COMMENT:Plan lacks job creation strategy and only makes nods to restoring competitiveness, writes CIARÁN HANCOCK, Business Affairs Correspondent
IN THE 1980s, when the economy was in the doldrums, everyone paid tax. At least that was the theory.
In fact, overtime was usually a cash-in-hand payment to workers, the black market in goods flourished and thousands of citizens had money salted away overseas. This was all to evade the punitive tax system of the time, with three tax bands and a top rate of more than 60 per cent.
In the Celtic Tiger years, we moved to an enlightened tax regime that rewarded work by allowing citizens to retain more of their pay and spend it as they wished. It seemed too good to be true. In fact, it was too good to be true.
Over the course of a decade, the numbers outside the income tax net swelled to 45 per cent. That’s just shy of one million workers.
Instead, the Government relied on transactional taxes, mostly from property. When the bubble burst, our backside was left hanging out the window.
So isn’t it now right, at this hour of crisis for our cash-strapped nation, that we drag a group of low earners into the net by widening the tax bands and reducing credits? Perhaps.
The Government will argue that middle and top earners will also feel the pain from these measures.
They will have their pension reliefs pegged back to the standard rate of 20 per cent. It’s a big blow to the private sector.
In addition, €665 million worth of tax breaks and reliefs will be scrapped or reduced, including the artists’ exemption. But some in the pensions industry feel that senior executives will simply restructure their remuneration.
This will probably involve sacrificing salary for a higher employer contribution to their pensions. The employer contribution is deductible as an expense. For the rest, they’ll be taxed on the way in to their pension schemes and taxed on the way out too.
It’s a form of double taxation, says Moore McDowell, a self-confessed “grumpy” economist. “It’s unfair,” he said yesterday, while adding, rightly, that the detail on public sector pension reform was thin on the ground.
Many believe the Government has bottled the property tax. Calling it a “site valuation tax” was the first sign of this.
Introducing a flat-rate €100 charge for 2012 – regardless of whether the property is a mansion or a one-bed cottage – was another. The average charge is forecast at €200 by 2014. It’s less than the cost of a pint of beer in Dublin every week.
Instead, John FitzGerald of the Economic and Social Research Institute (ESRI) argues that tax changes should be as “employment-friendly” as possible. “There is less incentive to work harder if you have to pay more in tax,” he said yesterday.
The Government’s plan to reduce the minimum wage by €1 an hour – which will affect about 80,000 workers – is a nod in the direction to competitiveness.
Certainly, there are many small business owners, particularly in Border areas, who complain that the current top rate of €8.65 is too expensive. But the various registered employment agreements that exist in the services and construction sectors are arguably a bigger drag on our competitiveness, and the four-year plan lacks detail on how these will be tackled.
The Government yesterday expressed the hope that its plan would regenerate the economy.
But it might just as likely deflate it and many economists have questioned the 2.5 per cent average growth projections set out over the four years.
There is one other element of the plan that irks Jack O’Connor, Siptu’s general president.
“There’s no strategy for job creation,” he said. “How are private investors going to be encouraged to invest even one cent in this deflationary strategy?”
To O’Connor, this is all about sending a signal to the IMF, the EU and international markets that we’re serious about tackling our problems. He is probably right.