ECONOMICS:If we can count on a regular net income, we can begin to consume without fear, writes ELAINE DOYLE.
CERTAINTY IS recognised as being one of the core pillars on which good tax systems are built. It was famously articulated by Adam Smith in his seminal work An Inquiry into the Nature and Causes of the Wealth of Nations.
However, it seems a long time since we could be certain of anything in a personal tax context. Over the past few pretty depressing months, household incomes have been affected by pay cuts and redundancies as well as reductions in various benefits.
We have also seen take-home pay affected by a frequently changed income levy, increases in health levies and the PRSI ceiling and in some cases a pension levy. No Irish income tax payer has had a consistent pay packet for months as all the staggered changes hit the bottom line month after month.
We are living in desperate times and measures do need to be taken to rescue our ailing economy. What I have an issue with is the threat hanging over us that worse will come over the next months and years.
We have been warned time and again that the current measures are just the tip of the iceberg; they only serve to keep the country afloat in the short term, and harsher tax increases and cost cuts are waiting around the corner. The past few months have conditioned those of us lucky enough to have taxable income to expect an emergency budget at any moment or indeed, the possibility of retrospective taxes cutting chunks out of our net wages.
What impact does this uncertainty have on consumers? If one was in the fortunate position to feel a measure of job security and can manage to negotiate the various hoops involved in obtaining finance, would it be sensible to commit to mortgage or car loan repayments while having no idea from month to month what take home pay will amount to? While repayments may be supported this month, who knows what the position will be next month or in six months’ time? For many, purchasing the smallest item that is not strictly necessary has become an impulse of the past.
Even those in a financial position to spend are sitting tight, dogged by uncertainty as to what the future holds, not just in terms of job security but also for fear of what has become a volatile tax system. Dampened consumption across all sectors in turn impacts on retailers, wholesalers and manufacturers, not to mention those providing any type of service that is not indispensable.
Lack of demand leads to job losses reducing capacity to consume and the spiral downwards continues unabated.
While I appreciate that stemming the flow of job losses is a very complex issue involving numerous variables, it strikes me that we could at least benefit from a little more certainty in the tax system. The country was geared up for drastic changes before the Budget in early April.
Rumours abounded and we expected the worst. A property tax, increases in both the standard and higher rates of income tax and the total abolition of the PRSI ceiling were the least of what was touted. Instead, we got hit perhaps a little less severely than we might have expected but with the caveat that we should expect more tax hikes and spending cuts over next months and years.
While we might be happy that the measures introduced were not as drastic as was expected, we are left treading water, uncertain as to what dangers lurk below the surface and just out of sight.
The only sensible response to this uncertainty is for us to consume as little as possible.
We cut out luxuries such as gym and golf membership, new clothes, holidays, eating out and expensive wine. We pay off our credit card bills and cut up our credit cards.
If we have spare income, we hoard it savagely to shore ourselves up for the harder times we are assured will come. Consumption is therefore further dampened with the contingent knock-on effects as we all wait in fear for the next recession-busting measure to be introduced.
Why can’t the Government do the worst, take the hard decisions that might have some chance of getting us out of the mess we find ourselves in and give us a measure of certainty that, in the tax context at least, they will leave us alone for a time. We might then be able to count on a consistent amount of net weekly or monthly income, be it ever so humble, and proceed with cutting our cloth according to our measure.
If we can count on a regular amount of net tax income, we can begin to consume what we can afford without the element of fear that stifles us now. We might manage to stop treading water and finally start swimming toward the shore. Even a minimal increase in consumption may provide some economic stimulation and we might begin to slowly turn things around.
Perhaps it is time for a reminder of the wisdom of Adam Smith’s philosophy on certainty in the tax system.
The Government certainly seem to take the concept very seriously when it comes to the corporate tax system. God forbid that we might ever tamper with our sacred 12.5 per cent corporation tax rate!
There is an urgent need for any tough measures necessary to be taken sooner rather than later; to be clear on the impact these measures will have on net incomes and give assurance that there will be no further resort to Irish income tax payers at least in the short to medium term. At the moment the only certainty is that nothing is certain.
Elaine Doyle is a lecturer in taxation at the Kemmy Business School, University of Limerick
