Sunday, May 07, 2006

Income Tax is the wrong Tax to reduce.

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


Mark Dowling said...

that's funny, because in the debate on the GST cut in Canada it's asserted GST hits richer people harder and income tax cuts are better!

Simon said...

Strange. Considering that who is more likely going to spend on something they need and not stuff in the bank. We already have low income tax rates here. Probably a lot lower then canada. So maybe the arguement for lower income tax works in Canada more then here?

Or mabye I don't know what I am talking about?