Irish VAT Hike Criticized

by Jason Gorringe, Tax-News.com, London

05 January 2012

Ireland's value-added tax hike will mean that the country's poorest will see a larger proportion of their incomes go on the levy than the more well off, according to a think tank.

Writing in the Irish Times, Dr Nat O’Connor, director of the Tasc think tank, argues that, because the least well off spend most, or all, of their income, they will effectively pay more tax. At the recent Budget, Finance Minister Michael Noonan increased the standard rate of VAT from 21% to 23%, effective January 1, 2012. The rate rise was brought in ahead of the schedule originally set out in Ireland's bailout deal with the European Union (EU) and International Monetary Fund (IMF). Noonan, along with Prime Minister Enda Kenny, did, however, promise not to increase personal income tax this year.

In his opinion piece, O'Connor writes that in spite of the government's claims that increasing VAT instead of income tax offers greater choice for the taxpayer when spending their money, standards of living may in fact be reduced. He stresses that, the lowest paid will be the ones to feel the brunt of the hike because they will pay more VAT as a proportion of their income compared to people whose higher incomes enable them to save.

In addition, O'Connor argues that by plumping for a VAT rise, the government is in fact placing a higher burden on people who have lower incomes, citing recent research from the Economic and Social Research Institute. According to the Institute, the hardest hit will be households in the poorest income decile, households in rural areas, six-person households and those containing a single adult with children. Therefore, O'Connor believes, "people on the lowest incomes may have no choice at all but to lower their standard of living."

O'Connor is clear as to where he believes the government's focus should in fact be. He concludes, "Taxes on wealth, such as capital gains and property levies, would be less regressive than consumption taxes and have a more positive economic effect. Higher levels of social insurance should also be considered, in tandem with increasing the insurance-based benefits to those who are unemployed."

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