Wednesday, 24 June 2009

The burdens of a low tax society

Sli Eile: Received wisdom in political economy establishment thinking here in Ireland is that taxes are a ‘burden’ (in other words not nice and to be avoided if you pardon the pun) and that the way out of the present calamitous budgetary situation is via spending cuts more than tax hikes (which, it is claimed, would further damage competitiveness, work incentive and add to deflationary pressures).

Writing in the Irish Times, recently, Ray Kinsella asserted that:
Now let’s examine revenue, which has collapsed over the last two years. Let’s assume that it will grow by 2 per cent on average for the next five years. That’s pretty generous for an economy dependent on international recovery and a domestic economy that is running on empty. This would result in revenue of about €38 billion after five years.
Kinsella, in common with most other economists, does not see raising taxes to any significant extent as part of a recovery-with-fairness strategy. In fact, he states
this will require cuts in public expenditure, not the kind of counter-productive and socially insensitive cuts which we have had to date. Somebody is going to have to ask the elephant, very politely, to leave the room. For elephant, read size of public sector.

So, the elephant is the public sector wage bill which equals numbers employed (including most professional economists) multiplied by average salary per unit. This assumes a number of things including:

Our public sector is ‘bloated’ in terms of unproductive workers; and
Pay, on average, in the public sector is too high to allow the private (especially traded) sector to regain competitive advantage.

Suffice it to say that the evidence for a bloated public sector in Ireland is very thin indeed. The OECD Review of the Irish Public Service published in 2008 found that the overall level of public sector employment and spending was modest in Ireland compared to other OECD countries.

But, the real elephant in the parlour is taxes. There is, I would argue, considerable scope for raising taxes as one part of an overall strategy to re-start (and reform) the economy? Colm Keenan reports that Irish taxes as % of Gross Domestic Product are low by EU standards:

The ratio for Ireland was 31.2% in 2007 compared to a (weighted) EU average of 39.8%. You can download the tables in Excel here

and the full Report there

It may be objected that comparing taxes to GDP is inappropriate for Ireland since we have on the highest gaps between GDP and GNP arising from profit repatriation (and transfer-pricing of multinationals). Even if this argument is accepted (which I don’t) taxes as % of GNP in 2007 in Ireland was 36.9 – still below the EU average in 2007.

However, it is not legitimate in my view to base total tax comparisons on GNP since all of GDP including profits of multinational companies can be taxed by Irish public authorities. Alternatively, if people insist on using GNP for comparisons of tax take as % of national income then they should deduct corporate taxes paid by MNCs. You can't have it both ways.

Expect a lot more hot air on taxes with the publication of the long-awaited Commission on Taxation soon as the ground is prepared for more public spending cuts in December and further tax hikes on PAYEE earners.


Anonymous said...

Even the IMF are saying that there is scope to raise taxes and broader our tax base... so I think there is actually an emerging consensus on this issue?

As for the public sector wage bill... well this will have to fall too... so it's not really an eithe raise taxesr/or reduce the public sector wage bill, it's both!

Slí Eile said...

That some increase in taxes is accepted is not the issue. The real issue is what scope there is to:
cut public sector wage bill (around €20bn)
transfers including Soc Welf (at least as much again)
other things
Where do you start:
health centres
another 10% on top of 10% already in pay and levies for lower paid?
PS workers are an easy target right now. But recall that another 10% on €20 bn is 'only' €2bn and probably much less given taxes and other leakages.
How far must we see the nation bleeding to pay for the mistakes and folly of the past?
There has to be saner fairer way? Holding spending on welfare plus salaries of those below a certain threshold, some pruning of wasteful spending and then expanding targetted capital spending is the way to go. Meantime, raise taxes, abolish most reliefs and go after tax evaders and avoiders.

Anonymous said...

Yes, I agree, it is very much a question of how much and fairness should be a part of this. The distributional effects of public sector wage cuts, tax cuts, and de-universalisation of social welfare need to be thoroughly investigated, from both an efficiency perspective and a normative perspective (justice, fairness, community cohesiveness etc...).

But basically, we need to start in all of these areas... we just need to distribute the burden appropriately. For me, this means much higher cuts on higher earning individuals.... but it doesn't mean completely letting off lower income earners :( Remember, prices are coming down - less income inequality - actually puts teachers, nurses, police in a much better position (unless they were mortgaged)! What might be better than fighting to maintain high public sector wages would be a debt cancellation program for mortgage holders in unsustainable positions.