Guest post by JJR: Shifting the tax burden from business to employees will not create jobs

JJR: Fine Gael frontbenchers may not take their lead from the Obama administration, but when White House Chief of Staff, Rahm Emanuel, said last year that one should ‘never waste a good crisis’, they seem to have taken this to heart.

In advance of the 2010 budget, the party has proposed a permanent €900m tax cut for business, financed by matching tax hikes for workers. This is not a tax cut ‘targeted at the most vulnerable jobs’ as they suggest; it is a tax cut that will boost corporate profits with only minimal and incidental job creation. The net effect would be a significant and regressive re-distribution of wealth.

The proposal includes a 20% cut to the standard rate of employers’ PRSI, costing €830m, and a 50% cut in the lower rate, costing €57m. This is to be financed by abolishing the PRSI ceiling for workers earning more than €75k, supposedly bringing in €470m, and through a carbon tax, bringing in €480m, disproportionately from the lower paid. Incidentally, the Department of Finance insist that abolishing the PRSI ceiling would raise €120m, some €350m less than asserted by Fine Gael.

According to Fine Gael, this tax cut will benefit 1.7 million workers. In actual fact, this near €1bn tax cut is aimed solely at improving the bottom line for business. Even accepting that FG’s costings are accurate, half of their tax cut is to be paid for by those earning over €75k as PRSI would be applied to their income over this level. The other half would be financed by a regressive carbon tax with no compensating measures for low income workers.

In fact, the biggest problem with this bumper business tax cut is that it is not targeted. It is a blanket cut that would reduce labour costs for employers for all existing jobs. And now for the ‘science bit’: Economists call this a ‘deadweight loss’; Fine Gael propose costly incentives for businesses to hire people, regardless of whether they were going to hire them anyway. The focus of Fine Gael’s proposal is on ‘infra-marginal’ rather than ‘marginal’ hiring decisions and, in economic terms, that is its core weakness. Acknowledging this fact, party spokespersons nonchalantly brush off this vast waste of money by saying ‘doing nothing would cost more’.

The party insists that ‘these changes are particularly targeted at lower-paid and entry-level jobs’ and the young unemployed. This is clearly not the case. Cynically, they are proffering the limited economic rationale for halving the lower rate of employers’ PRSI, at a cost of €57m, as justification for a blanket cut to the standard rate at 15 times the cost.

If Fine Gael were serious about protecting and creating jobs, they would be proposing tax breaks focused on jobs created or saved; they would focus on the ‘margin’. Reducing or suspending employers’ PRSI for people taken off, or kept off, the dole would be truly targeted and far more cost-effective. But this isn’t about job creation; This proposal is about securing tax breaks for business supported by spurious claims that this would support jobs.

Fine Gael’s proposal implies ESRI endorsement. In terms of tackling the jobs crisis, the ESRI concludes, in the Recovery Scenarios document cited by the party, that ‘priority needs to be given to labour market initiatives that will effectively tackle this skills deficit among many of the unemployed. In preparing for a recovery, the economy would also benefit from increased policy attention to measures to enhance productivity and innovation in the tradable sector of the economy.’ At no point does the ESRI propose a blanket cut in employers’ PRSI as an appropriate policy response to the crisis we face.

PRSI, whether it comes from workers or employers, is not really a tax at all. It is the social contribution made by workers so that they will receive state support if they fall on hard times; it is paid by employers to provide a safety net for staff in times of economic hardship.

Ireland has among the lowest level of social contributions in any advanced economy. Fine Gael cite other countries where reducing social security contributions have formed part of fiscal stimulus packages, but this overlooks the very low base at which Ireland is already operating. Our welfare system is barely keeping its head above water.

In Ireland, social contributions are paid into the Social Insurance Fund, out of which are paid employment-linked welfare payments. When the economy was booming, and at full employment, this Fund was billions of euro in surplus. With unemployment heading for half a million, it is set to move into deficit in 2010. Slashing PRSI contributions would undermine the viability of Ireland’s welfare system altogether and render the Social Insurance Fund defunct. Clearly, Fine Gael’s answer to this conundrum is to slash welfare rates for people who have already taken a hit by losing their jobs.

Make no mistake, this big business tax cut is a Trojan horse for slashing welfare and public services. Fine Gael want to cut the 2010 budget deficit by €4bn, €3.8bn of which would come from cuts to current spending. This would take slash-and-burn economics to a level that even the Fianna Fáil government considers to be beyond the pale.

Under this proposal, ordinary working people would carry the entire burden while corporate Ireland gets a near billion euro handout. This is not compassionate conservatism, or even so-called ‘common sense’ conservatism – this is cynical conservatism at its worst.
JJR is, obviously, anonymous.

Posted in: Taxation

Tagged with: taxation