Tax cuts for the public

The Socialist Party's message in the elections to Alþingi on September 25, 2021:Fourth offerpresented to voters around Pentecost:

SOCIALIST TAX POLICY PART V:TAX CUTS FOR THE PUBLIC

The development of public finances under neoliberalism can be defined in several steps. First, taxes on capital owners and large corporations were lowered with the promise that this would not lead to a loss of revenue for public funds, as tax cuts would stimulate the economy so much that capital owners and large corporations would actually pay higher taxes even if the tax rate was lowered. In addition, lower taxes on capital and corporate owners would reduce tax evasion and tax avoidance.

This, of course, did not happen. Initially, public services were not cut; instead, debts were accumulated in the belief that tax revenues would soon increase. When that did not happen, it was proposed that state assets be sold to the wealthy to reduce interest costs and decrease debts. The wealthy were, in other words, offered to buy public assets with the same money they received due to tax cuts, and the goal was to finance the tax cuts.

But this, of course, did not fix the state's operating position. There was still a gap after the tax cuts for the wealthy. The state spent more than it earned because its revenue had been reduced. Then, the measure was taken to charge for services that were previously free, services that people had considered paid for through taxes. This applied to healthcare, the education system, and then almost all public services.

By introducing payments into public services, a step was taken towards their marketization and privatization was prepared. If the service was not part of the collective insurance we pay for with our taxes, if it is like any other service we pay for; does it matter who operates the service? was asked. And the wealthy, who had previously been primarily in business, increasingly moved into areas that had previously belonged to the social sphere.

Privatization did not reduce the cost to the state treasury; on the contrary, profits were added for the owners of the companies that took over public operations. The state treasury was therefore just as badly off after tax cuts for the rich, despite the sale of assets, charging for public services, and privatization. Then there was nothing left but to raise taxes on the public, making them finance tax cuts for the rich with an increased tax burden.

This is the storyline of public finances during the neoliberal years. This did not happen exactly in this order; tax increases on the public began soon and before privatization was in full swing; but this well describes how the gears of neoliberalism worked.

Socialists intend to reverse the trend of neoliberalism, reclaim public power from the hands of the wealthy class, funds, assets, and resources, and rebuild public services. But here we want to explain how socialists intend to lighten the tax burden of the neoliberal years on the public.

V. Tax cuts for the public: Poverty shall not be taxed

When tax withholding was introduced, people on minimum wages paid no taxes, including retirees, disabled individuals, students, and people with incomes lower than minimum wages. Today, those on minimum wages pay about 17% of their income in tax, over 55 thousand krónur. Yet it is known that people on minimum wages have great difficulty making ends meet.

People on the lowest disability benefits, 240 thousand kr. per month, pay almost 25 thousand kr. of that in tax. People on municipal support receive almost 213 thousand kr. per month and pay over 16 thousand kr. of that in tax. This is entirely indefensible.

Before the era of neoliberalism, none of these people paid taxes. It is immoral for the Minister of Finance to target the poorest people, people who cannot afford food for the month, and take money from them to run the state treasury. A state treasury built on such injustice is fundamentally immoral.

Socialists completely reject the taxation of poverty in this manner. It should be legislated that it is prohibited to collect income tax or municipal tax from people with incomes lower than the normal cost of living. The tax system needs to be changed by lowering the lowest tax bracket and increasing the personal tax credit, but raising the tax rate in higher brackets in return, so that tax cuts for people below the poverty line do not lower the tax burden throughout the entire tax scale.

V. Tax cuts for the public: Taxes on middle and lower incomes reduced

Income tax on all the public was drastically increased during the neoliberal years. This is evident, for example, in the fact that in the 1991 budget, individual income tax was estimated to be around 12.8 billion krónur, or 42.9 billion krónur in present value. In the 2021 budget, however, individual income tax is expected to yield 186.6 billion krónur to the state treasury.

Wages have, of course, increased along the way, but not by that much. If income tax had followed wage development, it should be around 83.5 billion krónur this year. The difference is more than one hundred billion, 103.1 billion krónur, which the state collects more from wage earners today than thirty years ago. This clearly shows who paid for the tax cuts for capital and corporate owners. And these were not small amounts that were transferred.

Another way to highlight this is to point out that in 1991, 12.6 percent of state revenue was expected to come from individual income tax. Today, this ratio is 24.1%, despite capital income being separated from other income. By this measure, tax collection has gone from 97.5 billion krónur to 186.6 billion krónur. Individual income tax was 3.2% of GDP in 1991 but will be around 6.0% this year. No matter what measure is used, tax collection from the public through individual income tax has almost doubled during the neoliberal years, the years when members of the Independence Party claim to have lowered taxes.

The ratio of state revenue to GDP was 25.3% in the 1991 budget, but this year it is expected to be 24.7%. The difference is minimal, 18.8 billion krónur. The main theme of public finances during the neoliberal years was the transfer of the tax burden from the rich to the public. All tax cuts were for the rich. The public only received tax increases.

If we shift the perspective to individuals, the tax-free threshold in 1991 was 192 thousand kr. in present value, but today it is almost 162 thousand kr. Over these thirty years, however, wages have increased significantly more than prices. If based on the wage index, the tax-free threshold was over 374 thousand kr. in 1991, but as mentioned, it is almost 162 thousand kr. today. The difference is striking, unsettling.

Today, the lowest wages are 351 thousand kr. per month. Of that, people pay almost 60 thousand kr. in tax, or about 17%. In 1991, no tax was paid on the lowest wages, 0%. Low-income individuals have lost 720 thousand kr. per year in tax beyond what they paid before neoliberalism.

Today, the median gross wages are about 750 thousand kr. per month. Of that, people pay about 211 thousand kr. in tax, or 28.2%. If we were to take these wages back to 1991 using the wage index and apply tax according to the then-current tax laws, the tax rate would be 19.9%. Middle-income individuals have lost 747 thousand kr. per year in tax beyond what they paid before neoliberalism.

The socialists' offer is to undo the tax changes of the neoliberal years and reduce the income tax burden on middle and lower incomes by 700 thousand kr. per year. This is not a more revolutionary idea than that it would merely bring us back to the justice that prevailed thirty years ago and had prevailed for decades then.

V. Tax cuts for the public: Child benefits increased

One of the characteristics of the neoliberal years is the erosion of child benefits. And this goes hand in hand with the weaker economic position of young people, which in turn is a consequence of the financialization of the entire housing system and the weaker position of wage earners in the labor market. This has undermined the living standards of young people, many of whom are on the margins of the housing market where housing costs are high, and on the margins of the labor market where wages are low and employment is insecure. Young people own fewer assets but often still owe a lot, for example, student loans. And young people have a heavier burden of support due to children.

In this light, one might assume that child benefits would have been significantly increased during the neoliberal period. But this was not the case at all. On the contrary, child benefits were thoroughly cut.

According to the 2021 budget, just under 14 billion krónur are to be allocated to child benefits this year. That is about 161 thousand kr. per child. In 1991, before neoliberalism began to hollow out the tax system from within, child benefits were over 16 billion in present value, or almost 224 thousand kr. per child, but then the age of majority was 16 years, not 18.

But it is more natural to compare these figures to the economy's turnover rather than price changes. Child benefits were 1.2% of GDP in 1991 but are only just over 0.4% this year. To increase child benefits so they become the same proportion of GDP this year as in 1991, 37.5 billion krónur would need to be paid to children this year. Child benefits have therefore effectively decreased by 23.5 billion krónur over this thirty-year period, partly to finance tax cuts for capital and corporate owners.

For comparison, it would cost about 52.9 billion krónur to provide all children in the country with a personal tax credit that would be payable if the parents did not utilize it. That is where we should aim in a few secure steps so that all children receive child benefits of over 50 thousand kr. per month, the same amount adults receive as a personal tax credit. Partially, the increase would be financed by steeper tax brackets and high-income tiers, so that parents with incomes in the third tax bracket would be equally situated afterwards, but all families with children with good middle incomes and below would be much better off.

V. Tax cuts for the public: Housing benefits increased

Housing support also decreased during the neoliberal years, but not as much as child benefits. Interest benefits were 0.63 percent of GDP in 1991, but housing support is now 0.44 percent of GDP. The difference is equivalent to the state treasury having to pay out 19.7 billion krónur in housing support, 6 billion krónur more than is currently the case.

The difference, however, is that in recent years a more severe housing crisis has raged than has been seen since the end of the war. The increase in housing costs has devastated the household budgets of tens of thousands of households with middle and lower incomes. Those caught between low incomes and high rents have been pushed into deep poverty or relentless work slavery. Many are working two, even three jobs to afford rent and food for the month for themselves and their children. There is a state of emergency in many homes. And this must be met with emergency measures.

Of course, the state must solve the housing crisis. On the one hand, by building 30 thousand social housing units in ten years, as socialists have proposed, and on the other hand, with measures to curb the rental market, as socialists will propose in their offer to tenants. But until these measures address the housing shortage and the chaos in the rental market, the state treasury must compensate those who suffer from the unregulated housing market.

No one should have to pay more than a quarter of their income in housing costs. This means that low-wage earners with 351 thousand kr. per month and almost 282 thousand kr. net income according to current tax rules should not pay more than just over 70 thousand kr. in rent. If the situation in the rental market is such, due to the inaction of authorities, that people with these incomes have to rent a small apartment for 230 thousand kr., as is common today, then the state treasury must provide these people with 160 thousand kr. in housing support. The maximum support today of just over 32 thousand kr. is nowhere near solving the problems of these people.

Such high housing support flowing from the state through tenants to landlords is akin to blood money. They are like a ransom paid to speculators to free tenants from the brink of starvation. It would, of course, be more beneficial for the state to undertake housing construction to alleviate the housing crisis and free people, and to impose a rent cap to protect tenants from usurious rents. But until that has been done, tenants must be supported out of poverty. It is not the tenants' fault that the housing market is as it is; tenants are the people affected by the market, bearing the cost of its financialization without being to blame for the situation.

Socialists will seek to recover the costs of the housing market collapse from those responsible, the people who have financialized the entire housing system, and transfer the funds to tenants who have had to endure the consequences of the speculators' actions.

V. Tax cuts for the public: Charging stopped

Charging for public services is one of the tools of neoliberalism to transfer power and wealth to the rich. The purpose of charging is to marketize services that were previously outside the market, to accustom people to paying for education and healthcare like any other service.

Charging also has the purpose of making a larger portion of the population averse to taxes. The very richest consider themselves to lose by paying taxes; they pay more into the state treasury than they get back. In the post-war years, this applied to less than 1% of the population. But with income linkages and charging, a larger group has calculated themselves to the same conclusion, that they pay more to the state than they get back. This is often miscalculated, as people are tempted to forget that they can lose their health due to illness, accidents, or age, and underestimate the support of society, which is often difficult to discern in a simple calculation. But neoliberalism has succeeded; more people today believe that their well-being improves more with tax cuts than with increased public services.

Charging is thus primarily political, a part of a propaganda war, and has no social purpose. Healthcare that collects visit fees will not be better run because of it. And public services, primarily medical services and education, are not of a nature where it is wise to control demand with price. There is very little risk of people overusing these services; there is a much greater risk of people underusing them.

And that is precisely the outcome of the neoliberal years. The less affluent deny themselves healthcare and education due to charging. The systems we built up in the last century precisely to increase equality among people today promote inequality.

The state and our common funds are our common property. With public services, this acts as collective insurance for the residents and for society as a whole. It is better for everyone if we pay for medical care while we are fully healthy in the labor market. It is an utterly insane idea to charge people when they are sick and already struggling with their lives due to illness and its consequences, including loss of income due to reduced work.

The same applies to education and other public services. It is natural that we pay for education after we have enjoyed it, after we enter the labor market, rather than when we are low-income students in school.

The prerequisites for a strong society are free public services and infrastructure. This improves the living standards of all the public, especially those with the lowest incomes, thus acting as an equalizer. And equality is the most important goal if we want to build trust, empathy, and compassion within society.

But free infrastructure is also important for the economy. It promotes competition by lowering the initial costs for businesses, as all businesses have equal access to infrastructure. Free public services provide businesses with more educated and healthier staff and care for children while parents are at work. It was the experience of all countries in our part of the world that a strong development of free public infrastructure and services was a prerequisite for increased prosperity. The degradation of these infrastructures during the neoliberal period is a threat to society.

Socialists completely reject all ideas of marketization and privatization of the community's infrastructure and basic systems and are opposed to all charging for public services. Instead, we should begin a massive development of public infrastructure to meet future challenges, to strengthen the economy and general well-being here. This will only be done with social goals as a guiding principle.

The first steps on this path would be to make the use of healthcare, education, and other basic public service systems free for the lowest-income groups; children, students, disabled individuals, retirees, and people on municipal support. And then take the next steps with the goal of completely abolishing charging for public services.

V. Tax cuts for the public: Socialists' offer

The socialists' fourth offer to voters for the autumn elections regarding tax cuts for the public consists of a significant reduction in income tax on middle incomes and below, stopping the taxation of poverty, substantially increasing personal tax credits, child benefits, and housing benefits, and undoing the charging for public services and infrastructure from the neoliberal years.

The prerequisites for building a just society in Iceland are that the tax burden be lifted from the public and transferred to where it belongs. It is an equally urgent task to rebuild the support systems within the tax system, child and housing benefits. Such systems are a prerequisite for increased equality and for all residents of the country to flourish.

But the tax transfer from the wealthy to the public was not the only one during the neoliberal years. At the same time, the corporate tax environment was changed to best serve the wealthiest capital owners and the very largest companies, but much less so sole proprietors, small businesses, and medium-sized businesses. The tax system was effectively used to protect large corporations from competition from smaller ones and to reduce new entry in all industries. The result was the financialization of the economy, which drained power from manufacturing and service companies. This is discussed in the sixth chapter of the socialists' offer to voters on the tax policy of the economy of care, on how to lower taxes on small businesses and strengthen the economy from below.

Here you can read Part V of the offer:Tax cuts for smaller businessesApproved at a joint meeting of the executive and policy committees of the Socialist Party of Iceland on the Saturday before Pentecost, May 22, 2021