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The trick politicians miss with tax cuts

In the old days, budget day used to be the political equivalent of Christmas morning, when voters unwrapped their presents without any idea of whether they would be getting what they really wanted, or whether they would be getting a lump of coal for being bad voters over the course of the previous calendar year.

These days, the surprise is largely gone: The budget is comprehensively leaked well in advance, and the genuine surprises are few and far between. It’s bad news for journalists, in particular, who are expected to provide insightful analysis on budget day and consequently have to hype up this or that marginal change that “came as a surprise”. The big stuff is never a surprise, in the modern era.

In that spirit, we already know, a month in advance, that the Government will make itself poorer in the budget to the tune of about €11billion, with 90% of that going on extra spending, and about 10% of it going on tax cuts. This is, of course, a pitiful ratio if you are hoping for tax relief, but it’s about the maximum the Government can do without the usual howls from the left that they’ve turned into Margaret Thatcher.

The problem is, politically, that a billion euros divided amongst all the taxpayers amounts to relatively little. Which is why it will be “targeted” at those who are “most in need” – which translates roughly as “targeted at those whose votes we are most in need of”.

Even at that, if you are one of the lucky beneficiaries, and your tax cuts amount to more than about €20 a week, this writer for one will be astounded. That much money, spread out over hundreds of thousands of taxpayers, spread out over 52 weekly or 12 monthly pay packets, just isn’t that much.

Which is why, I’d argue, the Government is missing a trick. They shouldn’t do tax cuts at all: They should do tax rebates. And they should do them in January.

A tax rebate is not a tax cut: It’s basically giving people back, in a lump sum, the money the Government took from them and no longer needs. Instead of changing your tax rates, the Government sends you a cheque with a refund of some of your taxes from the previous year.

The advantages of rebates are considerable, for both politician and voter. The most obvious reason for this is that for most people, a cheque for €1000 in January would be much more welcome than 20 euros per week spread over the course of a calendar year. Though it’s the same amount of money, it will feel more substantial. What’s more, it can be targeted by politicians to arrive at a time of maximum need for most people – my pick here is January, which often feels bleak, but you could also choose the back to school period, or November when heating bills start to kick in.

The other advantage to rebates is that they take a talking point away from those people who incessantly bleat about how they don’t need tax cuts and how the money should be spent elsewhere: Those people are given an immediate and patriotic option: Don’t cash the cheque.

This also makes a rebate cheaper than a tax cut for the obvious reason that some percentage of people, due to ignorance, conviction, or oversight simply won’t cash the cheque. You get more impact with the voters at lower cost.

Then there’s the flexibility point: Tax cuts require a semi-permanent adjustment to the Government’s revenue stream, which would require more changes in the law to reverse. If you ever have to put taxes back up, that will be unpopular. Whereas giving people a rebate as a once-off can be done several times without ever being mandatory in the future. You could simply not give a rebate in bad years, which would have the same effect as a tax increase without being presented as one.

The downside to rebates is twofold, one economic, one political.

The economic downside is the risk of inflation, as people rush to spend their additional money, driving up prices. A large one-off injection probably carries more inflationary risk than a gentle spreading of additional wealth through a traditional tax cut. But this is a minor issue, since the Government is only allocating 10% of its additional spending to tax cuts: If a rebate is inflationary, then so is the other 10 billion going on infrastructure projects, or health.

The second downside is basically identical to tax cuts: For some people, the idea of giving taxpayers a cheque for €1,000 would immediately be met with the question of why the unemployed were not also getting one. The obvious answer is “they don’t pay taxes”, but for some reason that doesn’t seem to land with a section of the commentariat.

But Governments have to make choices, politically. And the fact is that voters who get a cheque in the post are not especially likely to support those arguing that it was unfair that they got it. If the opposition wants to argue that giving the voters you want to target money is wrong, well. Let them.

Rebates are commonly used in the USA, as opposed to tax cuts. They make political sense. An Irish Government that genuinely wanted to surprise in the budget would consider them.

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