SIPTU demands tax reforms in favour of low and middle income earners

The reform and reduction of personal taxation is an important feature of Ireland's current national agreement, Partnership 2000. However, despite broad consensus between the social partners on the need for reform, there has been considerable debate over the direction these reforms should take. In particular, Ireland's largest union, SIPTU, has raised the stakes considerably by threatening at its conference in October 1997 to oppose any future national agreements unless significant tax reform is instituted.

Partnership 2000 and personal taxation

Partnership 2000 (P2000), concluded in early 1997 (IE9702102F), is the most recent of the four national agreements that have been reached in Ireland since 1987. Within P2000, the issue of personal taxation is seen as a key issue. In a chapter entitled "Action on living standards through pay, personal taxation and social inclusion", it is suggested that reform and reduction of personal taxation will play an important part in improving employees' living standards.

P2000 states that "The Government will introduce personal tax reductions to the cumulative value over the three years of IRL 900 million on a full year cost basis". It is intended that after-tax take-home income will increase by nearly 5%. In addition, it is suggested that the changes to personal taxation will be implemented in a manner that promotes social inclusion. The agreement also states that a variety of changes have already been made to "reduce the impact of taxation on income for certain social welfare benefits". It also takes into account the employment situation of "atypical" workers, stating that "the social partners have agreed that the appropriate taxation arrangements for atypical workers should be examined jointly in greater detail during the course of this Partnership to see how the income tax system might be adapted to cope with this change in the nature of employment and activity." Finally, tax credits and personal allowances were an important feature of the P2000 discussions. Several groups see changes to tax credits and personal allowances as "a way of equalising the benefits of tax relief and allowances to taxpayers on different marginal rates and using these resources to fund other taxation changes".

Views of social partners on reform of personal taxation

Notwithstanding the broad level of agreement between the social partners on the need for tax reform, as expressed in the national agreement, there is now considerable debate over how these reforms might be best implemented.

Ireland's largest union, the Services Industrial Professional and Technical Union (SIPTU), which represents low and middle income workers in the main, in both the private and public sectors, has been amongst the most vocal on the issue of taxation, as has the public service union, the Irish Municipal Professional and Civil Service Union (IMPACT).

The general feeling within SIPTU is that the low paid are not benefiting to the degree they might from Ireland's increased economic prosperity and the high Exchequer tax revenues. At SIPTU's annual conference held on 7-10 October 1997, its vice-president, Des Geraghty, called for a substantial increase in tax-free allowances in the next budget, rather than the cuts in income tax rates proposed by the Government. He suggested that an IRL 900 increase in personal allowances would be of greater benefit to the majority of workers, arguing that any extra resources should be used either to widen the 27% tax band or to reduce the 27% tax rate. At the moment, a single person pays 27% tax on annual earnings up to IRL 9,400. For anything above this figure, a 48% tax rate applies, and accordingly workers enter the top tax band in Ireland on very modest incomes. The first IRL 3,450 of a single person's wage is currently exempt from tax.

In a strong worded attack, Mr Geraghty called the Government's approach a "scandalous squandering of resources". He also stressed the importance of having sufficient tax revenue available to pay for public service provision and anti-poverty measures. In particular, Mr Geraghty claimed that cutting the top rate of tax from 48% to 40% would exacerbate existing inequalities. The level of income inequality in Ireland is currently the second highest amongst OECD countries: according to OECD figures ("Income distribution in OECD countries", OECD, Paris, 1995), in Ireland the poorest 10% of the population receive 2.5% of disposable income, while the richest 10% receive 24.9%. Only the USA has a more unequal distribution, at 1.9% and 23.7% respectively. Within this context, SIPTU is in favour of major shifts in the tax burden in order to enhance social inclusion, rather than an overall reduction in income tax revenue.

Similar recommendations have also been made by various agencies and research institutes such as the Economic and Social Research Institute (ESRI) and the National Economic and Social Council (NESC), as well as the Combat Poverty Agency. Indeed, the director of the NESC has recently argued that the unfairness of the tax system is "exacerbated by its lack of transparency", and believes that the slowness of the reform process is related to the absence of a "constituency" to lobby on the issue. In addition, the 1996 NESC report, "Strategy into the 21st Century", suggests that the tax burden for low to middle income earners should primarily be reduced by increasing personal allowances, rather than reducing income tax rates, "as the latter would provide only limited relief to the lowest income earners". The report cites a number of advantages to increasing personal allowances. First, it is thought to be the "most effective way of providing tax relief for those on low incomes, while simultaneously providing tax reductions for the generality of taxpayers". The report also recommends that increases in personal allowances be combined with "widening the standard tax band" and "reducing the standard tax rate to 25%". Furthermore, a recent Combat Poverty paper suggests that the income tax system became more regressive between 1980 and 1995, with employees on 50% of the average industrial wage seeing their average tax rate increase from 14.4% to 17.4%.

In contrast, Ireland's largest employer's organisation, the Irish Business and Employers Confederation (IBEC), argues that despite the buoyancy of the economy, any surplus in the Government's finances should be used to reduce the IRL 29.5 billion national debt rather than to provide workers with significant tax concessions or to increase spending. John Dunne, director general of IBEC, believes that the best option that the Minister of Finance, Charlie McCreevy, could take, is to "run an Exchequer surplus this year" and "make inroads into repaying the high burden of national debt". While not against tax cuts per se, IBEC's position is to prioritise the reduction of the national debt and to gradually phase in reductions in the tax burden over the life-time of P2000 and to avoid conceding large tax cuts to employees.

More recently, Mr McCreevy has stated the necessity for a cautious approach to taxation, and that it would be economically prudent to run Exchequer surpluses in case of economic downturn in the future and also to avoid fuelling inflation. However, the Tanaiste (Deputy Prime Minister) and Minister for Enterprise, Trade and Employment, Mary Harney, announced on 3 October that because of the high Exchequer returns there will be "drastic tax cuts" in the December Budget. She is the first government member to state publicly that the Budget will contain significant income tax cuts.

Commentary

The background to SIPTU's call for tax reform, built around the widening of tax bands and raising tax thresholds, comes in the wake of a significant challenge to the union's leadership from disenchanted members, who lent considerable support to a radical shop steward of the far left-wing Socialist Workers Party (SWP) in the recent SIPTU presidential election (IE9709230N). The disenchantment is underpinned by a feeling amongst the membership that they are not benefiting as much as they should be at a time when the economy is booming. Moreover, this position is not confined to SIPTU, it is also shared by other unions, such as IMPACT, the largest public service union.

As a consequence, SIPTU has adopted a strategy on personal taxation that calls for a major "redistribution" of the tax burden in order to improve the position of low and middle income earners in relation to those on higher incomes. In addition, SIPTU has developed a strategy which involves targeting "strong" or "profitable" private sector companies to secure pay increases of 2% above the agreed basic and local bargaining terms of P2000 (IE9707223F). With regard to the possible impact of these strategies on the future of P2000, it would be foolhardy to believe that it is likely to have little effect. SIPTU has threatened that, unless there is significant reform of the tax system, its support for future national pay agreements cannot be counted upon. Plainly the union's leaders have identified the issue of tax reform as an important means of restoring their credibility and legitimacy amongst the rank and file. They are not likely to let the issue "go off the boil" easily, and their hardened position is likely to be sufficient to move the Government to meet some of their demands, at least. (Tony Dobbins and John Geary, UCD)