We all want the services, but we just don't want to pay for them
Without new taxes, income tax must rise. The Commission on Taxation had a chance to shout 'Stop' but flunked it
OF all the gibberish currently being flung from all sides at the unfortunate Irish public, it would be hard to beat the terms of reference of the Commission on Taxation -- or at least that part of them which asked the Commission to be mindful of the need to keep Ireland a low-tax economy.
Alas, there is nothing the Commission can do to keep Ireland a low-tax economy. That is the prerogative of the people who drew up the terms of reference -- the Government. And they can do that only by keeping Ireland a low-spend economy.
Which, of course, they have not done The last few years saw real growth in public spending on a scale which may never have been exceeded in a modern European economy.
It is still going up -- by about seven per cent more this year. With national income set to fall by around eight per cent, there should be a whopping 10 percentage point increase in public spending's share of the economy.
Don't feel foolish if you thought that, actually, we were enduring severe spending cuts. You thought right. Mr Lenihan did indeed make all kinds of unpopular spending cuts. But rising unemployment, and higher interest rate payments on a spiralling national debt meant total spending will still go up.
And economies are not supposed to shrink, especially not at this speed. If they do, all the logic gets turned upside down. That ferocious drop in the income earned by the country means public spending's share goes up even faster than the spending itself.
The upshot of all this is that Ireland is not a low-tax economy, but a high-tax economy which is not paying its taxes. Its citizens are buying public services worth over €300m a week -- whatever their quality may be -- without paying for them.
Incredibly, the Commission on Taxation accepted the mission impossible of turning a high-spending economy into a low-tax one. "These recommendations ... . are compatible with keeping Ireland a low-tax economy," it says in the foreword to last week's report.
I have read that sentence several times, but still have no idea what it means. It is difficult to know even what it is supposed to mean. In the context of the report itself, it could mean that Ireland should be a low- income tax economy. That, indeed, is the thrust of the report and it has a lot to recommend it. The simplest logic says that, of the three kinds of tax -- on work, spending or accumulated wealth -- taxes on work are likely to be the most harmful.
But such choices mean little unless basic reality is confronted. The first is the difficulty of persuading Irish people that, in fact, they pay very little tax overall. Yet it's true. Even if the Irish public service were a model of efficiency, quality and competitive wage rates, it could not be funded by the €40bn a year which seems to be underlying Irish tax revenue.
Do the maths. That figure is a handy €10,000 a year in taxes from every person in the country. Even in its shrunken state, income is about €35,000. A tax take of 28 per cent is not enough to pay for what we want.
In the real world, you have to pay for what you want. In the unreal world of government speeches and terms of reference, you don't. So people were naturally upset to see a whole range of unpleasant new taxes proposed in the report, for this supposedly low-tax economy.
To get any sense in the debate, one must start at the other end of the equation. How much should government cost? A round of public sector pay cuts averaging 10 per cent, and a large voluntary redundancy programme, might get current public spending down to €50bn a year. If it were then frozen at that level until economic growth resumed, the necessary increase in taxation might be held to €10bn a year.
If you think the first bit is unlikely to happen, I am inclined to agree with you. But the second has to happen in the end, except that, without the first the tax increase will be more like €15bn a year.
Without new taxes, including a substantial sum from property, this enormous increase will fall mainly on income taxes, and marginal rates will end up back at Eighties' levels of 70 per cent or more.
People close to government say there is already an acceptance that this is the only feasible political route. Brian Cowen's comments on the report imply the same.
The commission had a chance to shout "Stop!" but flunked it. The media had a second chance, but flunked it even more badly. We may escape a property tax, but don't be fooled for a moment into thinking we'll be better off as a result -- or paying less tax.
