Chapter 1: What is the main topic discussed in this episode?
The Clare Byrne Show on Newstalk. With Aviva Insurance.
the Justice Minister and Fianna Fáil TD Jim O'Callaghan has called for a cut in the 52% marginal rate of tax calling the rate imprudent demoralising and contrary to the common good. Well I'm joined in the studio by Barra Rowntree Assistant Professor of Economics at Trinity College and Barry Ward Fine Gael TD for Dun Laoghaire and you're both very welcome thank you for being with us.
Barra how do you feel about the marginal rate cut proposed?
So I think it's something that the government can choose to do, but it's a very expensive thing to do. So Jim McCallaghan highlighted being over 50% as the key issue for him and that it kicks in very low. That's true. It does kick in relatively low.
Chapter 2: What prompted Jim O'Callaghan to propose a cut in the 52% marginal tax rate?
We have a tax system in Ireland where average earners pay actually very low average tax rates. If you take the amount of tax and take that as a share of their salary, it's quite low. But then that marginal rate kicks in. What the marginal rate is, is the bit that you pay on any increase in earnings. So that is... relatively high.
So on over 44,000?
Yeah, exactly. And that kicks in lower than other countries. So it's something the government can do. But if they wanted to, say, reduce that margin rate to 49%, that's going to be 1.5 billion. And that's about a third of the cost of each year of Jim O'Callaghan's department.
So I think the question then for politicians is, well, what are you going to cut or where are you going to raise taxes instead? Because this isn't a free decision.
Well, luckily, we have Barry Ward here to answer all of those questions. Where are you going to find the money?
Well, the first thing is about the desirability of it. This has been Fianna Gael policy for a long time, and we have made reductions in terms of income tax in previous budgets, not the last one. But it is really important because as we face into a cost of living crisis, the best way to deal with that is, in fact, to put money back in people's pockets wherever possible.
And I will disagree with Barry on this. I don't think we pay low average rates.
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Chapter 3: What are the economic implications of reducing the marginal tax rate?
In fact, we pay much higher rates of income tax, both at the average income and the higher income across the OECD and across the EU.
Not at average. At higher earnings, yes, but not at average.
At the average wage, and remember, people in Ireland come into the top rate of tax, as Barra says, much earlier than other countries. But if you take the average wage, we are 21% of income here compared to 15.5% across the OECD and 17% across the EU. So we are higher.
Once you add in Social Security contributions, actually, things are not that different. Again, low earners, average earners pay very little. High earners do pay a higher share.
But we are talking about income tax and how much that takes out of people's ability to run their daily budgets. And what I'm saying is all of the criticisms that have been made of the government in recent times in relation to the cost of living, and it is huge and we know people are struggling, the very best way you can deal with that is by putting money back in people's pockets.
And that's what Fine Gael has been saying for a very long time and has done whenever it has been possible to do so.
So are you saying to me today now that you want to cut the lower rate as well?
Well, no, primarily the top rate first because the difficult... And in fact, what I would like to do first is change the bands in relation to the top rate of tax because that way you stop hitting the average earner.
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Chapter 4: How do average earners in Ireland compare in tax rates to other countries?
So you hit the average rate of income in Ireland. You're already into the top rate of tax. You're already paying the top rate of tax. So I'd rather bring that... that band up to adjust to the average income. And in fact, link it to that, if that were possible.
And do you accept that that needs to be paid for?
Yeah, I was just going to say, Barra is right. It's an expensive project, but it's a worthwhile project. And it's not the case that it can't be done. And remember, we've seen from past experience in this economy and in others, when you put money into people's pockets, it actually can end up generating money as well for the economy in other ways.
We also know that there are lots of people anecdotally in the economy who decide not to take that extra bit of work, that extra bit of overtime, whatever it is, because it puts them into a higher tax bracket and the amount of it, over 50% that they pay in tax, makes it not worthwhile. So it's also about making work pay and that benefits the economy in lots of other ways.
So that means that you don't accept Barra's figure that if you reduce this down to 49%, let's say that's the example that Barra used, that that's going to cost you 1.5 billion. You don't accept that figure because you feel that there are other ways to slice it.
I am not disputing that it's an expensive measure, but in real terms, I think the 1.5 billion euro is bold because it doesn't take into account the other benefits that come to the economy, yes. But I'm not saying it's not expensive. I'm not saying that it isn't.
So more people will do more work earning more than 44,000 because it'll be cheaper for them to do that. And they'll spend more as well, Barra.
So I think the Department of Finance looked at this a couple of years ago. They estimated, was there people doing this? They found there wasn't, right? So I think that's massively overstated. You get a few people.
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Chapter 5: What are the potential costs of reducing the marginal tax rate to 49%?
I don't think it's going to be anything substantive. So it might cost 1.4 billion instead of 1.5 billion, that kind of thing, right? So I go to agree that it's expensive. And so then the question really is, well, what does it amount to? That amounts to tripling the local property tax. Now, actually, I think that would be a good idea, right?
Moving away from taxing incomes towards taxing property would be something that would be good for the economy. But I don't see that as anything that politicians are proposing.
I don't see any politician... That's not a progressive measure. I mean, we benefit from a hugely progressive tax rate in this country because it reflects people's ability to pay. The more you earn, the more you pay. And that's the way it should be. We're one of the most progressive taxation systems in the world.
Much less so if we did this measure, of course, because one of the key bits is that the higher rate...
If you're talking about shifting that from income tax to property tax, then you're right, it will be much less progressive because it doesn't look like people's ability to pay.
It'll be less progressive if you cut the higher rate tax.
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Chapter 6: What arguments are made for and against the proposed tax cut?
Local property tax, the regressivity is overstated, but also, crucially, we allow people who can't afford to pay to defer it. That's built in by your government over successive years, right? It's a very sensible measure. Our local property tax is, on average, €300 per house. It's far below what it is even in the north, right? It's far below any modern country.
And it is much more of an economically damaging tax. So again, the case that you can make, I think, for doing the type of thing Jim McAllen said is shifting taxes away from income and onto property. But again, that's not something any ministers are suggesting. I don't see them either suggesting that they'll cut their budget by 1.5 billion.
So once again, it comes down to, is this really going to be something that we can afford to do? And is this really the group to prioritise at this time? Because again, you only pay this if you're above 44,000, as you said. We've just heard Barry say that he doesn't think that the lower rate This 20% rate should be the priority.
So what you were talking about is a cut in income tax for very high earners and not for anyone below average earners.
So back to the question, how do you pay for it?
There's two things. Firstly, cutting the lower rate is actually more expensive because it affects everyone, whereas cutting the top rate is more doable. Also, we talk about the top rate. Yes, we're talking about the top rate. You're talking nurses, guards, teachers, they are in the top rate. So it affects a huge cohort of hard-working people. How do you pay for it?
Well, there's lots of ways of paying for it. As I say, it's not quite as expensive as Barra makes out. But the first thing is... Okay, let's call it a billion. Yeah, the desire to do it is always there. The ability to do it is not always there. And it'll depend on what comes out of the Summer Economic Statement as to how feasible it is or isn't. But the reality is that every budget...
The government makes political choices and economic choices that have to be balanced. And I'm not suggesting that we would cut the top rate of tax and just borrow that money, for example, or massively increase the instability of the economic projections for next year. That's not what we're talking about.
What we're talking about is a policy where we recognise the fact that hardworking people are paying more tax here in income tax at the top or marginal rate than they need to. And we should be setting out a priority to reduce that.
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