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Opinion: Debunking the myth of the squeezed middle

High earners pay more tax but they also benefit from the fact workers in the service industry get paid low wages, writes Killian Donoghue.

Leo Varadkar, the Taoiseach, promised five years of tax cuts, at the Fine Gael Ard Fheis 2018
Leo Varadkar, the Taoiseach, promised five years of tax cuts, at the Fine Gael Ard Fheis 2018
Image: Sam Boal

THE THEORY OF the squeezed middle has been bandied around a lot in Irish politics over the last few years.

Back in September in the Dail, an Taoiseach, Leo Varadkar, said that there are some people who pay for everything but qualify for nothing.

The theory of the squeezed middle is as false as it is politically divisive.

Proponents of this theory display the same sort of blinkered vision as the Brexiteers: they want to reject any of the burdens that the political system places on high earners while allowing them to retain all of the advantages that they accrue from it.

Yes, those on high incomes do pay more tax, and some of it at a higher rate, than their fellow citizens on lower incomes and it is true that that money goes into the central exchequer, and a large part of it is redistributed.

But that’s only half the picture. Compensation does also flow the other way, as low wage workers are selling their labour at less than the cost of producing it. 

Cost of Producing Labour

I think most people would accept that citizens of this State, who work full time, should be able to afford housing, food and other basic requirements. 

But the outcomes of the market economy are not fair because the market is blindly indifferent to human need.

No person exists for the purpose of producing labour. The purpose of employment (selling your labour) is to cover your basic living costs at a minimum.

But the cost of living in a modern economy is so high, that there are now a significant number of people in full-time employment, who need subsidies to their income to achieve a basic standard of living. Rent supplements like the HAP scheme are an example of this. 

The concept of a person working in full-time employment and earning less than the cost of living is simply economically non-viable. No economist would propose producing something to be sold below the cost of its production. But that is what low wage workers are doing. 

The problem is that when the salary that an employer pays to an employee in return for their labour,  isn’t enough to cover their living costs, then the employee is effectively subsidising the employer. 

If their employer passes that subsidy on to the customer – as market economic theory would predict – low paid workers are therefore effectively subsidising the market in the area of their employment.

The other side of the equation is that other people are then paid more than the cost of producing their labour, yet they also benefit from the subsidies that lower paid workers provide to the cost of goods and services.

Example 

Let’s tease out this theory – take a childcare worker in a Dublin crèche. 

Legally, that worker could be caring for up to five pre-school children, possibly enabling up to five other adults to stay in full-time employment. Those availing of the service may complain that they pay very high-income tax and yet also have very high childcare costs.

But according to salary data provided by Early Childhood Ireland the average wage for a childcare worker is €11.70 per hour, that is €403 after tax for a 39 hour week.

Therefore a childcare worker could not afford to put their own child in childcare and likely cannot afford to pay their rent without some state support whether rent subsidies or social housing.

If childcare workers were paid the full cost of living, the cost of childcare would be considerably higher. So the childcare workers are subsidising the cost of childcare. And the same is true across all service and retail industries.

The role of progressive taxation is to balance the competing rights of those who profit to a larger extent from the market economy against the most basic rights of those who do not. 

That means taxing higher earners at a higher rate to compensate those on lower incomes who are subsidising the market.

Who is Squeezed?

It is incorrect to say that those earning high incomes are squeezed, pay for everything and qualify for nothing. It cannot logically be claimed that they are more squeezed financially than people earning less than them.

High earners benefit from an economy that, for complex reasons, places a higher value on certain occupations over others. And they qualify for the subsidised prices in the food, retail and service industries where low-income workers are employed.

Income and rent subsidies are a poor substitute for real livable wages. But the proponents of the squeezed middle theory would deny Irish low-wage workers even that consolation.

Their theory is a Trojan horse to justify tax breaks which would disproportionately benefit high earners and would prohibit the sort of investment that is needed in our healthcare system and social housing stock.

Any further deterioration in those areas, I believe could lead to the sort of political and economic division that we see manifesting in France, the UK and the USA.

The theory of the squeezed middle disparages those on low incomes and diminishes the value of their contribution to the economy and to society.
Killian Donoghue is a Law and Politics graduate from Maynooth University. He writes a blog about the Supreme Court of Ireland at scoirl.wordpress.com.

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Killian Donoghue

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