6 November 2008 Edition
Radical reform of tax system required
THERE are two important developments emerging from within our present economic crisis. The first is that a space is opening up to critique the failings of the Celtic Tiger model of economic development. The second is that as part of that critique various commentators are asking how the state intends to fund future social and economic development.
Speaking at an Institute of Public Administration conference some weeks ago, Department of Finance Secretary General David Doyle asked the rhetorical question: “Can Ireland have Scandinavian levels of public services with Boston levels of taxation?”
Noel Whelan, writing in The Irish Times some weeks later, opined that “Ireland’s tax base is too narrow and our tax rates are too low” to sustain current levels of public expenditure.
Neither Doyle nor Whelan was arguing for increases in taxation or public spending. However, their comments hit on one of the central questions facing Irish society today.
The Celtic Tiger model was built on a simple fiscal foundation: attract foreign direct investment through low corporation tax, encourage investment in construction and services through generous tax relief, and stimulate consumer spending through easy access to low-cost credit. Hey presto, you have yourself a debt and consumption-driven economic boom.
Unfortunately, this simple formula contained a number of problems which are now all too apparent.
The first is that debt-driven growth is unsustainable. When the bubble bursts, lending stops, debts go bad and consumption grinds to a halt.
The second is that, since tax revenue becomes excessively dependent on consumption taxes – stamp duty, service charges and VAT – when the consumption stops, so do the taxes, leaving a huge gap in the public finances.
The third problem is less talked about but equally important: namely that the low-tax model of economic growth generates increasing levels of inequality.
Low levels of direct taxation – whether on earnings or profits – are the primary reason why Ireland continues to lag behind our EU and OECD counterparts on investment in public services. Our tax system is one of the most inequitable in the developed world. Too much tax is paid by people and companies at the lower end and not enough tax if any is paid by those at the high end.
Countries with more progressive and sustainable tax systems are not only more economically dynamic but also more equal.
Greater levels of public spending – on universal public services, targeted measures to end inequality and poverty, and strategic investment in sustainable economic development – require greater tax revenues. More importantly, when spent correctly, such investment not only makes society more prosperous and more equal, but also more resilient against the twists and turns of the global economy.
The question therefore is not whether we can have Scandinavian levels of public services with Boston levels of tax but whether we are willing to put up with the many negative consequences that flow from a low-tax economic strategy.
There has never been a better time to make the case for a fundamental change of economic policy, including a radical change of our tax system.
An Phoblacht Magazine
AN PHOBLACHT MAGAZINE:
- The first edition of this new magazine will feature a 10 page special on the life and legacy of our leader Martin McGuinness to mark the first anniversary of his untimely passing.
- It will include a personal reminiscence by Gerry Adams and contributions from the McGuinness family.
- There will also be an exclusive interview with our new Uachtarán Mary Lou McDonald.