Why Leo Varadkar’s tax giveaway isn’t a bonanza
Last week the party that extols fiscal discipline promised to prise open the State’s piggy bank over the coming five years.
Fine Gael leader Leo Varadkar was preaching to the converted at the party’s Ard Fheis.
He promised to raise the point at which people pay the top rate of tax by almost €15,000 for a single earner and almost €30,000 for a couple over the next five budgets.
Absent from his address were some important issues: How much will it cost? Where will the money come from? And what would such an adjustment do to the public finances?
They are the questions an economist might ask.
A political scientist might also point out that it is unlikely Fine Gael will get an overall majority in the next general election and spending promises would have to be agreed with a coalition partners.
Taoiseach Leo Varadkar made the commitment at the Fine Gael Ard Fheis last weekend
So Mr Varadkar was promising something he may not be able to deliver politically.
But can he do it economically?
There are a few points to bear in mind about Ireland’s tax system.
Unlike most western European countries our tax bands are not index linked. In other words, as wages rise the point at which people begin to pay tax does not increase automatically. If tax bands remain static in a buoyant economy with increasing salaries, it means people pay more in tax.
According to the Central Statistics Office, wages are rising by 3.3% per annum at present in Ireland.
Leo Varadkar was not promising a tax cut.
Instead he was saying he would not sit on his hands and leave tax bands unchanged.
Increasing the point at which people pay the 40% rate of tax is expected to cost the State €597m per annum.
The Government has already set aside €620m annually to make adjustments to reduce the tax burden in each Budget between 2020 and 2023.
However, Mr Varadkar has pencilled in using almost all of the money for cutting the point at which people pay the higher rate of tax.
If the tax bands were indexed to keep track of rising wages, it would cost the State €550m.
If Mr Varadkar introduces the measure it would affect 920,000 taxpayers.
The changes would appear to be accommodated without jeopardising the public finances.
Mr Varadkar said he was ending the “unfairness” of previous tax hikes and added this would “allow hard-working people keep more of the money they earn. They deserve it!” But this is not a bonanza.
What was absent from Mr Varadkar’s speech was where he does plan to raise taxes.
Four days after his Ard Fheis address, he told the Dáil he would seek all-party support for increasing carbon taxes.
These are levies on petrol, diesel, coal, oil and other fuels designed to encourage consumers to behave in a more environmentally friendly fashion.
The Economic & Social Research Institute says these taxes could reach €3,000 per annum – although the Government has disputed the figure.
Politically seeking the support of other parties for carbon taxes is an interesting manoeuvre.
Critics might point out that when Mr Varadkar unveiled plans for reducing the tax burden on workers he did so at a Fine Gael Ard Fheis and has put his political stamp on the plan.
However, when he outlined plans to increase levies he asked other political parties to share the responsibility.