Lenihan levy shows little confidence in tax system

P O’Neill nominates the 1p and 2p levies as the single most damning aspect of Brian Lenihan’s budget. Not for what it says about the budget, but for the questions is raises about a tax system that may no longer be fit for purpose:

…it reveals a belief (which he confirmed yesterday) that he went for a levy because he did not trust the income tax system to fairly distribute the burden of higher taxes: upper income people would have used more deductions to dodge the higher rate.

He believes it asks questions of the core competence of the Department of Finance:

…income tax is one of your primary revenue-raising tools, especially with indirect taxes like VAT and excise constrained by EU shopping (or NI costs). But he chose not to use it. It also doesn’t say much about the Department of Finance’s ability to project revenue.

O’Neill identifies two primary ‘costs’:

First and foremost, the incentive structure for low income workers has been severely damaged. Now there is 1 euro per 100 coming right off the top of all income, except welfare payments. That used to be a problem with PRSI but they ironed that out with concessions on when PRSI kicks in and tax credits. 1% of gross is big money for people living from paycheque to paycheque. Second, it reinforces the quick fix mentality. Why bother improving the tax system through getting rid of many deductions when you can simply impose a levy in a real revenue crunch?

And one to bookmark for 2012:

Hopefully the voters won’t be silly enough to fall for the talking point that is being set up for future elections, that the government didn’t raise income taxes. Last week’s ESRI Budget Perspectives conference had made clear that the tax burden was going to have to go up (see the papers by Lane and Honohan). The government just chose a perverse way of doing it.