Taxing matters

Having just raised the issue of monetary policy (the Euro), I shall also mention fiscal policy. When I first had a job in Ireland, one of the less satisfying elements was the high taxation to which we were all subjected. All elements of both direct and indirect tax were punitive, and Ireland was known as a high tax economy. For those who believe that raising tax levels is an easy answer to our national debt problems, it may be instructive to note that we were there once and it didn’t help.

Now in more recent times the picture has changed. Corporate tax is low, income tax is more in line with European norms and perhaps lower than in some countries, and highly unusually, a huge proportion of the population is outside the income tax net altogether; I know of no other country where the proportion of non-tax payers at lower income levels is so high. As we have already noted, there is no property tax, no local taxation, and there is no wealth tax (though Ireland experimented with that rather unsuccessfully in the 1970s). Indirect taxation, on the other hand, is high by international standards.

The low tax framework has been one of the major drivers in foreign direct investment. I know this for a fact, because I was involved in discussions around one or two of the most important investments over recent years, and Ireland’s tax régime was the deciding factor that prompted them to go for here rather than some other European country.

Having said that, Ireland’s tax net needs to be widened, as there are too many people either escaping liability altogether or manipulating expenses or exemptions to such as an extent as to undermine the national interest. But whatever it is that we do, Ireland needs to have fiscal policy levers to underpin economic and social policy. In this context, the constantly threatened attempt to impose an EU-wide harmonisation of taxation is a major risk to national interests. While Ireland’s EU Commissioner assures everyone that corporation tax harmonisation is not on the agenda, media reports suggest otherwise, and this will become one of the most important issues for government over the period ahead. If we don’t have tax advantages, we have very few others in competition with geographically more advantageously placed and bigger and wealthier countries. This is one benefit we must hold on to.

Taxing land? Scottish Greens suggest Land Value Tax

It has long been a matter of debate as to how to fund local government and local facilities and developments. The traditional method in these islands was the system known as ‘rates’, which were a local tax based on historic property values. In Ireland domestic property taxes were abolished in the later 1970s, while in Britain they now consist of the so-called Council Tax, which applies to residential property.

Now in Scotland the Green Party has suggested the introduction of a Land Value Tax, which they propose should be based on the value of land without taking into account any development that might be on it, and levied at 3.16 per cent of that value. As a matter of interest, the research commissioned by the Scottish Greens suggests that Scotland (in terms of its land) has a total value of £12.3 billion. They believe this will create fair local taxation while at the same time providing a disincentive to property speculation.

Whether this is a workable proposal is something that might need to be considered further. But it seems to me to be clear that property taxation is one of those issues that will need to be addressed properly at this period of public exchequer shortfalls, and at least this is a basis for such a discussion.

Taxing matters

At the Fianna Fail Ard-Fheis and on RTE radio, the Taoiseach Brian Cowen stated several times this past weekend that taxes in Ireland will rise. We don’t know when, by how much, for how long and how often, and we don’t know whether he is talking about income tax, capital taxes, corporate tax or indirect taxation (such as VAT) – but we know it will be at least some of these, and by noticeable amounts. I would stick with my view that whatever is to be done should be done in one go, to maximise the benefit for the exchequer and to minimise the effect on sentiment that is bound to flow from a continuing process of tax increases over time. The trick will also be to do this without completely losing the ability to present Ireland as a low-tax economy. If we lose that, we are likely to lose a lot of prospective foreign direct investment.

But my other concern is this. The prospect of tax increases may suggest that a good way of dealing with higher education funding might not be through tuition fees, but through some form of taxation targeted at those who have benefited from university degrees. Indeed, this was the gist of a proposal from Fine Gael education spokesperson Brian Hayes made in November 2008, and which I believe is currently Fine Gael policy. The thrust of this is that third level graduates would, on entering employment, be liable to pay a special tax that might be collected through the PRSI (social insurance) system.

On the face of it this looks a reasonable way of addressing higher education funding issues, but in fact it is not. There are a number of problems with such a proposal, but the two key ones are these: that those emigrating – who perhaps should above all be paying for their education as the benefit of it will be going to another country – will be exempt; and that while money may be collected this way, there is absolutely no guarantee that all of it (or even any of it) will actually go to the universities and colleges. No Minister for Finance will ever accept the idea of ringfencing revenue receipts for any particular purpose, regardless of how it was collected.

Although I know that it is not an easy step to take, in the end there simply is no viable alternative to university tuition fees. Sooner or later – and I hope and expect sooner, we shall need to take this step. And when we do, we will also at last be able to allocate appropriate and much more generous resources to the needs of those who come from disadvantaged backgrounds.

On the road to God knows where

It is said that Barack Obama’s Chief of Staff Rahm Emanuel remarked recently that you should never let a good crisis go to waste. In fact, there are many reasons for suggesting that Ireland’s current difficulties provide an opportunity to re-consider our economy, our political habits and our society. People are generally willing to think more radically when the status quo isn’t working as well as it should. So we need to ask ourselves where we are going; and we need to use the debate prompted by that question to set out a vision. Armed with the vision, we are more likely to be willing to make sacrifices, and we are also more likely to be able to contribute to the process that will lead to our destination.

So far we haven’t done much of this. What’s going on right now is a kind of national firefighting, with teams of people pouring water over conflagrations here and there, and others running around shouting, and others again in shock looking at the charred remains of some of the fires that wouldn’t go out. You get the picture.

Much of the public commentary, and I think a good deal of the chatter at the bar over a pint, is about the Horrible Bankers. Without wanting to take away from the truly amazing story of what some of these good people apparently considered right and proper in conducting their business, at this point it’s a sideshow. Putting the men from the financial boardrooms in the stocks and throwing rotten tomatoes at them may be perfectly justifiable and even fun, but right now it doesn’t help us at all. We need to move beyond the firefighting and finger wagging and get to the vision thing. We need to know where we’re going next and how we’ll get there.

A few people have started making suggestions about a very different form of society and economy than the one that brought us the Celtic Tiger. Higher taxes (at least for the rich), public ownership of this and that, cast iron regulation of the other, are amongst the things on the menu. The Boston versus Berlin thing is also being resurrected, but it’s a little tricky because Berlin is also in a bit of chaos right now and Boston may, in the Obama era, be rather unlike Boston.

The serious point of this post is that when you want to recover from a crisis you need a strategy, not merely tactics. And the strategy requires a vision. And it may be time to suggest, gently, that cutting public expenditure is not a vision (even if it is right), and may not even be a tactic. Nor is raising taxes. Some of the big questions we need to be asking now include: who will be creating this country’s wealth in five years’ time? To what extent and in what way do we expect to distribute that wealth? As we keep talking about innovation, what kind of innovation do we want Ireland to be known for, and how can we harness that innovation to generate both growth and jobs?

Some of these questions are put and addressed in the Government’s plan, Building Ireland’s Smart Economy. But on the whole that document is too busy, and perhaps contains too many detailed ideas without setting it in the context of an overall vision. And most important of all, that vision, when we have it, needs to be communicated directly to the people.