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.