com/?p=105
So their is some stories on reform. But when we talk about reform people say we should talk about the issue’s when we talk about the issues people say we should talk about reform. There is no pleasing people
As for your idea’s
Land gain tax is an interesting idea that I never thought of.
As for the consumption tax. I would think that has a limited scoop to work and would effect the lower classes more as they are going to have to buy more then the upper classes who can save more. I’ll think about it and come back with a better arguement then that. I used to believe it but something changegd my mind. Forget what it was.
As for your spiel about the unions and red tape. Have to say I pretty much agree.
Would two unions, considering the nascent militancy of our own at the moment, not lead to an almost perpetual state of brinksmanship? While many unions fight their own corner there is a degree of ‘divide and rule’ going on where all out demostrations and stoppages are a rarity.
Two super unions would be able to generate walkouts for any sectoral issue unless it was to their interests not to. While an appealte labour court might account for that , walkout is walkout.
On the bigger issue of taxation, a simply point for the moment, income tax is seen as the tie that binds. Essentially when the general interest in politics is lacking there is an interest to see where the money goes. Scrapping the most direct and observable tax may serve to make government even more detached from the populace than it is currently. Thats not a aux-ideological defence but an observation.
Finally, how about a tax on rent as a substitute to other forms of taxation. Since rent is contingent on the ownership of land, often a birthrite or contingent aquisition and the scarcity of land, rent is the most unearned of profit due as it is to externalities. George proposed this a long time ago and it has been cast aside. I am still engaging with the idea myself so take a look around it and see.
Cian had 2 good points to make about my proposals.
In the matter of consolidation into 2 (Super) Unions, it was not an exercise in creating a Behemoth that would threaten our democratic institutions.
An element of independent control would reuire to be built in.
This would be as follows:-
All Union Funds would be sequestrated & lodged with the Central Bank of Ireland. A Charter would be set up to give recognition to the two Unions and they would be free to elect officers.
The Funds in the Central Bank would be for the benefit of all the Members and would be invested in Government Bonds. The income should be sufficient to pay the overheads of the 2 unions, whose affairs and accounts would be subject to an Annual Audit.
All Employers, with a staff of, say, more than 100 persons, would be obliged to hire a suitably qualified Personnel Manager (PM), with skills in people management & negotiating.
All complaints by an employee would, in the first instance, be brought to the attention of the Personnel Manager, who would examine the compaint, its nature etc. The PM would attempt to resolve the disput in house.
If the solution is not acceptable to the complainant(s), the matter would be referred to an Arbitration Board (AB), which would be a Tribunal of suitably qualified professionals. Witnesses might be called & examined and the matter debated until a solution was reached.
If this failed, the matter woiuld be referred to the Labour Court (LC) – a Statutory Body set up under standing Orders of the Oireachtas.
Either Union would be free to appoint advocates to their cause and plea on behalf of their Member(s)
All evidence would be examined and a decision would issue.
THIS DECISION WOULD BE APPELLATE AND ABSOLUTELY BINDING ON BOTH UNIONS.
Should the Unions disagree and attempt to overrule the HC decision, they would be in contempt of Court and risk the penalties of such actions.
As their Funds are invested for the benefit of their Members (Pensions; ex-gratia payments in cases of hardship etc.) it would be difficult to sell the concept of a Strike – or similar for some of the issues that have been fought over in the recent past.
The mechansims for Wage Bargaining would be similar to that obtaining at the moment.
The Benchmarking Process is unwieldy & a simplified method of rewards is necessary; one which recognises productivity & efficiencies; not time.
In like manner, the Labour Court would be the forum for decisions in the event of deadlock. Their ruling would, once again, be appellate.
There has to be some independent method of bringing Closure to such matters, otherwise industrial anarchy will follow.
And NOW is the time to introduce such measures.
If Government waits until the Credit balloon bursts, probably in 2008, it will be too late.
The Second Point for Cian lies with his concept of taxing Rents – i.e. the profit arising form the usage of Property. This is already covered by taxation.
If it is to be used as a substitute for direct taxation, there must be a possibility that the property will be sold & the funds will migrate to a less hostile tax environment?
However, if a Tax on Fallow Land & Property were to be introduced, we would have a Productive Tax.
Consider the benefits.
All those empty houses & fields; the land banks, so reviled by Social commentators, would all have to wash their faces. Work the land; utilise the housing productively
OR SELL.
But it would be uneconomic to retain an asset that is not yielding an income AND to pay an annual tax on it.
This is what I call Progressive Taxation.
Allow the people discretion on how and what they spend & pay an Exit Tax; not a tax on their work, which is productive.
In like manner, companies should retain their profits to expand & carry out reserach, not pay taxes on their profits & see it wasted, by Government, on Grants to inefficient companies & fanciful exercises.
By all means provide support for entrepreneurs & start-up enterprises. but subject to stringent rules that protect the investment – such as bank guarantees.
Over & Out.