It’s somewhat surprising that a lobby group for SME owner managers is calling for increased USC taxation on high incomes, but there is method in ISME’s madness. High-earning self-employed individuals pay a 3% USC surcharge on income above €100,000, and ISME has proposed a similar levy for all PAYE workers earning over that level. This chimes in with socialist demands for a post-Covid ‘Solidarity Tax’, and would have the merit of extracting more tax from thousands of civil service officials on six figure incomes, though of course private sector income earners would be hit too.
The ISME suggestion is one of many revenue-raising ideas analysed by ESRI researchers Theano Kakoulidou and Barra Roantree in a paper that outlines the options available for increasing tax revenues. The authors point out that government revenue in Ireland as a proportion of Gross National Income (37.3%) is high relative to the UK (32.9%) and three points above the OECD average, but lags behind leading EU nanny states such as Italy (41.9%), Sweden (43.9%) and France (45.9%).
The ESRI view is that tax increases in the coming years are inevitable. Budget 2021 set the government on course for permanent increases in non-Covid spending of over €5bn, not including the cost of more free healthcare with the Sláintecare policy. In addition, the pension drain on state finances will keep increasing as the number of pensioners doubles by 2050.
ESRI concludes that the most straightforward way of raising substantial tax revenue is through increases to the main rates of income tax, the USC, PRSI, VAT and the Local Property Tax. Increases to higher rates of income tax and the USC are described as ‘the most progressive’, and one option examined is removing PAYE and Earned Income tax credits from high earners. The ‘progressive’ result would be a tax rate of 64.2% on incomes between €100,000 and €120,000.
The academic duo’s analysis of policy options is mostly agnostic, but they have a real go at Entrepreneur Relief. Tax foregone from this was €92m in 2018, which is insignificant in the context of state revenue of €77bn. “The justification for applying lower tax rates to people who own their own business than to the rest of the population is far from clear,” say the pair, a view probably not shared by risk takers currently availing of the Employment Wage Subsidy Scheme.
The overall message is loud and clear – tax hikes are on the way. Against that backdrop, brushing up on Spanish might be a good idea, as ESRI’s table ranking countries by tax as a percentage of GDP shows Mexico (16.2%) bottom of the list.