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Facing Reality

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Nothing illustrates the Government's weak-kneed approach to the crisis more clearly than the fact that on the same day that President Obama demanded that US companies receiving bailouts should limit executive salaries to US$500,000, our Taoiseach who earns more than President Obama merely urged top executives in banks covered by tax payers' guarantees to take 25 per cent salary cuts. Arguably, a maximum salary of about €200,000 would be appropriate for Irish bank executives when account is taken of their size relative to their US counterparts

Ministers are currently making a big fuss of the fact that a relatively small number of tax payers account for the most of the income tax paid within the State. Revenue statistics for 2006 indicate that about 60,000 tax payers had incomes above €100,000 and that they paid taxes of €3.3 billion at a effective rate of 32% on incomes of €10.2 billion. Given that their average income was €175,000 - equivalent to about 17 times the old age pension or over four times the average industrial wage - it is scarcely surprising that they account for such a high proportion of total income tax.

It is hard to fathom why the government is so protective of the highest paid while so willing to assault the lowest paid. This has been going on for decades through national wage agreements which have awarded the same percentage increases to the lowest and highest paid. A more recent example is the October budget which set out to apply the same income levy percentage to all taxpayers irrespective of circumstances. It took public outrage to exclude the lowest paid and increase the rate for the higher paid. The proposed pension levy for public service workers is a further example of the government's skewed thinking.

Given the magnitude of the fiscal and competitiveness crisis facing the country, it is imperative that the worst excesses of the Celtic Tiger should be clawed back from those who benefited the most. Here are some ways of doing this:
  1. Our parliamentarians must set an example which is proportionate to the economic catastrophe they presided over. While their salaries may not be significant in overall monetary terms, they have huge importance from a leadership perspective.

    Accordingly, the salaries of ministers, TDs and senators should be reduced by, at least, one-third and instead of being linked to overblown civil service scales, their salaries should be linked to those of politicians in other states of comparable size and status and having similar numbers of parliamentary sitting days. Likewise, salaries of senior administers and professionals across the public sector should be benchmarked against opposite numbers in other countries.

  2. Employees with salaries of €100,000 have ten times the impact on national competitiveness as those earning less than €10,000 a year. While lowest-paid employees represent 14% of workers, they account for only 4% of the national payroll. At the other end of the spectrum, those earning over €1,500 a week account for just 4% of all employees but 12% of the national payroll. Outside of the public sector, the majority of the highest paid work in manufacturing, distribution,  finance and professional services. As manufacturing is the only sector truly engaged in international trade, Government must strive to influence remuneration of high flying executives in non-traded sectors through its procurement processes and by effective implementation of competition policies.

  3. As is applicable in the USA, exceptionally high salaries paid to executives in the private sector should be funded by shareholders rather than subsidised by taxpayers. Accordingly, any elements of total salary, bonus and pension contribution exceeding, say, five times the average industrial wage (i.e. over €200,000) should cease to be deductable for corporation tax purposes.

  4. The conditions applicable to non-residency for tax purposes should be reviewed so that non-residency means exactly what it says. For starters, tax should be changed on worldwide incomes of tax exiles pro-rate to days (or part of) spent in the state.

  5. A new tax rate of 48% should be introduced for earnings above €100,000. This would yield about €800 million a year, and even more would be gained if allowances for "top-hat" pensions, investments etc. are reduced. An even higher rate should be introduced for those earning over €200,000. If applied immediately for the next five years, these changes would make a significant dent in the projected €16 billion shortfall.

These proposals are directed at those in leadership positions and the highest paid. While small in number, they are hugely important for setting example, restoring fairness to the tax system and contributing to the national finances and competitiveness.

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This page contains a single entry by Brian published on February 5, 2009 3:23 PM.

Banking Package was the previous entry in this blog.

Proposals on Crisis is the next entry in this blog.

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