by Philip Ferguson
In its December budget, the Fine Gael-Labour coalition increased much VAT from 21% to 23%.
The first thing to note about VAT is how it affects people on lower incomes the most.
From what I’ve been able to google, VAT was introduced into the south by its membership of the EU. The imposition of VAT significantly raised the level of indirect taxation. The proportion of government income derived from VAT is substantial. In 2010 it was €10.1bn out of a total tax take of €31.69bn (just under a third) ; in 2011 it was €9.74bn out of a total tax take of just over €34bn, which came to just over 28.5% of the entire tax take. Moreover, indirect tax in 2010 was €14.94bn and in 2011 €14.93bn. So, between those two years, indirect tax take stayed the same, while corporation tax collected went down from €3.94bn in 2010 to €3.52bn in 2011.
An important trend in taxation in New Zealand, where I am currently living, is the proportionate rise of indirect tax, with our version of VAT, called GST, being introduced by the Labour government in 1986.
Victoria University economist Bob Stephens has pointed out that between 1982 and 1988, “effective average tax rates including GST for couples on average earnings with two dependents increased from 18.7 percent to 24.1 percent. Average tax rates for similar couples on three times the average income declined from 40.3 percent to 34.9 percent.” So we can see that indirect tax means the wealthy pay less of their income in tax while workers, especially the poorest, have more of their income taken in tax. (Perhaps some reader would like to check the data for Ireland over the period since VAT was introduced.)
Let’s consider someone on the dole in the 26-counties and a top company CEO. If an unemployed person is getting €188 a week on the dole and they buy something which costs €100 plus VAT, then they are now paying €23 in indirect tax and this tax is about 12.5 percent of their total weekly income. If a top CEO like, say, Owen Killian on €10 million a year – which Mr Killian was on in 2009 – buys the same item for €100 and pays the same VAT, his indirect tax payment only makes up about 0.0115 percent of his weekly income!
However, there is another vital aspect to indirect tax such as VAT (by far the largest form of indirect taxation).
Workers’ labour-power under capitalism becomes a commodity and, like all other commodities, its value is determined by the socially necessary labour that goes into creating it. Basically, this means that the value of workers’ labour-power is the value that is required to house, cloth, feed and otherwise maintain the worker in a sufficient state to turn up to work each day to produce profits for the employers. If that value translates into €500 a week, this is the value of the worker’s labour-power and will be roughly reflected in the wage. The worker, however, can create a value much greater than this – say a thousand dollars worth of goods or services. The extra €500 is surplus-value, and in the hands of the boss. (To simplify matters, I’m disregarding the part of total value that comes from the use of machines, raw materials, rather than adding that on to the €1,000.) In good times, and with strong organisation, the tax on workers’ wages (PAYE) has to come out of surplus-value and therefore lessens the amount of surplus-value that the boss can convert into profit.
During boom periods, the bosses are OK about this because they have so much surplus-value and they are prepared to buy peace with the working class. However, when capitalism goes into slump, the capitalists want to cut down on anything which reduces the amount of surplus-value they can convert into profit. They do this in a number of ways – eg, by cutting government expenditure on health and education, since this is financed out of surplus-value, and by shifting tax from being a deduction from surplus-value into being a deduction from the value of labour-power. Indirect tax is a useful weapon for doing this.
Now, instead of the worker getting the €500 value of their labour-power per week and, say, €150 income tax coming out of the $500 surplus-value, there may be only €100 direct tax coming out of the €500 surplus-value and $50 indirect tax coming out of the worker’s €500 wage.
What has happened is that the worker’s share of the €1,000 has fallen from €500 to €450, while the boss’ share has risen from €350 to €400, and the government continues to get €150.
Moreover, VAT allows the bosses to immediately pass on costs. In this sense, it doesn’t really cost the bosses anything. If they pay VAT on some item they need for their factory or office, that cost is factored into the cost of their finished product. A product costing €100 plus €21 VAT, making a total of €121, will now simply cost €123, because the VAT has risen by €2. Workers, on the other hand, cannot simply ‘factor in’ VAT to their incomes, because they don’t set the price of their labour-power. You can’t turn up at the job and tell the boss that you’re now charging him an extra 10% (an increase from 21 to 23% being slightly less than a ten percent rise) for your capacity to work. Or, in the case of beneficiaries, tell the welfare they have to pay you an extra 10%.
Demystifying tax cuts
In the second part of this article I want to look at income tax. This hasn’t been cut in the twenty-six counties, so it is different from the New Zealand situation, but the key parts of analysis of income tax are still pertinent to Ireland, north and south. I haven’t bothered cutting out the bits about the specific New Zealand situation.
To many people increasing VAT while lowering direct forms of tax seems like taking with one hand and giving back with the other. So, why bother? Especially when National is not just cutting company tax and income tax for the wealthy, but everyone’s income tax. Why, for instance, would they cut the tax of low-paid workers, if all they want to do is make the rich richer?
There are two main reasons why the capitalist class and their parties, whether National or Labour, favour tax cuts: one is to do with the actual workings of the capitalist system and the other is to do with capitalist ideology and its role in social control.
The first issue is bound up with the workings of a capitalist economy such as New Zealand. As we’ve noted above, under capitalism workers are paid less than the total value of the commodities which they produce. The rest is surplus-value, which is converted into profit by the capitalist.
However, each capitalist does not get back the full surplus-value produced by their workers. Some of it goes to other capitalists – bankers, landlords and so on – and some of it goes in tax to the government. This latter includes company tax, individual capitalists’ taxes and the pay-as-you-earn tax of their employees.
The less total tax is paid, the more surplus-value there is to be converted into private profit for the capitalist. This includes cuts in the tax on workers, since tax on workers in developed capitalist countries like NZ generally comes out of surplus-value. So tax cuts, including for workers, reduce the drain on surplus-value for the capitalist.
Of course, this also means less money for the government to spend on public services, services which often benefit workers since they can’t afford to pay for private health, education and so on. The money spent on public services is often called the ‘social wage’. So, with tax cuts, the workers get more money in the hand, but end up losing part of the social wage.
When workers’ wages have been held down the way they have in New Zealand in recent decades, workers will often be keen to get any kind of increase in income. Workers see and experience immediately more money in the hand and may not think about the potential loss of part of the social wage.
So employers prefer tax cuts because they don’t cost them anything, and then, on top of this, they get the biggest tax cuts anyway.
By contrast, workers’ wage rises cut into the surplus-value of their exploiters. Wage rises mean that part of the surplus-value which they have produced is returned to them at the expense of their exploiters, rather than at the expense of government social spending.
On the ideological side, there is also a good reason why the ruling rich prefer tax cuts. Capitalist society is divided into two major classes – an exploited class (workers) and an exploiting class (employers). Although the employers are very aware of this – and they use a whole armoury of legislation to maintain their position – they don’t want workers to think in class terms. That might lead to workers waging a serious class struggle for the ownership and control of all the wealth working people produce.
Rather, the capitalists want everyone to think that we all belong to the same social group. We are all merely ‘consumers’ or we are all really ‘taxpayers’ (or both). Indeed when leading ‘new right’ politician Roger Douglas set up his own political party in New Zealand in the early 1990s, he called it the ‘Association of Consumers and Taxpayers’ (ACT), instead of the Association of Capitalist Exploiters (which is what it really stands for). In the south of Ireland, the establishment of the Progressive Democrats (or regressive autocrats, as they were really) represented a similar phenomenon.
The idea of low prices and low taxes promotes this kind of consciousness, as against workers’ class consciousness. Of course, what Walmart-level prices mean in a capitalist economy is subsistence wages for workers in China and other places that the bargain stores import commodities from. And what low income tax and low company taxes mean in a capitalist society is high indirect tax – Roger Douglas, after all, was the architect of GST, a huge tax-gathering mechanism which hits workers hardest – and the commodification of a range of services which were once provided for free by the state. This process is also evident in both the twenty-six and six county states.
Interestingly, the twenty-six county state, like most other western capitalist states, has a capital gains tax. It’s interesting to see how comparatively little this collects, however – €244 in 2011, about 2.5$ of what was collected in VAT!
In Ireland, the plunder of wealth by hundreds of years of English, then British, colonial rule created chronic under-development across most of the island, coupled with lop-sided development especially in the relation to the north-east with the rest of the island. The emergence of imperialism and the plunder of the economy of the island by a range of imperialisms meant new forms of lop-sided development, of which the growth of the non-productive, parasitical financial sector is an extreme, but logical, example.
Investment in the artificial economy leads to job losses in the real economy; investment in the real economy means that workers create more and more value while receiving proportionately less of it in the form of wages, even when wages rise. And rising wages would still be offset by an increase in VAT.
For workers, even when the system gives with one hand (wage rises), it takes away with the other (VAT and price rises). The only way out is for workers to take control of the economy and plan investment, production, distribution and exchange on the basis of what we need to have a good and secure life.
The entire attempt of the twenty-six county establishment to make workers pay for a crisis made by capital needs to be opposed. One useful demand in what would need to be a wider platform based around workers’ interests could be “Abolish VAT!” That demand can also unite employed workers with the unemployed and other beneficiaries.
 National is the main party in government in New Zealand.