Questions that should be put to the Minister

Michael Taft27/07/2011

Michael Taft: The Cabinet has approved the interim Household Charge of €100, designed to ‘raise’ €160 million from 1.8 million households. There are some exemptions: those in receipt of mortgage interest supplement, social housing tenants, commercial property and premises owned by a charity. Otherwise, the charge will be universal.

Is it inequitable? Yes, it is. Even Fine Gael opposed such a tax in opposition:

‘. . . flat rate charge means that houses in standard neighbourhoods worth a fraction of some mansions will pay the same rate of tax. It will be difficult to pay for asset-rich but income poor households, particularly the elderly and the unemployed; and it will be deeply unfair for a young generation that paid exorbitant amounts of stamp duty and VAT on the purchases on over-valued houses, many of whom now find themselves in negative equity.’

Question 1: Why is the Minister performing a U-turn, - committing to one thing before the election, and doing the exact opposite afterwards?

The Minister has claimed he had no choice – that it’s in the EU-IMF deal. Interesting, though, that Fine Gael published the above after the deal was signed. In addition,

There is no mention of a flat-rate charge in the EU-IMF deal.

Second, a property tax is stipulated for next year and the following year. But as Minister Noonan pointed out, the Government is free to substitute one fiscal measure for another as long as it yields the same fiscal result. The Government has done this already – with the Jobs Initiative. It has also announced there will be no income tax increases, even though the EU-IMF deal explicitly calls for such increases this year and next. So merely stating that something is in the EU-IMF agreement is not a sufficient explanation.

Question 2: Why is the Minister introducing a regressive, flat-rate household charge when (a) there is no reference to it in the EU-IMF deal, and (b) the Government has declared that it is free to substitute measures in the deal?

The imposition of the household charge is, to put it bluntly, a political choice. It is also, in economic terms, a highly irrational one.

Already, the spin being put out is that it’s only €2 a week. However, if we are to believe the findings of the ‘What’s Left’ tracker published by the League of Irish Credit Unions, that €2 will impose a further substantial burden on households and the economy.

The tracker found in July that 750,000 people (or approximately 20 percent of the adult population) had only €70 each month after paying bills. A €100 charge will reduce this discretionary spend by 12 percent.

A further 250,000 had no money left after paying their bills. The €100 charge will send them into negative balance.

For a million people, the charge will reduce their discretionary budgets by 12 percent or more. Of course, a proportion of these will be either tenants – public and private – while others will be receiving mortgage supplement. Still, many, if not most, will be liable to the charge. So when you hear someone going on about ‘only €2 a week’, just remember: there are significant sections of the population who only have €16 a week or less to spend after essentials.

Even if people had twice the amount left after paying bills - €140 – the charge will still amount to a substantial cut of 6 percent.

Question 3: What is the Minister’s Department (or the Department of Finance) economic impact assessment on households’ discretionary spending budgets (that is, after bills and essentials are paid for)?

There are other losers. What about the businesses dependent on the spending power of these households? Using the ESRI’s impact of an income tax, we should expect the household charge to result in a consumer decline of approximately €100 million next year. However, this figure is likely to be higher: the ESRI was estimating a rise in a progressive tax (income tax); the household charge will disproportionately hit low-average income earners.

Question 4: What is the Minister’s Department (or the Department of Finance) economic impact assessment on consumer spending and, so, economic growth?

And while the Government hopes to ‘raise’ €160 million, the benefit to the Exchequer will be less. Once you factor in the fall in consumer demand and, so, spending taxes; and the impact on employment (firms coming under pressure may reduce hours, pay and even let people go), the actual savings will be less. Again, based on the ESRI’s simulations, the actual benefit could be of the order of only €100 million. Again, as noted above, this figure could be lower because of the regressive and, therefore, more deflationary nature of a flat-rate tax.

Question 5: When the deflationary impact of the charge is assessed, how much will the Exchequer actually ‘save’, as opposed to how much the charge will ‘raise’?

The Government wants to promote growth, employment and demand. Yet they seem determined to do the opposite. A regressive flat-rate charge on top of pay cuts for JLC workers? These questions could help determine exactly what the Government’s strategy is.

And the answers could tell us a lot about what we can expect in the budget later this year.

Posted in: EconomicsInequalityTaxation

Tagged with: Deflationequalityuniversal household charge

Michael Taft     @notesonthefront


Michael Taft is an economic analyst and trade unionist. He is author of the Notes of the Front blog and a member of the TASC Economists’ Network.



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