The Irish income tax system - a tyranny of the majority?

Informed by history but with the luxury of a blank page, the founding fathers of the United States drew on a set of timeless principles to craft an institutional and legal framework which still resonates with relevance today.

In throwing off the shackles of a distant monarchical tyranny, they wisely resisted the temptation to embrace a dangerously pure form of majoritarianism. The phrase ‘the tyranny of the majority’ was used by John Adams in 1788 to summarise a scenario in which a majority places its own interests above those of a minority group. In doing so, the majority oppresses in a manner comparable to that of a tyrant.

To Adams and his compatriots, there was little point in defeating one type of tyranny only to replace it with another. This was to prove their guiding light as they laid down the solid Republican foundation which continues to securely ground the United States to this day. A carefully crafted framework of checks and balances counters the danger that ‘the tyranny of the majority’ may sunder the crucial glue of democratic legitimacy.

By contrast, budgetary policy in Ireland owes little to political or economic principles. The clearest insight into what motivates the Irish Finance Minister in framing his annual budget arguably comes from the Friday night TV institution, ‘The Late Late Show’.

Uniquely in the world of TV entertainment, almost every week the benevolent host announces to noisy acclaim that he has some free gift ‘for everyone in the audience’. In like fashion, every year the Irish Finance Minister contorts his budget offering into whatever shape necessary to seem to be offering something to everyone in the electoral audience. While such a mishmash of measures may generally do little harm, the cumulative impact on the income tax system has more recently resulted in a worrying outcome.

Many historical ruptures have resulted from a popular reaction to the unfair imposition of tax. Both George the III of England and Louis the XVI of France for example, largely provoked their downfall in Colonial America and Imperial France by imposing an unfair tax burden on colonial farmers and sans-culottes respectively.The tyranny of an unreasonably applied tax burden can cause dramatic upheaval.

I believe in tax. I believe in income tax. I believe in progressive income tax. I believe in the provision of quality public services, generously funded by progressive income and other sources of taxation. While such views may be controversial in many countries, I think they represent the broad consensus in Ireland.

Nobody likes paying tax. For politicians, lessening or removing the burden is invariably popular. However the inevitable outcome – that more and more people pay less and less tax – has now reached extreme proportions in the Irish income tax system.

According to a recent report from the Irish Tax Institute, fifty per cent of income-earners in Ireland today pay less than four per cent of the income tax. The vast majority of these income-earners pay no income tax at all. In combination with the large numbers dependent on the State for their welfare or pension income, it is clear that a large majority of Irish citizens contribute nothing from their income to the myriad of essential services provided to citizens by the State.

In stark contrast, further up the income scale at a salary level of €55,000 for example, an Irish taxpayer pays more tax than in Sweden, Spain, Switzerland or the US. At €75,000, they pay close to French levels and over €4,500 more than their equivalents in the UK. The extremely progressive nature of the system – second only to Israel within the OECD – is further emphasised by the fact that a worker on €100,000 earns less than six times the amount of a worker on €18,000, but pays almost 66 times the amount of tax.

Margaret Thatcher famously believed that there is no such thing as society. Her philosophical soul-mate Ronald Reagan meanwhile said that the nine most terrifying words in the English language are, ‘I’m from the government and I’m here to help’.

In common with the broad consensus of opinion in Ireland, I think Thatcher and Reagan were profoundly wrong. The essential importance of a well-functioning society and the great capacity for good of a well-funded state are broadly agreed. So too the need for a progressive income tax system to fund this greater good.

Before a dangerous tipping point is reached, which may dramatically undermine this desirable consensus however, I think two simple changes are urgently needed to move the income tax system toward safe and sustainable territory.

Firstly, regardless of their income, every income-earning citizen should pay some income tax. Secondly, while fully accepting the compelling case in favour of a progressive system, the Irish income tax system should move gradually over the next decade toward the average progressiveness of our OECD or EU counterparts.

As was well understood in forging the newly independent United States, the risk that a tyrannical majority can usurp the greater good should not be ignored. For the mandarins of Merrion Street and their political masters today, the risk that the Irish income tax system is now close to becoming such a tyranny can no longer be ignored.

If not this year, then in some budget very soon, an Irish Finance Minister will have to forego his focus on audience-pleasing trinkets and address this looming threat to the very glue of democratic legitimacy. Tomorrow would be a good time to start.

John Looby is a Senior Portfolio Manager at KBI Global Investors, a global investment manager based in Dublin. The views expressed are his own.