Tax Spending not Work

There was a short discussion on Agenda two week ago about the possibility that Mc Creevy may be moving further towards this method of taxation than ever before.

Does anyone have an opinion on how functional this system is and are there any glaring drawbacks? Has it been used before and how committed would Governments have to be to follow through?

Direct taxes are on income, e.g. PAYE, DIRT, Corporation tax. Also maybe PRSI, though not really a tax.

Indirect taxes are on spending, e.g. VAT and excise duties.

Most countries have both types. In Ireland we tend to have heavier indirect taxes, and lower direct taxes than other countries.

So this is already happening in Ireland. People pay very low PRSI and low income tax but get hit with high VAT and savage duties on a narrow range of goods.

Note that Direct taxes are fairer, as they are progressive, and the better off end up paying more.

Indirect taxes and regressive, and hit the poorer harder.

On the other hand, high indirect taxes discourage smoking, drinking and driving. Lower direct taxes encourage jobs.

Contango10

tax spending

In my dictionary, "fair" means to treat everyone equally. So therefore, direct taxes, being progressive, hit those on higher incomes harder, and by definition, are unfair.

Why should a person who spends large amounts of money and effort in getting an education and trying to better oneself subsidise people on lower incomes. A recent article in the Indo highlighted that there are very many people benefitting so much from social welfare system to such an extent that to work in a job paying above the industrial wage would represent a decline in income for them. That is absolutely crazy. The social welfare system was not designed for that.

Taxing spending is much more equitable. Indirect taxes hit everyone equally, they do not hit the poorer harder. They are the same no matter how much you earn. I am aware that lower earners would have lower incomes out of which to spend. But would be a real incentive to work, productivity etc.

End of rant.

Re: tax spending

Curious, well you should be happy, as we live in a country that has low direct taxes and high indirect taxes.

The income taxation/transfer system is designed, on purpose, to take a bigger fraction of income in tax from a person on a higher income. Example:

Earn 36k, pay 21% of income in tax
Earn 24k, pay 15% of income in tax

This is progressive.

An alternative is a proportional income tax, also known as a flat tax. Example:

Earn 36k, pay 18% of income in tax
Earn 24k, pay 18% of income in tax

Here, the higher earner pays the same fraction of income in tax, but pays more in cash.

Most countries have a progessive income tax system. It seems you might prefer a flat tax.

The third category is regressive. Example:

Earn 36k, pay 21% of income in tax
Earn 24k, pay 25% of income in tax

VAT, duties and other indirect taxes are regressive as they take a larger share of a lower income. A high earner and a lower earner both buy a portable TV for €242, paying €42 VAT each. That is a bigger chunk of the lower earner's income.

If we want a more equitable society with less wide income inequality, then we need progessive taxes.

In reply to your case from the Indo, I find it very unlikely that somebody would be better off on "Social Welfare", than earning over €500 a week.

Though I do agree that any disincentives caused by the tax/welfare system should be eliminated. Personally, I would abolish Unemployment Assistance for single people, especially young people.

Contango10

tax spending

" Fair " does not mean treating everyone equally,running a state is not a football match . Or , if I may ask the question , why are those who have a lot to spend live here and not in countries where they are treated equally ? I suppose its a better living in a stable society -compared to a living " in warre " as Hobbes would say .

By increasing indirect taxes and reducing direct taxes, are you not then handing over more control to the individual as to how much tax they are willing to pay?

Your tax 'bill' is then proportionate as to how vulgar you want to be in displaying your wealth, especially when it comes to luxury items and multiple properties.

At retirement, would there be a mass exodus from this country to one where direct taxation is very high? Maybe there is some method in the 'foreign property madness', at least for, say, half the year.

Re: tax spending

Curious, well you should be happy, as we live in a country that has low direct taxes and high indirect taxes

Click to expand...

Actually we live in a country with high direct taxes (20% higher than US) and high indirect taxes (200-300% higher than US). This is then amplified by how bad a service we get for how much extra we pay. Take a look at our roads compared to the US.

Oh and before you say we don't have property tax, we get stamp duties and levies that more than make up for it. I estimate stamp duty to be equivilent to up to 0.5% P.A property tax alone!

Re: tax spending

I'm amazed these at statements by Curious:

Indirect taxes hit everyone equally, they do not hit the poorer harder.

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Indirect taxes mean people pay the same absolute amount for a given item (e.g. €400 bin charges for all), but €400 means a hell of a lot more to someone on the minimum wage than it does to someone on €50,000. Indirect taxes DO HIT the poorer harder.

Why should a person who spends large amounts of money and effort in getting an education and trying to better oneself subsidise people on lower incomes.

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Tell that to the generation before you whose taxes paid for most of your education!

The social welfare system and the tax system should work in harmony to

(a) Fund an adequate standard of living for those who get left behind.

(b) encourage certain socially desirable behaviour such as getting a job if you can, dealing with waste and pollution responsibly, etc.

Unfortunately when people start making suggestions about using welfare/tax to encourage socially desirable behaviour they get derided. Mary Harney suggested in 1997 that the welfare system should not encourage single parents to leave their own family unit and move into flats on their own. She was abused from on high by the other parties, and this week Labour brought it up again.

There was no discussion about the potential benefits of single parents remaining at home, the support structure of their family, the need for less social housing etc. Just the soundbite sledgehammer that "Harney wanted to punish single mothers".

Until we learn to discuss ideas, even radical ideas sensibly, we're going to be stuck with leaders who are afraid to even utter words that could potentially be turned around by others to hit them with.

-Rd

Re: tax spending

Actually we live in a country with high direct taxes (20% higher than US) and high indirect taxes (200-300% higher than US).

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Househunter1, I haven't got any figures but I suspect our income taxes and PRSI are nearly as low as the USA. Remember, just 4% PRSI here, with an allowance, exemption and a ceiling. In the USA worker pay payroll tax, like PRSI here, as well as income tax.

Example: earn €38k in Ireland, pay under 18% of it in direct tax. I think that's low. Most people would agree.

But, yes, the USA have no VAT, though many states have sales taxes. Plus lower duties.

Contango10

tax spending

Comparing USA taxes with Irish - European - taxes leaves one thing behind :If you need wealth to stabilise
the status quo and can't create it it at home than you are entiteled to rob your neighbour (Monroe doctrin). If he is to poor than you are entiteled to rob any one i.e. Irak,Angola .

News from EXXON-MOBILE released today ;
To create 1000 Dollars of wealth in the year 2000 the USA needs the energy equivalent of 440 kg coal whilst
GB needed 270 and Germany 230 kg .
Exxons forecast for the year 2200 looks only better at the first sight ; USA 320 kg , GB 180 kg and Germany 140 kg of coal . GB ,Germany and Ireland have about similar taxation rules ( direct/indirect tax) wich seems to stipulate economic efficiency .
The gap in efficiency will widen even more .
Lets hope that papertigers will become as extinged as the the real ones .

tax spending

Comparing USA taxes with Irish - European - taxes leaves one thing behind :If you need wealth to stabilize
the status quo and can't create it it at home than you are entitled to rob your neighbors (Monroe doctrine). If he is to poor than you are entitled to rob any one i.e. Iraq,Angola .

News from EXXON-MOBILE released today ;
To create 1000 Dollars of wealth in the year 2000 the USA needs the energy equivalent of 440 kg coal whilst
GB needed 270 and Germany 230 kg .
Exxon's forecast for the year 2200 looks only better at the first sight ; USA 320 kg , GB 180 kg and Germany 140 kg of coal . GB ,Germany and Ireland have about similar taxation rules ( direct/indirect tax) which seems to stipulate economic efficiency .
The gap in efficiency will widen even more .
Lets hope that paper tigers will become as extinct as the the real ones .

taxing spending not work

I saw the Agenda programme which the original poster refers to. Very interesting indeed. I agree with taxing spending and not work. Makes total sense to me. The current system is a disincentive to work.

Re: tax spending

Example: earn €38k in Ireland, pay under 18% of it in direct tax. I think that's low. Most people would agree.

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Hi Contango10
I'd like to get to know your accountant if he can shave that much off your tax bill. I've calculated that someone on €38K will pay in excess of 25% of their income in tax (around €10K). On this Salary in the US the total of your medicare, state and federal tax and everything else would add up to around 7.5K. This difference increases then as your income increases.

To be honest with you I think we have better social structures in Ireland resulting in a better quality of life for people in general, and therefore I don't mind paying a premium in tax as long as the we get what we pay for. Our government does an excellent job in some respects but clearly in terms of maintenance of public facilities we are not getting what we pay for. Money is being squandered somewhere and thats the painful thing.

Re: tax spending

Typical tax calc for someone on €38K

first 28K @ 20% tax = €5,600, next 10k @ 42% tax = €4,200
sub-total = € 9,800
Less Tax credits, personal = €1,520, PAYE = €800
Net Tax payable = €7,480, or 19.6% of income.

Re: tax spending

Hi Tommy
I think you subtracted PRSI instead of adding it there. This would change the figures as follows;

first 28K @ 20% tax = €5,600, next 10k @ 42% tax = €4,200
sub-total = € 9,800
Less Tax credits, personal = €1,520, PAYE = €800
Net Tax payable = €9,080, or 23.9% of income.

Re: tax spending

Also I have 2% Levy = €760 +
PRSI 4% of 38K less first €150 pw = €1200
which brings us back to the original 10K figure.
Am I missing something here?

Re: tax spending

Househunter1, unless I'm grossly mistaken, your caclulations are wrong: 9800-1520-800=7,480!

The €800 Paye tax credit is a credit - i.e. a subtraction from your income tax liability.

I deliberately excluded levies and PRSI from the equation, as it was mentioned above that USA workers also pay payroll tax instead of PRSI & levies.

Re: tax spending

Sorry Tommy
I misread your calculations, I thought the €800 was PRSI. Time to get the eyes checked!

Re: tax spending

Househunter1, I will now show you how I pay under 20% of my income in tax.

38K = gross tax due of 9,800, as calculated already. I have three tax credits:

Basic tax credit = 1520
PAYE tax credit = 800
Rent paid tax credit = 254

So that means tax of 9800-(1520+800+254) = 7226. That is 19% of my gross. I also get 42% tax relief on pension contributions of 133 pm, and on expenses of 402 pa, saving 841 pa in tax. So I pay 6385 in tax.

This is 16.8% of my income.

PRSI and the Levy amount to 2015.89 pa, which is 5.3% of my wage.

Overall deductions = 22.1%

Contango10

Re: tax spending

Fair enough Contango10
I have first hand experience of this having transferred back from the US on the same salary and suddenly having to foot a higher tax bill, however I may not have been as astute as you in claiming the relevant deductions!