Yesterday's exchequer returns mark the end of Ireland's tax strategy since the end of the 1990s. As capital gains taxes collapse and stamp duty returns are all but eliminated, corporation tax is also dropping as Ireland is particularly vulnerable in this area given the amount of transfer pricing and profit shifting for tax purposes within our corporate sector.
This marks the end of what has been a strategy for public revenues that could only work during the boom times. We are now faced with a heavy reliance on income tax and VAT at a time when both are falling (see table below)
Capital gains taxes and corporation taxes won't be improving any time soon (and many of the great and good will be writing off their other taxes against capital losses for years to come). Stamp duty revenues are gone.
We can expand the tax base - carbon taxes and property taxes are the obvious candidates. If a property tax is introduced, we should consider a credit for stamp duty paid in the past ten years (reducing revenue but increasing ability to pay - and fairness). The recent QNHS employment figures show job losses among the younger age groups, who are likely to be carrying heavy mortgages. Any property tax increases would need to be accompanied by anti-foreclosure measures.
We can raise income taxes - some of this has happened already and more is on the way. But we need to be careful how and where we do this.
As Aedin Doris notes in her comment here: "Remember that the tax-free portion of income is pretty much set to exempt those working full-time, full-year on the minimum wage; if 38% of the working population aren’t paying tax, it’s because we have a lot of people working part-time and/or on low hourly pay".
And of course, those people working for these low wages are particularly likely to suffer from the lack of the social, collective goods that come with strong public services in other countries.
This leads her to conclude:
"In my view, widening the tax net should be considered only after all possible tax expenditures have been pruned away, and the extent to which any one individual can benefit from them strictly limited."
So let's clean out a lot of those tax reliefs. Their incentive effects, which were often minimal or perverse, are largely irrelevant these days when stimulus will be much more important. The government cut the state agencies it didn't like pretty quickly when it wanted to - let's have a quick run at the tax reliefs this time around.
The crux of the matter is that this gap is too huge to close with cuts and tax increases, even though those will play a part. We have scope for borrowing, given our low debt ratio but this will give a few years 'breathing space' at best.
What can close the gap is growth. After all, in 1987 we introduced some cuts but the public finances improved when we managed to generate growth. We need to be crafting a stimulus plan for growth, incorporating fiscal measures and programmes that generate employment and are geared towards the medium to long term developmental needs of the economy and society (education and training, greening the infrastructure and economy, small business development, innovation, urban design, caring and other social and reproductive work, and more). Bell and Blanchflower suggest a plan for the UK while Block and Keller propose 'stim-novation' measures, combining stimulus with innovation policy, for the US (see also this report from the Information Technology and Innovation Foundation). We have barely begun this discussion.
Our growth cannot free ride on international trends as it did in the 1990s - it will have to be based on developing new capacities and forms of participation in the economy that keep people attached to the labour market through the recession, meet social and economic needs, and build capabilities that will serve us well when recovery comes. Fixing the financial system so that private investment is forthcoming will be an essential part of this process. Public investment - and therefore borrowing - will be crucial.
This is the kind of debate that might have occurred were the institutions of social partnership playing a central role in the process. ICTU's ten point plan is perhaps the only attempt at such a plan to this point. It is a debate we need to have urgently.