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James Fitzsimons: Inequality tax could get economy back on top again

The problem with the Irish economy is not that we did everything wrong, but we don't know what to do when we're on top. It's easier to be submissive and think of Europe.

We should be forging ahead with a new plan for Ireland's development in the EU and restoring our economic credibility.

Up to 2007 we showed we could be winners. Since 2008 we demonstrated a capacity to withstand the most harrowing austerity measures that any country has endured. It's time to get back in the driving seat. We have few valuable resources in this country, but we have a well-educated population. If we cannot find solutions to get us back on top again, how can we expect others to invest in our abilities?

There are two things impeding our recovery. The first is our obsession with the myth that banks cannot be responsible for their own losses. The second is thinking we can save them. We are one of the smallest countries in the EU, making up less than 1 per cent of the population. We don't want to default and nobody else wants us to default, but robbing Peter to pay Paul is no solution. And that's all we've done since the troika took control.

We are the exception to the rule. The EU can save the European banks, but Ireland cannot. Financial markets repeatedly downgraded every move the EU made to contain the financial contagion. Its lack of confidence vindicates our claim to a better deal. We may be guilty of embracing a financial system that helped fuel our economic growth. We might have harnessed it better than any other country relative to our size. And that was our downfall.

We are victims of the European banking system as much as we are part of the problem. It's a pity that our Government cannot see it this way. When it should focus on our financial recovery, it is doling out penance. Even worse than that, it is appeasing the "gods" by sacrificing the innocent. It would achieve much more if it understood the problem and set about finding an Irish solution. The European banks are in such disarray that anything we pay back may be lost and will make little difference to the final solution.

Meanwhile if the EU wants to dress it up as "business as usual" it can roll over the loans using its own resources. But repayment should be deferred until it resolves the bigger issues that exist in the European banks. Essentially the EU should underwrite the Irish debt that already exists.

Having removed or deferred repayment of what we owe would leave only our balance of payments between us, and a welcome back to international money markets. It may not be quite as simple as that, but until we move in this direction the Irish economy is doomed to stagnation and dependence on our rich neighbours in Europe.

There is no guarantee that the Irish banks will lend as businesses and households may require. That is a matter for financial regulation and one where a competent government could play a role. We might not see another Celtic Tiger in our lifetimes, but neither is it improbable that the environment can be cultivated to return to growth. And if we can cast aside the shackles that restrain us there is no reason why our recovery cannot be faster and more pronounced than for any other country. The problem is that those in charge are willing to accept what they have when they could use their powers to spread it around.

The great debate continues in the US and elsewhere as to the growing disparity between rich and poor. There has been talk of a Brandeis tax in the US. It may be more conceptual than real, but it has interesting and useful attributes that would help in our own system. First of all it attempts to monitor and control the growing disparity between the income of the rich and poor. In 1980 the top 1 per cent made 12.5 times the average household income in the US. By 2006 it made 36 times that income. Whatever about taking more from the rich, a Brandeis tax would seek to restore the balance by levying an annual tax on the top 1 per cent.

Mr Brandeis was concerned with the issue nearly 100 years ago. His concerns were with the way that this would create labour and social unrest as the gap widened. There would be some equity if all boats were raised by the same tide. But even today the disparity continues to grow, whether it's between rich and poor, private sector and public services, or between corporate and personal. Inequality leads to dissatisfaction and inefficiency. It impedes progress and stifles prosperity at a national level.

Just as there will always be the poor, so too will there be the rich. But we could reduce the gap so that those who are least well-off have a dignified existence by right as opposed to someone else's choice or whim. Nothing has been done to tax the rich relative to their ability to pay, or to consider taking more from companies that can afford to pay as they hoard their profits. The Brandeis tax would seek an equitable contribution. It would be easier to apply to the rich than to corporate entities, but the concept could be used to restore the imbalance for both. If our Government wasted less time analysing past indiscretions and pandering to those who don't have our interests at heart, they could strive to find the solutions that we await and that are achievable.

The same principle could be applied to maintain a balance between private sector and public service. A similar index could maintain equilibrium of income. The intention is not to penalise the public sector but to find balance in how the austerity measures are applied throughout society. There is no reason why it could not be used to lift all boats in the public service relative to the private sector, when recovery gets under way.

A recent OECD report highlighted a global problem for income disparity between rich and poor. In Britain the income of the top 10 per cent of high earners was 12 times that of the 10 per cent at the bottom of the scale. In 1985 it was only eight times.

If we return to the Brandeis principle, society should be better off if there is less of a disparity between rich and poor. The OECD report does not confirm this, but it claims that more than half of people feel that governments should do something to reduce the gap. Pressure is on, but those who control the purse strings still hold the balance of power.

We didn't get the solutions that we thought a new government should bring. A Brandeis tax would be a good starting point for the Government to regain control and restore some credibility. We are surviving in a rich man's world and little more. The Government needs to create a society where rich, poor and middle class can live in harmony. There will always be those who do not fit into what society has to offer. There will always be 2 to 3 per cent who feel it is better that they eke out an existence rather than make the effort to compete for something better. At the other end there are those who will strive to have it all.

The Government's role should be to ensure that the rest, who strive to realise their full potential, could keep most of what they create. It should be capable of redistribution of wealth, without fear of failure. This is the problem facing all governments, but maybe ours more than most. When the Government comes up with a viable plan for Ireland, it won't need to award gold stars to justify the existence of its ministers. Until then we can only live in hope.

James Fitzsimons is an independent financial adviser specialising in tax and financial planning

Sunday Independent