A Defence of Taxation: Progressive alternatives to reducing public services through tax cuts

22 May 2014

A Defence of Taxation: Progressive alternatives to reducing public services though tax cuts provides a detailed analysis of the Irish tax system, as part of TASC's research on tax policy. Taking a fresh perspective on the issue, the report's authors demonstrate that Ireland's overall tax take is too low to provide adequate public services. While some higher earners will benefit from tax cuts, everyone will lose from the resulting reduction of public services like health, education and social protection. Tax cuts will also reduce funds available for public investment in the economy, which has a vital role in sustainable economic recovery. The report offers some useful insights into how the Irish tax system really works, in contrast to the narrow focus on the 41% higher income tax rate.

Key findings include:

  • Two-thirds (65%) of people who pay income tax do not pay anything at the higher rate.
  • Only five per cent of people who pay income tax actually pay the higher rate of tax on more than half of their gross income.
  • Everyone is a taxpayer, and families on the lowest incomes pay more than a quarter of their income in consumption taxes like VAT and excise.
  • The public cost of tax reliefs and tax breaks, which greatly benefit the highest earners, is equal to more than a quarter of all taxes raised. This is far above the European average, and the cost of tax breaks has increased despite the economic downturn.

The report has six recommendations:

  • Maintain, and if possible increase, public service provision. Everyone in Ireland benefits from the ‘public value’ of public spending and most people in Ireland would be better off maintaining public services rather than paying less tax.
  • If the Government wants to cut tax in one area, they should offset it elsewhere. Introducing a third marginal rate of income tax of 48% on incomes above €100,000 would affect less than one in 20 people who pay income tax, but would raise €365 million to pay for public services or tax cuts.
  • Likewise, tax cuts and public services could be funded by reducing Ireland’s high level of non-basic tax reliefs, which cost €9.6 billion in 2010.
  • One equitable tax cut would be to remove a 'step effect’ in the PRSI system. At worst, the current system can require an employer to pay €1,680 to give a low paid employee a net annual raise of just one euro.
  • In terms of income tax changes, increasing tax credits rather than changing the 41% rate or the bands would benefit nearly all workers equally in real terms, although some part-time workers would still not benefit.
  • Lowering the VAT rate by 1% would benefit far more people than income tax cuts.

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