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Brendan Keenan: At some point, tax revenues must meet cost of services

IT was the Bourbons, the ancient rulers of France, who learnt nothing and forgot nothing. But perhaps we have been a little unfair to the Bourbons. It seems to be a common enough failing.

Lessons are not so easily learned from past experience. We may know what went wrong in the past, but that does not mean we can think of something better the next time.

That is one possible explanation for the confused thrashing about on taxation. Still, it is a bit depressing that so little seems to have been learned from the experiences of the closing decades of the last century, when taxes first soared and then were slashed.

Everyone agreed that the taxation system created by the crisis of the 1980s was unacceptable. They may have differed on what should be done about it, but something had to be done. It bore too heavily on wage earners, as compared with other groups, and very high deductions at relatively low levels of earnings deterred people from taking work and encouraged nixers.

A second feature of the Irish tax system was its heavy reliance on spending taxes. The main argument against that is that it bears more heavily on those on low incomes, while the taxes which might help reduce VAT and excise would fall on employers and/or the better-off.

The intervening 30 years seem not to have inspired any thoughts on how things might be done differently. The same characteristics are re-appearing as income tax rises to close the deficits.

Budget data from the Department of Finance showed what has been happening, and how quickly. A single worker earning €40,000 a year -- which is above average earnings, paid 19pc of his income in tax in 2008, and 24pc last year. The "marginal" tax take from the last €7,000 earned went from 47pc to 52pc.

Someone earning €100,000 a year saw the tax bite on their earnings go from 32pc to 39pc. The switch to the Universal Social Charge saw a bigger increase in the marginal rate, which went from 43pc -- which is lower than that for workers' earning less -- to an equal 52pc.

These figures are given as examples. They should be given as policy. This is the nature of the income tax system being constructed. One would like to assume that the merging pattern is intentional: that there is a plan and a strategy behind it. It seems more likely that the only real consideration is the need to raise money.

Of course, the purpose of taxation is to finance public spending. If spending increases faster than the economy, the tax burden must rise. That is what happened in the 1980s, and is happening again now.

One thing that did not happen then, and is not happening now, is any serious study of what the spending figure ought to be. There appears to be nothing easier than letting public spending rise rapidly, but reducing it is regarded as nigh on impossible.

Yet the size of the government, as a proportion of national income, is just about the most fundamental political decision any society can make. There is a wide ideological split as to what the right size should be, but no political decision on the matter appears to have been actually taken. It is all just an accident.

The enormous flow of funds within Irish society -- €55bn a year -- to finance basic government spending seems to be a matter of chance. The last two governments increased it by around €20bn and then decided it would fall by almost €6bn over the course of the five-year plan.

The new government endorsed that decision. But why that figure? Why not a bigger reduction? Why not a smaller?

The answer, almost certainly, is that the last government thought it was all they could manage, and this government agrees.

It would indeed be a reduction of a kind rarely seen in any country. The health spending review published this week, and the large protests over cuts in very small schools show how difficult it is going to be to find that €6bn. But difficulty does not qualify as policy.

This, by the way, has nothing to do with bank costs, or the ballooning interest bill. They are extra. It is just the cost of public services and minimal public investment.

Tax revenues must meet that cost at some point. They are still about €8bn a year shy. It is amazing how this simplest of sums seems to escape everyone's attention.

Each worker would have to contribute another €2,000 a year in income tax to meet that bill, assuming the present contribution of income taxes to total revenues remains the same. The implications of that also deserve more attention.

The government clearly recognises the risks to employment from such a steep rise in labour taxes. It left income tax largely untouched in the Budget.

The main reason given was that this might encourage more consumer spending, but there must also be doubts, given the slippage in income tax revenues last year, that increases are becoming self-defeating.

In fact, there must be serious doubt as to whether the Irish income tax system can finance a public sector which, when everything is added together, will amount to half the economy. It was designed -- although designed is hardly the right word -- to do much less than that.

It may have been bizarre that workers entered the top rate at less than average industrial earnings, but the average ones paid just 15pc in overall tax. With two children, child benefit meant they were actually net recipients from the State.

There have been changes, but 2012's taxation of 24pc on average earnings hardly seems sufficient to fund the public sector the country has constructed.

The problem is not the top rate -- although it should apply at higher incomes than it does at present -- but the 20pc rate on the bulk of incomes. It is too low to meet the demands which are going to be made on it.

The politics of a large rise in the standard rate, even if accompanied by more tax on higher incomes, are poisonous.

Not as poisonous, though, as the abolition of large swathes of payments from the State to citizens and the privatisation, along with redundancies of many government services to prevent such increases. Something is going to have to give.

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