Dr. Nat O'Connor:

I thank the joint committee for the invitation to address it. TASC is an independent, progressive think-tank and our core focus is on the growth of economic inequality in Ireland in recent decades, which follows trends in the United States and the United Kingdom, as described by economists such as Professor Thomas Piketty who recently spoke at TASC’s conference. Economic inequality is bad for society, but it is also bad for economic growth and stability. We recently analysed Ireland’s tax system and how it interacted with the economy. We present evidence that defending and, ultimately, growing our level of taxation is essential for economic recovery and to boost job creation, in addition to tackling inequality.

Ireland is caught in a low-tax triangle; our tax and social insurance take is just three quarters of the European average. Low taxes mean lower levels of public services and social transfers and everyone has a higher cost of living, with more out-of-pocket expenses for services that would be cheaper or free of charge in other countries. As a result, many do not have enough money for essential goods and services, meaning less demand in the economy and calls for lower taxes. However, this is a downward spiral. In response to a parliamentary question the Minister for Finance, Deputy Michael Noonan, confirmed that “Ireland does indeed have the lowest tax wedge of all EU members, for those on average wages.” To be clear, the actual combined tax and social insurance figure paid by people on average wages in Ireland is the lowest among EU members of the OECD, despite the nominally high marginal rate. This is because of the much higher rate of tax credits and tax reliefs in Ireland.

Recent calls for cuts to Ireland’s higher rate of income tax are based on two false premises. First, a cut to the 41% rate will not benefit those on middle incomes. The Minister for Finance has confirmed that only 17% – the top one in six of income earners – pay anything at the higher rate of income tax. The vast majority would not receive any benefit from changes to the higher rate or bands.

Second, tax cuts in a low-tax economy are not the best way to boost growth and job creation. Drawing on recent research by the ESRI and the Central Bank, it is highly likely that tax cuts for the higher paid would lead to people paying down debt, not boosting the domestic economy through consumption or investment.

In considering options for budget 2015, in addition to arguing for Ireland’s tax base to be defended, we have circulated other tax-related policy briefs to members. We outline TASC’s analysis of the inequitable step effect in PRSI. An employer must pay €1,680 to give a one euro net pay increase to a worker. We present the case that cutting VAT would benefit everyone rather than cutting higher income taxation. We propose a third rate of income tax for high earners. We have a detailed analysis of the cost of tax breaks in Ireland, which continue to be very high. We recommend the best practice in Australia, where there is an annual report on all tax reliefs which can be scrutinised by the parliament.

Tax cuts would lead to a decrease in public services, social transfers and public investment, which would have the net effect of shrinking the economy and worsening economic inequality. Those on low incomes or reliant on welfare would gain nothing from tax cuts but would be worse affected by reduced income or service cuts.

In a recent study the IMF pointed out that the economic growth multipliers from investment were higher than what would be achieved through income tax reductions. To boost growth and job creation, we need public investment in infrastructure and human capital, which business groups and economists have suggested. A virtuous cycle in the economy is possible, with public investment crowding in private investment. However, to do this we need to strengthen the tax base. This is to maintain public services and social transfers and fund new public investment.