McDowell publicly tells Ahern to cut taxes

Michael McDowell's real, if coded, message to Bertie Ahern last week was this: win the next election for the existing Government by delivering transparent tax cuts to middle income earners in the next budget.

As usual the political cognoscenti focused on the wrong, if obvious, points of the speech: the claim about the influence of minority coalition parties (positive in the case of the PDs, negative about anyone else as McDowell sees it) and his claim that there's no real difference between Bertie Ahern and Enda Kenny.  

The speech was more interesting in how it examined the taxation policies of various governments over the last 35 years, claiming that Fianna Fáil only introduced radical reforms when under the influence of the Progressive Democrats. It showed how when under the influence of Labour it increased taxes between 1992 and 1994 after the major reductions of the previous government. The Rainbow coalition, although presiding over the early days of the boom, cut personal income tax rates by a mere one per cent, McDowell contended.  His speech emphasised that the existing policies of the potential junior partners of future coalitions would be to increase various taxes.
Instead of addressing the issues dealt with in the speech the opposition parties all played the jaded game of making claims about the state of the relationship between the Government parties and all that sort of guff, as if anyone cared. Maybe they feared entering debate on McDowell's terms, believing they could not rebut the arguments he made for factual accuracy.

But they neglected to make political capital out of the weakness in McDowell's economic argument, the political failure of this government, since its return to power in 2002, to introduce real tax reforms to the benefit of middle income earners.

All the major advances were made between 1997 and 2002, as McDowell implicitly admitted in his speech. Since 1997 the basic rate of income tax has been cut from 26 per cent  to 20 per cent . The top rate has been cut from 48 per cent  to 42 per cent. Residential Property Tax was abolished. The rate of Capital Gains Tax has been reduced from 40 per cent  to 20 per cent . Corporation Tax has been reduced to 12.5 per cent. It is a matter of opinion as to whether all of these things were socially desirable or not, given that tax is about social equity as well as raising revenue. Either way it is clear that these cuts did not inhibit the ability of the State to raise tax revenues. They may also have assisted greatly in promoting economic activity and creating wealth.

The Programme for Government entered into by the existing coalition made three promises about personal taxation. It promised to:
• achieve a position where all those on the national minimum wage are removed from the tax net;
• ensure that 80 per cent of all earners pay tax only at the standard rate;
• use the potential of the tax credit system to target changes and to pursue further improvements in the income tax regime if economic resources permit.

So how has it performed in those goals? Not too well, as it happens, although that wasn't in McDowell's speech. When I interviewed him about this on The Last Word on Friday 24 February  McDowell highlighted how the minimum wage is now out of the tax net. This is true, but as with previous budgets that may change if the minimum wage is increased as part of the new partnership talks.
McDowell pointed to the tax burden of people on average industrial wage falling from 27 per cent  of earnings to 23 per cent but conceded that the Government had not achieved its objective of getting sufficient people out of the top tax rate. He said this has “yet to be achieved”. It is a long way from that, as many PAYE workers feel that they hit the top tax rate too quickly, at little more than the average industrial wage. Surely the top rate should be reserved for really high-income earners, yet the reality is that many of these people shelter income from tax through State provided legal tax avoidance schemes that middle income earners, on the top rate of tax, cannot afford to avail of.
And what of the third aspiration? McDowell conceded that “it is government policy that the 42 per cent  tax rate will be brought down to 40 per cent  if economic circumstances permit.” However, in the December 2002 and 2003 budgets Charlie McCreevy, reacting to the major increases in public spending, not only failed to reduce the top tax rate but he failed to index link tax credits, resulting in increased tax demands in real terms on rising incomes.

Subsequently, Taoiseach Bertie Ahern declared that “the era of major tax cuts are over” which many took to mean that the 40 per cent  aspiration had been abandoned. However, McDowell – who seems to do a lot of interpreting of what Ahern means these days – denied this is the case and said to watch the next budget (the last, of course, of this Government).  

Much of what this government has done in relation to income taxes has been hard to explain to the voter, even when it confers benefits to the less well-off. Many voters, despite rising wages, perceive they are not as well off as they should be. They resent the high price of Government provided services and have appreciated the Fine Gael line that these are increasing in price at rates well in excess of general inflation. Many are aware of the high rates of VAT charged in this country and understand that taxes on consumption disproportionately affect lower income earners.
The economy is in rude good health and the state of the public finances is excellent. The Government will undoubtedly be tempted to throw hundreds of millions of euro at many pork barrel projects over the next year and to make various expensive big gestures on capital spending that may win votes. But what McDowell knows is the goodwill created by headline grabbing income tax rate cuts. Cutting the top rate to 40 per cent  would impact on an enormous amount of voters and would be easily understood. He told Ahern that on Friday 24 February, albeit in a public fashion.

Matt Cooper presents The Last Word on 100-102 Today FM, Monday to Friday, 5pm to 7pm