Brian Lenihan

'IS THERE a life after tax?" begged the placard behind the banner of the Association of Customs and Excise Officers. Even the tax collectors were disgusted.

It was 23 January 1980, and 700,000 people had taken to the streets in 37 towns across the country.

The biggest labour demonstrations in Irish history were organised as a response to the government's attempts to close the last massive hole in the public finances. People were angry and they wanted immediate reform of the PAYE system. The new taoiseach Charlie Haughey was the subject of much anger at the protests as posters blasted, 'Tax Charlie's Friends'.

Almost 30 years later, Ireland is a very different place but the scenes like 1980s PAYE marches may not be consigned to history. A few weeks ago the government ruled out tax hikes as a possible means to fill the hole. Yet tax hikes came to the top of the political agenda last week as the government prepares to implement an emergency budget.

The tough measures anticipated in the budget are needed to save an extra €2.5bn to €3bn on top of the €2bn in cuts that have already been announced.

Speaking to the Sunday Tribune after news of the budget broke last week, Fine Gael's Michael Darcy said: "As a backbench TD, I could even see that the numbers didn't add up in the last budget. So what was minister Lenihan doing? Anyone watching the public finances could see that they could never get to the local elections without having another budget."

Darcy told the Dáil in the days after the October budget: "This must be seen as a stopgap enabling budget… another budget is on the cards within a year."

He was right. The emergency budget is on the way and pre-budget speculation is rife again. The structure of the PAYE system provides the government with a quick-fix solution to the crisis, as money can be immediately taken out of the PAYE workers' pay. PAYE workers will be hit and some of them may even start to revisit the question 'Is there life after tax?'

According to statistics recently collated by the Labour party's finance spokeswoman, Joan Burton, through a series of parliamentary questions put to finance minister Brian Lenihan, a small percentage of high income earners pay a huge amount of tax.

Progressive tax system

Figures, based on last year, demonstrate the progressive nature of the tax system. They show that the bottom 32.3% of earners pay no income tax at all. At the other end of the scale, 32.8% of all income tax is paid by the top 2.8% of earners.

"There is much ill-informed comment about taxation. We constantly hear that somebody else should pay; we all have to pay," Lenihan told last weekend's Fianna Fáil ardfheis. "Over the last 10 years when we could afford it, we progressively reduced the tax burden on the lower-paid to the point where 40% of all earners are now outside the tax net. In Britain, all earners above €6,860 are subject to income tax at 20%. In this state, workers can earn €18,300 before they start paying tax, PRSI or the income levy."

Lenihan added: "Tax increases have to be part of the solution to our economic difficulties. But there can be no return to the bad old days of a 64% tax rate."

It has been suggested that those who pay no tax at all may be hit in the emergency budget. It is unclear if this will be done by altering the tax bands, or by applying the 1% levy to everyone, even if they earn less than €18,300.

According to the department of finance, an increase of 1% on the standard tax rate would yield €535m this year, a 2% increase would yield €800m and a 3% increase would yield €1.2bn. At the higher rate of tax, a 1% increase would yield €155m, a 2% rise would yield €310m and a 3% increase would yield €470m.

A new, third rate of tax has been discussed and the department estimates that taxing those who earn over €100,000 at 48% would yield €435m in a full year. It is worth pointing out that all of these yields will be a lot lower if catastrophic job losses continue.

It is understood that the government may opt to tinker with the income levy, and other areas such as health expenses relief, rather than going through the bureaucratic nightmare of altering tax rates in the middle of the year. The government is eager to introduce carbon taxes but implementing new structures for collecting them will take time, so the government may opt for taxes that can be collected more quickly.

The government needs money and needs it fast, so the 'old reliables' will be hit with excise duty increases.

"They will attack the old reliables as they are simple to collect and they have an immediate impact on the economy," said Jackie Masterson, a taxation partner in the Russell Brennan Keane accountancy firm.

Petrol increases likely

In the October budget, the 8c in the price of petrol was expected to reap €166m in 2009 for the government, so another increase is a likely way to increase revenues.

Similarly the 50c increase on a packet of cigarettes last October was estimated to yield €105m in 2009. The government will certainly raise the excise on these again in the new budget.

"Capital gains tax and stamp duty will be left alone as they require transactions to be happening in the economy before they can make money," Masterson added. "The commission on taxation has been given the brief of looking at relief and exemptions so they will probably be left with that brief until later in the year."

One of the more controversial measures being considered is taxing child benefit. Recently, Owen Keenan, former chief executive of Barnardos and current director of Middle Quarter, a consultancy in the non-profit sector, recommended the tax.

"In the current economic situation, I have particular concern for the protection of low-income families," he told the Sunday Tribune. "It could be a way of redistributing income through the tax system if the same payment rates were maintained but were subject to tax depending on parents' income.

"There are families that do not need child benefit so they put it into a bank account for their holidays. It would be regrettable to tax it but if needs must it is something we should do."

Increasing VAT is another option. According to the last budget the VAT increase from 21% to 21.5% was due to yield €208m in 2009, but the collapse of consumer confidence will have obliterated these estimates, making it difficult to estimate how much another VAT increase would yield.

Early childcare supplement will almost certainly be cut and the controversial scrapping of extra social welfare payments at Christmas is also being considered.

Last weekend, Lenihan recalled how, "Seán Lemass along with Ken Whitaker rescued this country from the abyss in the late 1950s. Ray MacSharry did it in the late 1980s."

Lenihan and Cowen's decisions in the coming weeks will go a long towards defining their own political legacies.