David Quinn
Photo: iStock. Justice Minister, and possible future Fianna Fáil leader, Jim O’Callaghan made an interesting comment a few days ago when he said that our high rates of income tax are “imprudent, demoralising and contrary to the public good.” His reference to the public good was particularly interesting because he might as well have said the “common good”, and that brings him into Catholic social teaching territory.
This set me to looking up what the Catholic bishops here have had to say on the subject of income tax, and I found a big, 109-page pastoral letter from 1999 entitled Prosperity with a Purpose: Christian Faith and Values in a Time of Rapid Economic Growth.
Back in 1999, the Celtic Tiger was roaring and there was a debate, then as now, about how best we could spend all the money being generated, or else cut income taxes or maybe a combination of the two.
This is not high-level economics. The Government spends what it raises in tax, and if it spends more than that, it borrows. There are endless demands for more Government spending, especially on health, housing, and social welfare, with education getting a look-in as well.
But at a certain point, is the tax burden that allows the Government to pay for all this simply too crushing? This is what Jim O’Callaghan was driving at in his remarks.
Value
Back in 1999, the bishops said in their document that the concept of “the common good” should be the overriding principle in determining personal, communal or national priorities, which is obviously true.
What is striking about the document looking back is its ambition. It is hard to imagine the bishops today coming out with a 109-page document about the economy and the common good. (I wonder who wrote it?)
If someone from the Labour party or the Social Democrats was to pick it up today, they would find an awful lot in it they would agree with, for example, its repeated calls for greater public spending and broad hints that voters should be willing to pay more tax to fund it.
But that was 1999. Back then, we were really only entering a period of sustained prosperity for almost the first time ever. The country never had as much money at its disposal. Since then, even allowing for the economic crash a few years later, public spending has surged. Yes, the economy is much bigger than it was, but are we really getting value for money?
We live in a country where public money is often incredibly badly spent and projects often coming in late and over-budget”
For example, in the last 10 years, the health budget has doubled. But would you really say our health system is twice as good as it was in 2016?
We live in a country where public money is often incredibly badly spent and projects often coming in late and over-budget. The still-to-be-opened national children’s hospital is a good example.
In that 1999 document, the bishops rightly argue that spiritual and social values had to be maintained alongside unchecked materialism and that social inequality needed to be tackled.
So, how unequal is Ireland? Economists used something called the ‘Gini coefficient’ to measure this. A society with a score of 0 has perfect equality, while a society scoring a 10 has perfect inequality (meaning one person would have all the wealth).
America, which is one of the most economically unequal societies in the Western world scores around 4.2. The EU average is just under 3. Britain gets a 3.5. France and Germany each score roughly 3.
What about Ireland? We score a 2.7, meaning we are one of the most economically equal societies in the world. Back in 1999 when the bishops issued their document, we scored a 3.1. This means we are more economically equal now than we were then. We actually score better than Sweden, which is considered very egalitarian.
Tax
The reason for our good score is that we have a generous social welfare system. If that did not exist, or was less generous, we would have much more inequality.
Alongside the generous social welfare system, we have one of the most progressive income tax systems in the world. What does ‘progressive’ mean in this context? It means that the more you earn, the more tax you pay. This seems fair enough, but suppose you end up in the highest tax band very quickly? This is what happens in Ireland.
A single person needs to be earning just €44,000 per annum in order to start paying income tax at 40%. In fact, they pay much more than that, because they also have to pay PRSI and the Universal Social Charge bringing their tax up to 52%. A person on €44,000 per annum is not well off by any stretch.
Why work an extra 10 hours in a given week and come home much later than normal when so much goes in tax”
Married couples are somewhat better treated under the tax system, especially when they are both earning an income. (Remember the tax individualisation row?). But they still pay a lot of tax unless they are on very moderate incomes.
When Jim O’Callaghan says our high rates of income tax are “imprudent, demoralising and contrary to the public good”, this is what he means. They rob people of the incentive to seek promotion and earn more. Is it really worth your while taking on big responsibilities and more pressure in your job in return for more pay if more than half of that goes out the door in tax?
High taxes also rob people of the incentive to work overtime. Why work an extra 10 hours in a given week and come home much later than normal when so much goes in tax? This leaves employers in the lurch and probably drives up demand for immigrant workers and in turn that puts more pressure on the housing system.
In addition, why should someone on high pay stay in Ireland if they can bring their skills elsewhere and pay less tax there? If we lose enough high-income workers, then the tax take will suffer overall.
But never mind high-income workers, let’s look at middle-income workers only. They pay too much tax. It is why there is growing talk in Government circles of a tax cut, or at least a widening of the tax bands at the next budget. Public spending cannot go on being increased by well above the inflation rate forever. At a certain point, too much is being taken from ordinary taxpayers to fund all this. There is, in fact, a Catholic case for an income tax cut, and it is based on the simple principle of fairness, something that is demanded by the common good.