Wednesday, 29 July 2009

Guest post by Eoin O Broin: Time to raise taxes

Eoin O Broin: The Commission on Taxation is due to complete its work later this week.

Established in February 2008, its remit was to ‘review the structure, efficiency and appropriateness of the Irish taxation system’. Its report is expected to help the government set the framework for tax reform for the coming decade.

Its terms of reference included a commitment to ‘keep the overall tax burden low’ and a ‘guarantee that the 12.5% corporation tax rate will remain’.

Sources close to the Commission indicate that, while the report will go some way to simplifying the notoriously complex system currently in place, it will keep its word on maintaining a low tax take.

If this proves to be the case, should we welcome the report? Absolutely not!

One of the great myths of our time is that low-tax economies are more competitive. There is no evidence to support this claim.

A quick look at the World Competitiveness Scoreboard for any recent year demonstrates that there are more high tax countries in the top ten than there are low tax countries. In particular Norway, Sweden and Finland always feature prominently as amongst the world most competitive economies, despite their relatively high tax takes.

The real determinants of competitiveness are science, technology, education and affordable health and childcare all of which require investment by the state.

And where does the state get the cash to invest? It gets it from taxation of course.

And here’s our problem. Ireland has one of the lowest tax takes of any the EU’s 27 member states. In 2007, the total tax revenue as a percentage of GDP was 31%. Only Latvia, Slovakia, Lithuania and Romania took less.

At the other end of the scale, world leaders in competitiveness such as Sweden, Denmark and Finland had tax revenues from 44% to 51% of GDP.

You don’t have to be an economist to conclude that if you have Latvian levels of taxation you can't have Scandinavian levels of investment in job creation or public services.

In the same year, Ireland had the third lowest level of government expenditure as a percentage of GDP in the EU at 34% of GDP. Only Lithuania and Estonia fared worse. Again, at the top end of the spectrum, the Scandinavian countries ranged from 49% to 54%.

There is also a clear link between a country’s total tax take and the levels of inequality. The larger a country's tax take, the more money it has to invest in various forms of social protection and wealth redistribution. In 2008, Ireland spent 18% of GDP on social protections compared to Sweden’s 32%.

So what does all of this tell us?

If you want greater competitiveness and less inequality, you need to have enough money to invest in research and development, education, job creation, public services and social protection.

If you don’t, then your economy will be weak and your society crippled with inequality.

It is time to make start making the argument to raise taxes, for the good of the economy and the good of society. If the report from the Commission on Taxation fails to do this, then it should be thrown in the bin.
Eoin O Broin is the Chairperson of Dublin Sinn Fein, a member of the party's Ard Comhairle and author of Sinn Fein and the Politics of Left Republicanism (Pluto 2009)


Ronan L said...

Isn't it a tad simplistic to cite a couple of correlations that happily converge with the author's prior beliefs?
I think we should be asking more pertinent questions at this point in our nation's economic ill-health. On the above post, I would suggest the following:
What is competitiveness? Why do we want it?
Is it about job creation? Or topping an odd composite index with no economic theory behind it used predominantly for marketing purposes by Investment Promotion Agencies?
Surely we should encouraging a more detailed level of analysis than this. I firmly believe that taxes can be used to achieve social good, by better pricing resources - such as roads, water, carbon and land - that the market will price incorrectly. Taxes for taxes' sake, though, will hardly get us motoring up whatever competitiveness league table we care to look at.

Brian Woods said...

I am genuinely concerned that so few commentators, here and on the other site,'across the street', do not appear to have a clear understanding of the real trouble we are in. A few commentators do seem to have some grasp of the problems, but most do not.

Our economy 'grew' by inputting credit and outputting debt, not by producing something which could be sold outside the country so that a real surplus would accrue here - not in some other land.

No amount of wishful thinking will make our debts evaporate. And until we get rid of the debt we will continue our slow-motion, deflationary spiral. We are moving forwards into the past - like to 1999! We have some ways to go yet. Select your decade - I fancy the 1930's if we continue with our current mindsets and responses.

Brian P

Slí Eile said...

Very much concur with your post. The issue will be well aired when the Commission Report is out. Whatever the weather plenty to read this summer!
Interesting comment. Could you elaborate a little. I didn't quite follow your points. If you are saying that debt levels and bad credit policies were the main problem surely we still have to consider the lack of systematic innovation and growth on world markets for indigeneous firms - with some notable exceptions.

Anonymous said...

Eoin's argument is fallacious and simplistic - besides isn't SF's policy in Northern Ireland to lower taxes? What he says is of limited relevance as his argument draws simplistic causal relationships between statistics that are not amenable to such linear analysis. He also seems not to have even the most basic understanding of the feedback mechanism between tax rates and economic growth. Such arguments are typical for amateur economists? All his post demonstrates to me is SF's economic illiteracy.
Comparison with the Nordic economies is wrong-headed; compare like-with-like! We don't have the industrial base or natural resources of Norway. Sheile Killian put up a much better explanation and critique of the low tax approach.
Economic policy needs to be grounded in realities not social theory. Increase corporate taxes and you will stagnate the economy even further - is it right-wing to admit that? Increase personal taxation on high-income individuals and you will get capital flight, tax evasion and reduce investment. Those are realities irrespective of your ideology.
Short of the nationalisation of key productive assets - there is little point in suggesting any naive alternatives to massive cutbacks at this stage. The only honest voices are Fianna Fáil and the Socialist Party - it's one or the other as the middle ground has disappeared.
Besides, with rising taxes and the collapse in GDP - the percentages Eoin desires might obtain anyhow (so much for his analysis!) but with little benefit.

Anonymous said...

More competitiiveness and less inequality. Sounds wonderful. Less inequality? We all probably have a good idea what this might mean. But competitiveness? Um, not too sure about this one. Perhaps it has something to do with markets. Mightn't want to get too close - full of neocons, greedy types, gombeens, capitalists, exploiters of labour, parasites. We could devise policy and regulation to make sure they do socially and economically things - and to prevent them doing damage to society and the economy. Probably not. That seems like hard work and we might get contaminated. Anyway markets don't really work, do they? It's best to just tax them and tax them hard. They're so dumb and greedy they'll keep doing socially and economically useful things and won't spend time and effort avoiding and evading the higher taxes.

Dream on.