Originally posted on Business Post 03 April 2022.
A wage increase would generate hundreds of millions of euro in tax yield without much political or social pushback.
Are wages in Ireland really too low? It would appear the emerging consensus is that they are.
There have been recent debates in the Dáil over the level of the national minimum wage. Trade unions are signalling the need to achieve increases in pay in the order of 5 per cent or more. Even President Michael D Higgins has engaged in the discussions, with his observation last week at the Siptu Biennial Conference that we should be entering a new era of worker engagement and negotiations over pay and conditions.
Last week, there was progress on issues such as pensions auto-enrolment and minimum statutory sick pay. Both of these are entirely laudable and necessary social reforms, but both also create further inflationary wage pressures and extra costly demands on employers.
Every household in the country is feeling the pinch of higher fuel prices and other essentials, a wave of price increases prompted initially by the rapid economic recovery post-pandemic, and now perpetuated by the miserable and evil war in Ukraine.
No one can be in any doubt that Ireland is an expensive country to govern. The pandemic has added to our national debt servicing costs. There are legitimate calls for additional funding for health, education and social services, along with the need to provide aid and support for the war refugees. But these calls are not being matched by a willingness among the Irish population to pay for the enhanced government services.
In February, a Red C poll in this newspaper found that while the majority of the population were keen to ensure that the retirement age would not be raised, a similar majority would not be willing to pay the tax price of what undeniably is a social good. This tax reticence is nothing new.
It took two attempts for a modest local property tax, to fund essential local council services, to stick. When LPT revaluations fell due last year, the system was tweaked in such a fashion that the tax burden would only increase on very few people. In 2012 the nation jibbed at paying a levy for septic tank inspections, and then many refused point blank to pay the water charges which were needed to repair a (literally) leaky public service infrastructure.
Ireland collects tax and social welfare in the order of 20 per cent of our GDP. In most other developed economies, according to OECD statistics from 2020, the figure is closer to 34 per cent. As of now, we don’t raise enough taxes to pay for current and future government services, but we don’t have the collective national will to introduce new taxes or allow existing tax rates to get any higher.
One possibility is that instead of changing the tax rates, the government might change how much gets taxed. The easiest way to do that politically is to levy additional taxes from higher wages.
If wages increase in both the public and private sectors, but allowances and reliefs do not, a higher proportion goes in income tax, USC and PRSI. This would not be a new strategy. In the 2016 Programme for Partnership Government, a stated tax policy was not to increase tax bands and allowances as wages increased, so that additional revenue could flow to the exchequer. This phenomenon is known as fiscal drag and is a form of taxation by stealth. It seems that stealth taxation is the only way in which an Irish finance minister can raise funds without being deflected by a political headwind.
The effect of fiscal drag can be quite dramatic, particularly as the Irish tax system is very much skewed in favour of the lower-paid, as indeed it should be. Calculations are frequently wheeled out around budget time on the impact of a 1 per cent change up or down in an income tax rate. We rarely see tax calculations which involve changes in wages.
Tax projections are not an exact science, especially given the distortions in income levels from the pandemic, but what might be the effect of everyone in the country receiving a 5 per cent wage increase? A rough and conservative calculation, based on the most recent publicly available figures, suggests an increase in income tax yield alone in the order of €800 million. Additional USC and PRSI yields would likely drive the total yield over €1 billion. That’s a huge amount of recurring tax money to raise with possibly little enough outcry.
Of course, wage increases bring their own problems, not least the challenge of competitiveness. Nor would a general wage increase be a rising tide that can lift all boats. Increases in disposable income are all very well until met with higher costs of goods and services and last week’s inflation figures are a genuine cause for concern.
When government addresses wage claims either in the public sector or for that matter in the private sector, the bigger exchequer picture will be factored in. What might be lost on the roundabouts could be gained on the swings.
Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland
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