Taxing times in Ireland

With the Southern economy continuing to slide almost everyone agrees taxes must rise – but who is to pay them, exactly?

Tax: arguably the most restrictive political issue in the world. Does anyone remember the Liberal Democrats promise back in the 1990s to put a “penny on income tax” to pay for… well, everything good and true? The fact that a penny on tax rates was seen as a radical and, in some quarters, risky move says more about the dull state of politics than any screed I might pen could hope to pen.

Alas, being dull does not mean something is not important. Fast forward to 2010 and taxation is still a huge issue.

Nowhere is the debate more hotly contested than in Ireland. In the North everyone is bracing themselves for swingeing cuts and tax hikes from a British government that can do what it likes to the place without worrying about losing a single seat in parliament. In the South, meanwhile, the economy has already hit the wall and revenues are incapable of paying for public expenditure. In such circumstances it’s hardly surprising that tax has become a dividing line in political debate. Which is the correct strategy? Tax more or cut services? Or both? Ignoring the fact that this is a severely circumscribed set of terms for a discussion, it is genuinely the source of a yawning chasm in public opinion.

The soft, trade union left wants to see tax rises for the wealthy while the business class wants to see cuts to services and, if taxes must be raised, then to have them raised universally from the bottom up. Both the government and opposition parties seem to want to cut spending and hike taxes.

There is a sense, both in Ireland and abroad, that tax rises are inevitable and the only debate being had is who, precisely, will be liable to pay them.

Today’s Guardian leader suggests that Ireland is in serious trouble because its culture of low taxation means the country cannot raise sufficient revenue: “During the boom, Dublin cut income and corporation tax and relied increasingly on property taxes.”

The problem with this thesis is, well, it’s not quite right. To be sure, Ireland’s tax base is too narrow and the corporation tax rate of 12.5 per cent is unusually low. The detail of the sentence, however, is misleading.

For a start, Ireland does not have a property tax, either in the US-sense of an annual, recurring charge on property or in the form of residential rates. Ireland does have stamp duty on the sale of property but this is a one-off payment per transaction, not a recurring tax.

Whatever one thinks of the issue, property tax and stamp duty are not at all the same thing. A property tax produces regular income for the state but stamp duty can only be relied upon when houses are being bought, and as we know, these days they aren’t. No sales? No stamp duty collected. (First time buyers are exempt from stamp duty and there were calls, shortly before the crash, for their total abolition).

The difference is between the two forms of charge is crucial one, as property tax is a source of serious contention in Ireland, with some commentators demanding it is introduced while others claim to do so would cause a further economic collapse.

The other familiar form of property taxation, residential rates payments, were abolished in 1977. This populist move on the part of the then-Fianna Fáil government has never been undone but local government still needs to be funded. Unlike in Britain where rates were replaced, in a nakedly ideological move by Margaret Thatcher’s Conservative government, by the poll tax (known as the “community charge”), which was itself eventually superceded by council tax, in Ireland local government is funded directly by central government. Where does the money come from? Income tax.

The basic rate of income tax in Ireland is twenty per cent with 41 per cent levied on individuals the balance of incomes above €36,400 (€40,400 for single or widowed persons with children and €45,400 for household income for married couple). There is an additional levy of one per cent on the first €100,100 earned from which only those on minimum wage are exempt.

In the North, as in Britain, the 40 per cent rate doesn’t kick in until earning £37,401 (approx. €43,092).

True, in the UK there is a higher rate for those earning over £150,000 (approx. €172,826) and no equivalent in Ireland, but let’s forget about these super wealthy individuals for the moment, this article is about ordinary people.

There is also the spectre of double taxation. Citizens pay bin charges, random banking-related levies and now water rates are on the horizon again, having been tried and rejected before, disguised as a green measure to counter “water shortages” in a country with more water than we know what to do with, albeit one with a leaky, outdated infrastructure. In addition, free medical care is to all intents and purposes only available to the indigent or elderly.

The end result of all this is that personal taxes are higher in the South than in the North – or in Britain.

Even Ireland’s famously low corporation tax is under pressure. Both the conservative and green groups within the EU parliament have been demanding it rises, suggesting that its doubling should be a condition of EU bailouts. Many have complained that this would destroy Ireland’s international competitiveness, sending foreign-based companies such as Intel fleeing to cheaper climes.

Whether or not this happens, things are already looking grim. Given the facts at hand – income not meeting expenditure and borrowing becoming increasingly costly – where the South should go from here is far from clear.

  • interested

    Prof Colum McCarthy was raising the prospect of water charges on RTE radio at lunchtime today-a charge-a tax or another way to maintain services-interesting considering the NIW debate

  • Glencoppagagh

    Jason
    Garett Fitzgerald from the Irish Times last Saturday: “As a result, amongst the 30 developed countries in Europe, north America and east Asia that constitute the OECD, Ireland has by far the lowest level of taxation on incomes – subject to the single exception of Mexico”
    If you’re correct then taxation of middling incomes is a little more onerous than in the UK but still far from oppressive.
    Refusal to contemplate any rise in corporation tax in current circumstances does not inspire confidence that Ireland has much else to offer direct investors. It’s ironic that the only sector of the economy showing signs of life enjoys fiscal immunity.

  • joeCanuck

    No matter how taxes are raised, diectly as income tax or indirectly in the form of fees, licences etc, there is only one group that will pay at the end of the day, through personal tax or passed on costs; Mr and Ms citizens.

  • Nordie Northsider

    Strange things are happening. McCarthy made a subtle but important reference in his RTÉ interview to the manner in which much of the Bord Snip report was quietly forgotten: ‘there are quite a few things in his ‘Bord Snip’ report that could be revisited, he said.’

    He might have said: why were the greater part of my proposals left to die a quiet death?

    Whatever one’s opinions about the Bord Snip proposals it doesn’t inspire confidence to have a Government commission expert opinion and then ignore it. And who now remembers the Commission on Taxation?

    Another small illustration of the chaos and indecision at the heart of Government: on one day the Department of Finance announce the closure of Gaeleagras, the civil service Irish language training body, the next day the Department of Community Affairs etc. say it’s not closing at all. Wee buns in terms of the deficit, but a clear sign of how disfunctional this Government has become.

  • Alias

    Fitzgerald doesn’t add indirect taxation; high levels of personal debt; high cost of living; wage deflation, et al, into the mix – and nor does he had in the consequences of the rabid europhilia that he promoted (massive external debt, a forthcoming rise in the ECB policy rate, nationalised eurosystem debts, etc). What this euro-quisling is actually finessing is the transfer of wealth from Irish taxpayers to eurosystem banks in Germany and elsewhere in the EU. He is advocating that Irish people should be taxed and also advocating that this taxation should then be extracted from the economy and exported to said eurosystem banks. At some point Irish people are going to have to assert that their incomes belong to them and not to the state or to eurosystem banks. I propose a new tax on those political hacks like Fitzgerald that have lived a parasitic existence off the state, never having secured employment outside of it. Let us start with a 99% tax on ministerial pensions and progress to a 30% residential tax on properties in Rathgar. And why exactly is this clown provided with a state allowance for a car and driver, and indeed a Garda protection for his property? Let the parasite pay for his own security.

  • John East Belfast

    Alias

    “At some point Irish people are going to have to assert that their incomes belong to them and not to the state or to eurosystem banks.”

    I sympathise with some of your sentiments but you seem to be totally forgetting that Ireland borrowed the money.

    ok perhaps some of it went to banks who loaned it onto dodgy developers but all were regulated/legislated by the democratically elected Govt voted in by the Irish people. You just cant wash your hands of the problem.

    Even if “the people” decided the country should just default on the loans all those Euro land creditors effectively have the country’s deeds and they will be a lot more ruthless recovering what they can than NAMA and the Govt would.

    Also from Peston’s figures the other day it just isnt Irish banks that are indebted to Euro land Banks – it appears the Govt, individuals and corporates are also up to their necks – the entire country has been mortgaged.

    Therefore you can either work your way through it in a managed way or you can firesale the whole country

  • Alias

    “I sympathise with some of your sentiments but you seem to be totally forgetting that Ireland borrowed the money.”

    Sorry, but you seemed to be confused about who actually borrowed the money – and no corporate entity signed the contract as “Ireland.”

  • Glencoppagagh, I have no opinion on whether or not taxes should be raised or how. What I am saying is that there are a lot of dubious (and flat) charges.

    Fitzgerald is bending the truth. Yes, taxes are lower for the rich bu they’re higher for ordinary people. I’m not saying this is defensible or desireable, just that claiming Ireland has universally low income taxation is not accurate.

  • “Refusal to contemplate any rise in corporation tax in current circumstances does not inspire confidence that Ireland has much else to offer direct investors.”

    I do agree, by the way.

  • Glencoppagagh

    Alias
    The charges to which you refer may well be regressive but they are essentially just an alternative means (to taxation) of paying for public services. The government still needs to raise more money so there is no question of ‘double taxation’ .
    The suggestion reminds me of the more feeble minded politicians on this side of the border who object to water charges on the grounds that since water services are already funded, people would be paying twice for their water.

  • Glencoppagagh

    Alias
    He did note that indirect taxes were high and regressive.
    Am I right in interpreting your vitriol as an allegation that he is an agent of some dastardly Euro-plot designed to re-impoverish Ireland? Is it a punishment for the low corporation tax?

  • Frederick Chichester

    “everyone is bracing themselves for swingeing cuts and tax hikes from a British government that can do what it likes to the place without worrying about losing a single seat in parliament”.

    You seem to imply that NI is being singled out for special treatment. Actually, funding is tied to the Barnett Formula – and so is linked to need (however imperfectly). The number of seats held or not held by Northern Irish parties is utterly irrelevant.

  • DC

    Not to worry, David Cameron said he will turn Northern Ireland into an enterprise zone – the Herald of Free Enterprise zone.

  • The thing I dislike about the current changes to Irish taxation is that they are making the tax system more complex. The principles which I think should underpin the tax system are these:

    1. All state benefits – unemployment, state pension, rent allowance and other ad hoc social welfare benefits, child allowance etc – are *taxable* income. This in reality would only catch people who for instance drew benefit early in the year but acquired a well paying job for the remainder.
    2. Rather than withdrawing services like the medical card when you are only a few Euros over the criteria, or working 21 hours a week instead of 20, the benefit holder should be simply assessed a certain amount of tax to cushion the impact of working harder/longer.
    3. Total exemption limits should be low with a 10% rate the starting point on the scale. Very few people should pay zero tax because that implies that services are free.
    4. PRSI should be formalised as a pension plan and an employment insurance plan, as in Canada, with all new payments kept out of general revenue and protected from the kind of raids being made on the NPRF at the moment.

  • Internationalist

    I myself am by no means an expert (just a regular guy) and I struggle to understand the complexities of the world of global finance. I’ve read a bit here and there, in this day and age who hasn’t? Could someone please explain to me why I haven’t heard any of the following possible solutions being mooted by the economists in the media and why they wouldn’t work so that I might begin to understand the things I don’t.

    Basically I believe that Ireland should adopt one of two options alongside raising taxes but not cutting spending.

    Option A) leave the Euro for a short time to enable the government to effectively guide the country out of the mess its in. By bringing back the Punt the government will have more tools to achieve its mandate, at present the Euro is a hindrance as it prevents Ireland behaving like a sovereign state. With the Punt Ireland would be able to use inflation to raise revenue and pay down the debt to a less insane level along side measures of additional taxation and then rejoin the Euro with the value of the currency readjusted to reflect all the money that was printed. (This is not my favoured option as the ECB might say your not getting back into the Euro.)

    Option B) Surly some economist can figure out some temporary dual currency system (Euro and Punt) that will allow the government to set interest rates and print Punt if need be while allowing the Euro to float against it until the country is in growth and the debt is manageable. If all the money (and debt) in the banks up and down the country was suddenly split between Euro and Punt, say 80/20 between Euro and Punt (this split is arbitrary for the purposes of an example) people and business would be encouraged to spend their 20% Punt which would have an unattractive 0% interest + inflation eroding its value that is in the bank faster than their 80% Euro. This would stimulate growth I think. It would make Ireland more competitive by reducing wages in real terms as the government can then continue to run a deficit as it can print its own money without increasing debt reducing the value of the Punt further. By tying it to the Euro with a split and a promise not to do it again investors and the public will know inflation can never get out of hand and will slowly come down as the level of debt falls over time. I think this strategy could be successful as it would attract foreign investors in manufacturing, their raw materials could be bought abroad in Euros and then sold in Euros abroad without their capital depreciating in Ireland. It would essentially be like setting up a giant sale that would make it cheaper to do business in Ireland while stimulating the local demand at the same time.

    I’m sure I will be shot down for this post but I want to know where my thinking is flawed, I know its well outside the box.

    Lastly once this is all cleared up we should be looking to set corporate tax rates from Brussels for all EU countries.

    Thank god I’m not in Lenihan boots!

  • Alias

    Glencoppagagh, and I am right in stating that you think that Ireland is not constitutionally obligated to implement the policy of those who hold the sovereignty in this area under the Maastricht treaty? What exactly do you think is the constitutional position when a nation transfers its sovereignty to a third party? It means that the nation has voted in a referendum that amends its constitution to give effect to its declaration that it has determined that the EU should determine its internal affairs in the area where it has transferred its sovereignty. The role of the government thereafter is simply to implement the policy as it has been duly determined by those who are constitutionally sovereign to determine it. There is no fiendish plan, kid: it is the constitutional position that the government must do as it is directed to do by those who are constitutionally sovereign. The government has no constitutional authority to overrule those that are constitutionally sovereign.

    Sovereignty is simply the authority to make decisions of behalf of a nation. When you give that sovereignty away to a supranational agency, all that happens is that those decisions are then made by those to whom you have transferred that sovereignty in their collective interest and not in your particular interest. If there is a conflict of interest between your particular interest and their collective interest then that conflict will be resolved in their favour since they hold the sovereignty. In this instance, the conflict of interest between eurosystem banks and the Irish nation is resolved in favour of eurosystem banks, with the EU agreeing that it is not in its collective interest that its banks should lose money as a result of their reckless lending to Irish banks and so it exercises the sovereignty to instruct the state to contain those debts within Ireland at the expense of Irish citizens rather than allow them to default to the lending states.

    So I’m afraid that the tin-foil hat that you project onto my head is really a dunce’s cap upon your own head.

  • Alias

    Agree all you like but confidence is misplaced since 94% of exports from Ireland are from foreign-owned corporations that have located here because of Ireland’s low corporation tax regime and not because of any loyalty to the state. Increase taxes and you put at risk 94% of your exports. That is suicidal, but again if the EU can gain the sovereignty in this area too then it will instruct the Irish state to destroy its economy accordingly by harmonising taxes with other backward EU regions.

  • joeCanuck

    I’m far from being any expert too. But I think you can inflate your way of of internal debt as long as you don’t mind beggaring those on fixed incomes. Different for external debt (the large part of Ireland’s borrowing); try to inflate your way out of that and nobody will lend to you in the future. Besides which it depends on which currency your debts are designated. If they are in US dollars, they will have to be paid in dollars so inflation can’t get you out of the hole, if in Euros, paid in Euros. Who will take your Punts?

  • Watcher

    Lenihan has the toughest job in Ireland.

    The problem is that there is no quick solution, so we won’t know if his path is the correct path for some time.

    [Imagine there are people in the North who advocate an independent Northern Ireland – what mess would it be in now.]

  • Internationalist

    The state would still be receiving a large % of its revenue from tax in Euro so it could continue to service external debt in various currencies. I believe its mostly internal loans that have been transferred to NAMA that are the toxic junk that are causing the problems so they would be the target.

    Its all too complicated, what is simple is how angry it makes people.

  • Liminal Umwelt

    Perhaps some of the tax exiles will come back ….(like f…)

  • barnshee

    [Imagine there are people in the North who advocate an independent Northern Ireland – what mess would it be in now.]
    Please explain -exactly how?

  • John East Belfast

    Alias

    I deliberately used “Ireland” because collectively the whole country is liable.
    Ireland owes approx Eur 800billion to non Irish lending institutions – only about a quarter of that is owed by Irish banks.

    The rest is owed by the Irish Govt, individuals and corportes.

    Therfore you need to stop saying this is somebody else’s problem – ie the bad European banks for lending the money.

    You borrowed the money and so you will have to pay it back – your Govt realises that.

    If you dont pay it back or at least service it then the people you owe it to will take the deeds of your country’s assets and realise them in whatever way they can

  • Greenflag

    ‘By bringing back the Punt the government will have more tools to achieve its mandate, at present the Euro is a hindrance as it prevents Ireland behaving like a sovereign state. ‘

    True . Going back to the Punt assuming a devaluation of same would result in huge asset losses for investors , and business corporations as well as individuals . We already have a trade surplus so having more of a trade surplus would not be immediately benificient ..Alias’s sovereignty/ myth is just that . The USA gets away with it’s theoretical financial sovereignty as does the UK to a lesser extent simply because the world’s international banking criminals and fraudsters are headquartered in those countries and the world can’t afford for the USA (the world’s biggest economy and nuclear power to go belly up and for it’s ‘capitalist ‘ society to collapse . Ditto fro the UK on a smaller scale . If Ireland ‘sinks’ /defaults it could prove problematical for a few British and German banks but apart from that not a world economy ending event .

  • Greenflag

    They could of course tax the Churches . After all the RC Church has been ‘bailed ‘ out by the Irish Government ? Payback time ?

  • Mack

    JEB

    The government isn’t up to it’s neck in debt yet. A large chunk of the new debt is coming from taking over bank debt it never should. Maybe there were good reasons to pursue the current strategy for AIB and BOI, but never for Anglo.

    Some individuals are up to their necks in debt, that is unfortunate for them. They may have to go bankrupt – this shouldn’t be an issue for the sovereign. Many others aren’t. The debt load is not spread uniformly.

    Firesale the whole country? That’s probably what should have happened – commerical & residential property sold off dirt cheap would have provided us with a massive competitive advantage (think Multinationals securing biz premises at rock bottom prices, making the cost per head in Dublin a tiny fraction of London and cheaper than Belfast).

    It’s not too late..

    Jason

    Welcome back! Autumn must be your blogging season 🙂

  • Glencoppagagh

    Did the Maastricht Treaty oblige Irish banks to borrow massively from other European banks in order to satisfy their customers’ lust for property speculation?
    The Irish are fools, their banks were reckless and European banks should have avoided becoming so exposed to them. However, allowing Anglo-Irish to fail would not have brought down the European monetary system.
    While the debt repudiation option may be discouraged by Brussels, Ireland is receiving considerable support from the ECB.

  • Comrade Stalin

    Um, £10bn coming from the British exchequer being cut to £0 instead of £8bn ?

  • interested

    the model raises interesting questions exemplified by Senator Rosses pointer to the State repurchasing M50 road assets at a vast cost to taxpayers when the same assets had earlier been transferred out of State ownership free!! Has anyone seen the asset register for Northern Ireland Water?

  • pippakin

    Greenflag

    if only…

  • pippakin

    Interesting article in the Telegraph (UK) biased and tory but still scary: http://bit.ly/a6oIiM

  • Kathy C

    As an American my taxes have helped bankroll the “peace” dividin for years….I will be happy the day I don’t have to keep paying for northern Ireland and our money can be kept here!

  • pippakin

    Kathy C

    Heres a news flash: American money has contributed to the deaths of a couple of thousand Irish people.

    Give my regards to Peter King and NORAID and tell em to stay where they are.

  • aquifer

    The trouble with neglecting to tax things like property is that it leads to misallocation of resources and inefficiency. People own houses and can afford to keep them empty. Businessmen invest their working capital in buy-to-lets. People in cities hang onto houses that are too big for them, others commute huge distances to work to pay for new homes, creating traffic jams. Farmers ruin the best agricultural land by dropping bungalows on it. (The new planning rules in the North make houses a regular cash crop.) Houses scattered around the place will never have an efficient bus service. People die and who gets their property can become a lottery, and a state-funded lottery when the state funded many services that made that home habitable.

    An now the value of that inheritance has been underpinned by NAMA, to be paid for through general taxation.

    No property tax is not a no-cost option.

    Luckliy Sammy Wilson has shown the way ahead. He charges rates but allows the elderly to postpone paying until they pass away. Injecting credit to keep people spending while avoiding forced sales of properties that could lead to prices collapsing and an asset price crash.

    Live now die later.

  • Kathy C

    Hi Pippkin- took a few days for me to get back. There is a HUGE difference between tax payer money and donations to what ever and whom ever. Personally, I’m not a fan of Peter Kings and haven’t donated him any money…and haven’t given money to NORAID either. But I can tell you this…have paid taxes and the US gov’t seems to give those in the north…lots and lots of my money and other US taxpayers as well. I want to see the north pay for their own things and stop hitting the US taxpayer

  • pippakin

    Kathy C

    Sorry I must have been in a bad mood yesterday. I do get angry with the way some Americans not just supported the murder of Irish people they paid for the murder of Irish people because it was usually Irish people who died.

    I know how you feel about your taxes. For decades the north has had ‘special’ status and basically that means a lot of money has been thrown at it in a, usually futile, attempt to keep the death rate down. I understand a few people have become very rich!

    If the British were to leave the north they would save Nine Billion pounds plus. The Irish govt too could save a few billion. In these straightened times the north is an expensive ‘luxury’.

  • Kathy C

    Hi Pippakin,
    ah…just talking about taxes puts people in a bad mood …no harm done. Good point you made about the north being a luxury that britian can’t afford. The way the politicans have turned out in the north…all they do is complain…and expect OTHERS to pay their way. Maybe it’s time for the north to pay their own way and all the freebies stop. ANd better yet…here’s an approach for the politicans….maybe take some of the tax money from the north…and give it to others who are having difficulties like we’ve given to them. lol…can’t see that one happening. always good chatting with ya