McCreevy got it right on tax rates

The initial popular outrage over the Budget appears to have subsided. A very unsatisfactory patch was introduced to placate ‘women in the home’ and the philosophical basis of the Budget, individualisation, has been maintained.

Of course the liberal classes felt very uneasy getting on that particular bandwagon for fear it would imply that they were in favour of ‘women in the home’. So the issue has moved on to whether the tax rates should have been reduced.

The argument here is clear and simple. By reducing the top rate of tax from 46% to 44% the wealthier sections benefited disproportionately. This is undeniable but it still was the right thing to do.

Firstly, as a measure it will almost certainly pay for itself. In the past few years each time income tax rates have been reduced the actual take from income tax has increased. The reason for this is that overall economic activity is increased with the extra demand in the economy and also people are not inclined to pay high tax rates.

Secondly, and more importantly, we must learn not to tax work. People react very badly to tax on work and over the past 40 years personal taxation has been one of the most debilitating features of our economy. The reduction in tax rates will serve us well long into the future.

The alternative was to increase personal allowances which would have favoured middle income earners. This is also true. But changing personal allowances is a movable feast so that we still get caught as we catch up with the allowances.

In any case, the fact is that the rich never pay 46p in the pound. In a survey a couple of years back, the Revenue found that people with incomes in excess of £250,000 were paying as little as 10% of their income in tax.

How can this be?

These people avail of the various tax incentive schemes from pensions to apartments and from seaside homes to movie making. So long as they keep reinvesting their money they never have to pay tax. Undoubtedly in the future these people will declare themselves incorporated and pay their tax at our new super-duper low corporation tax rate of 12.5%.

And if you can’t do all of this legally then there’s always the Ansbacher accounts, the Isle of Man, the black economy…

So let’s not fool ourselves that high tax rates do anybody any good. And if the tax take increases when we lower tax rates, how does the poor do badly out of it? They don’t.

We should reduce tax rates until we start to lose revenue. That’s only common sense.

Much comment has been made about the increasing gap between rich and poor. But absolute poverty is more important than relative poverty.

My problem with tax cuts is that it is seen as an alternative to public spending. I believe that we should maximise the returns from tax so that we can spend more on infrastructure, poverty, social inclusion, education and health among other things.

In fact, it would have been better to have spent the money rather than reduce taxes at this time.

But in the long-term lower income tax rates reward work, power the economy and give us more resources to tackle the chronic underfunding that has plagued us since the South became independent.

A fair society cannot be legislated for or taxed into existence. There is ample evidence that the State cannot provide an alternative to capitalism.