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A wealth tax is a possibility. You don’t need to be a member of the far left to call for this

Instead of cutting taxes and USC, politicians should start spending more, writes Julien Mercille.

Julien Mercille Associate professor, UCD

THE UPCOMING BUDGET 2016 reveals the views of the government to be drastically at odds with those of ordinary people.

The government has emphasised tax cuts but Irish people have called for more public spending instead. The difference is easy to explain: tax cuts favour the rich, whereas spending favours everybody else.

Indeed, Enda Kenny’s tax cuts are regressive, meaning that they benefit the rich disproportionately. For example, the ESRI did a study that shows that reducing the standard rate of tax or cutting the Universal Social Charge’s “main” 7% rate would mostly benefit upper-middle income households.

No need to cut taxes

In any case, Ireland is already a low-tax economy, so there is no need to cut taxes even more.

An important Irish Times/Ipsos MRBI opinion poll asked people what should be done with the promised €1.5 billion in the budget. The question was: “What one thing would you like to see the Government do with some of this money?”

Overall, less than a quarter of people wanted tax cuts while two-thirds wanted expenditure increases.

The most popular answer was “spend on health care”, given by a remarkable 27% of respondents, followed by “spend on housing and tackling homelessness” (12%).

In third place came “cut the Universal Social Charge” (8%) and in fourth was “cut income taxes” (6%).

Increase spending 

The preference for spending increases as opposed to tax cuts is thus overwhelming. It is easy to make sense of this. More spending redistributes income to ordinary people (through social transfers) and improves the quality of public services (by spending on health care, education, child care, etc.).

There is a social-class dimension to the poll’s answers. For example, among those who want more spending on health care and housing there are large numbers of unemployed, skilled, and semi-skilled workers, as opposed to professional middle-classes.

This is because the better off would benefit more from tax cuts, and because they are less affected by bad public services (they can get private health insurance, for example).

What would a progressive budget thus look like? It would involve more public spending, no tax cuts, and tax hikes on those who can afford to pay.

The extra spending is easy to justify: both corporate Ireland (IBEC, the employers’ association) and the leftist anti-austerity parties agree. For example, IBEC called for an extra €1 billion in spending.

More spending is good for three main reasons.

First, it increases the economy’s long-term productivity by improving infrastructure, research and development, training, and so on. You can’t have a growing, competitive economy if you don’t invest in roads, people, innovation, broadband, water provision, etc.

Job creation 

In this respect, strategic economic sectors should be targeted for their potential to be competitive and create jobs.

Second, spending in the form of social transfers redistributes income and reduces inequality. It also actually increases growth by boosting demand in the economy. This is because poor people tend to spend more of their extra income than the rich, who will likely just save it and not spend it directly in the economy.

Indeed, the IMF recently conducted a study that asserted that raising the income share of the poorest 20% will increase GDP growth a lot more than raising the share of the rich.

Third, better public services benefit everybody by lowering living costs (through cheaper health care, education, etc.) and increasing our quality of life.

On taxes, which ones should be raised?

A wealth tax is a possibility. It could raise about €300 million annually. You don’t need to be a member of the far left to call for this.

David McWilliams did in his excellent documentary The Great Wealth Divide, as well as economist Stephen Kinsella in the Sunday Business Post, along with many others.

Another option is to increase the contribution of employers to social insurance. Ireland’s status as a low-tax economy is mostly due to this specific issue, which therefore should be raised to catch up with the rest of Europe. It will serve to make our social safety net broader and stronger.

There are many more possibilities clearly explained in, for instance, the Budget submission of Unite the Union, which can be found here.

Hopefully, government officials will read it carefully and adjust their budget proposals.

Julien Mercille is a lecturer at University College Dublin. His new book, Europe’s Treasure Ireland, is out. Follow him on twitter @JulienMercille

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About the author:

Julien Mercille  / Associate professor, UCD

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