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Thursday, 25th April 2024 |
| Sort out the PRSI/tax mess |
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| Dan McLaughlin believes that last year’s decision to abolish the ceiling on employers PRSI made little sense. |
In its recent commentary on Ireland the IMF argued against the use of fiscal policy to affect overall demand in the economy (as advocated by the ESRI and the Central Bank) on the basis that estimates of potential growth are too unreliable to allow any meaningful guess as to where the economy is in cyclical terms.
A neutral budget
On that basis they advocate adopting a neutral budget which would in practice mean accepting a lower surplus in 2002 as activity has slowed thereby reducing tax buoyancy.
Direct taxes on labour are high relative to taxes on capital, and this imbalance will be exacerbated further by 2003, when corporation taxes will be reduced to 12.5 per cent. The risk is that in the medium term Ireland will continue to attract large numbers of foreign firms, because of low profit taxes, but that workers will remain scarce due to a marginal tax rate over 40 per cent. Hence it is appropriate to continue to cut tax rates on income.
Last year’s decision to abolish the PRSI ceiling made little sense, other than to send a message to firms contemplating coming to Ireland that the Government is rowing back on its commitment to lowering profit taxes by effectively raising the tax rate by other means.
The PRSI/tax relationship is a mess, with a ceiling on income liable for PRSI against a health levy which is charged on all incomes, with no ceiling.
Government spending has risen strongly in recent years, but there is a perception that there has not been a commensurate increase in the standard of public services. This implies that there are structural impediments to the delivery of better public services.
There is neither rhyme nor reason in the determination of public sector pay. A realistic benchmarking exercise has to put a monetary value on some of the non-monetary benefits accruing to public sector workers including job security and pension rights. In addition, discrimination in pay is necessary for the functioning of a healthy labour market, be it in the private sector or in the public sector.
The 20 per cent Social Housing provision needs to be reassessed, both in terms of the wide variation in its implementation across the country and whether it has contributed to a reduction in the supply of new housing this year.
No budget is a ‘giveaway’- the government can only decide whether to take less or more tax from peoples incomes in the coming year.
In its recent commentary on Ireland the IMF argued against the use of fiscal policy to affect overall demand in the economy (as advocated by the ESRI and the Central Bank) on the basis that estimates of potential growth are too unreliable to allow any meaningful guess as to where the economy is in cyclical terms.
A neutral budget
On that basis they advocate adopting a neutral budget which would in practice mean accepting a lower surplus in 2002 as activity has slowed thereby reducing tax buoyancy.
Direct taxes on labour are high relative to taxes on capital, and this imbalance will be exacerbated further by 2003, when corporation taxes will be reduced to 12.5 per cent. The risk is that in the medium term Ireland will continue to attract large numbers of foreign firms, because of low profit taxes, but that workers will remain scarce due to a marginal tax rate over 40 per cent. Hence it is appropriate to continue to cut tax rates on income.
Last year’s decision to abolish the PRSI ceiling made little sense, other than to send a message to firms contemplating coming to Ireland that the Government is rowing back on its commitment to lowering profit taxes by effectively raising the tax rate by other means.
The PRSI/tax relationship is a mess, with a ceiling on income liable for PRSI against a health levy which is charged on all incomes, with no ceiling.
Government spending has risen strongly in recent years, but there is a perception that there has not been a commensurate increase in the standard of public services. This implies that there are structural impediments to the delivery of better public services.
There is neither rhyme nor reason in the determination of public sector pay. A realistic benchmarking exercise has to put a monetary value on some of the non-monetary benefits accruing to public sector workers including job security and pension rights. In addition, discrimination in pay is necessary for the functioning of a healthy labour market, be it in the private sector or in the public sector.
The 20 per cent Social Housing provision needs to be reassessed, both in terms of the wide variation in its implementation across the country and whether it has contributed to a reduction in the supply of new housing this year.
No budget is a ‘giveaway’- the government can only decide whether to take less or more tax from peoples incomes in the coming year. |
Dan McLaughlin is chief economist at Bank of Ireland.
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| Article appeared in the September 2001 issue.
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