Squeezing out the votes

Apr 16, 2018

Sunday Business Post, 15 April 2018
The Budget is still seven months away, but already the debate has opened up with suggestions in the media last weekend that the Government could prioritise social welfare benefits in preference to tax cuts next October.  Talk of social welfare benefits usually involves the position for the unemployed and pensioners.  These are not the kind of benefits which are on the agenda if the reports are to be believed, but rather the benefits that people of working age receive for the PRSI they pay - dental and optical benefits, parental leave and other welfare payments and subsidies.

If the reports are true, this apparent policy change would chime with the very modest improvements to PRSI benefits for the self-employed provided in the last Budget.  Because the confidence and supply arrangements with Fianna Fáil are scheduled to expire after the next Budget, the Minister’s statement next October will be de facto an election budget.  A feel-good factor has to be found somewhere.  The political calculation is whether the “squeezed middle” voters might be better encouraged with direct benefits from their PRSI contributions than with tax cuts. 

Conventional Wisdom

Voters might not be as sensitive to income tax rates as conventional wisdom has it.  There is a so-called Laffer Curve theory, which is the notion that once tax rates rise above a certain point, less tax is collected.  That’s because once tax rates are seen to have become excessive, people take action to get themselves out of the tax net.  Those actions can range from refusing overtime because the pay after tax isn’t worthwhile, to underdeclaring income or overclaiming allowances to reduce the tax bill illegally, to getting out of the country altogether.

The difficulty with the Laffer curve theory is that it is a theory.  The existence of a super-efficient tax rate has never been proven, and certainly not in an Irish context.  Recent research by the ESRI shows that the proportion of taxpayers who are caught for the highest rates of tax has been remarkably stable over the past decade or so.  The researchers also conclude that while tax rates do impact on taxpayer behaviour on the margins, there isn’t a significant impact across the board for all categories of taxpayer. 

Taxpayer Satisfaction

Could it be that taxpayer satisfaction is more likely to be found in the provision of benefits rather than in tax reductions?  Other recent research, this time conducted by the Department of Social Protection, suggests this is could be the case, at least for the 300,000 or so self-employed in this country.  A survey published just a year ago identified that almost 90% of those self-employed who were surveyed will be quite willing to pay additional PRSI in exchange for additional health and social security benefits.  Presumably they would be even more pleased to receive additional benefits without paying anything additional.

Reducing Income Tax rates benefits a relatively small cohort of the electorate, because the top 20% of income earners pay about 75% of all the tax.  A policy of offering benefits which might improve the lot of more voters, instead of applying tax cuts to help fewer voters seems to make good political sense.  But will such a policy help the squeezed middle, those just about managing, more effectively than tax cuts?

Ireland operates a progressive income tax system.  The more you earn, the more tax pro-rata you pay.  That’s a very fair approach, but progressivity becomes difficult to tinker with because even small changes ripple right up through the system.  For instance last year a key change was to the standard rate band – for single people €750 more income was taxed at 20% before the 40% band took effect.  The big winners were those earning around the €33,800 cut-off point, but it also meant an extra €3 per week for everyone earning more than €33,800 and taxed at the 40% band.  It was of no benefit to over 1 million households which per current Revenue estimates, are outside of the 40% band.  Yet according to Department of Finance figures the measure cost the Exchequer some €150m.

Giving Back Control

The great advantage of an income tax cut is that it gives the citizen back control of more of their own money.  An improvement in benefit payments can be more targeted, and by definition is availed of by those in particular need.  If tax cuts don’t come cheap, providing benefits for workers don’t come cheap either; it’s estimated that social protection supports for those of working age will cost nearly €800m in 2018, and even the relatively modest treatment benefits (dental, optical and the like) available to workers will cost €75m.

In the run-up to Budget 2019, the debate may not be so much about which workers might benefit from tax cuts as about which benefits would be better than tax cuts.  Recent experiments in tax policy have shown that there is strong resistance from citizens to any suggestion that they might have to pay more for services like water or local government infrastructure.  Holding taxes at current levels while improving worker benefits isn’t an experiment that has been tried here too often.  It might just squeeze more votes from a squeezed middle.

 

Brian Keegan is Director of Public Policy and Taxation with Chartered Accountants Ireland