The Law of Unintended Consequences

Jan 04, 2018

Sunday Business Post, 31 December 2017
It’s almost as if a tide of fiscal, regulatory and political uncertainty hit the Western world in 2017.  In Germany the major political parties are still trying to form a government as the AFD, a far right party, has won representation in the Bundestag for the first time in decades.  A new Austrian coalition government already features ministers from a far right party.  After an inconclusive election it took months for the Netherlands to form a government.  Italy is facing into another general election in 2018.  In Spain the elections in Catalonia this month hold a significance greater than ever before following the region’s bid for independence.  The government of Malta is dealing with ugly allegations of corruption.  That’s before even mentioning the UK government’s travails and Brexit.

Whether it’s a cause, a symptom or a consequence of this turbulent tide, there was no shortage of new tax reports, decisions and law during 2017 either.  Despite politician’s claims to the contrary governments have few enough direct levers to pull when directing the course of their countries’ economies.  It’s often the case that tax policy is the handiest one available, even if all the consequences of its use can’t be foreseen.

The best example during 2017 is of course the huge block of US tax law that has been pushed through Congress during the last few months and finalised just before Christmas.  It is worth noting that the US Tax Cuts and Jobs Act faltered at its very first administrative hurdle.  Small discrepancies in the version of the Act as passed by the Senate meant that the bill had to be returned to the House of Representatives for them to vote to re-approve legislation they had already passed. That kind of problem at such an early stage doesn’t augur well for the coherence of the new Act.

Unintended Consequences

It is almost inconceivable that the new US tax law, running as it does to over 1,000 pages, won’t have mistakes or unintended consequences. Most tax law does.  Even our own most recent Finance act, a mere stripling of 118 pages, had to have last-minute corrective surgery in the Seanad.  It was considered necessary to fix the law governing new rates of stamp duty on commercial property to ensure that the higher rate would apply in every selling arrangement.  

It’s easier to understand why it might be tricky to make a tax hike stick, but a tax reduction can have unintended consequences also.  While the overall intent of the US legislation is to give effect to tax cuts broadly across the board, such reductions are unlikely to materialise for all individuals and all businesses.  Only time will tell which US industry sectors will win out, and which US industry sectors might lose out. 

Intended Consequences?

On our side of the Atlantic it seems that the UK authorities are finally beginning to think about which of their industry sectors might gain or lose because of Brexit.  The UK Parliamentary Committee on Exiting the EU chose the days before Christmas to publish the British government’s sectoral analyses of the impact of Brexit. There are 39 of these reports, covering sectors from agriculture to wholesale, with the likes of fisheries, gambling, medical services and the nuclear industry all commented upon. Because parts of the reports are redacted, readers are left to work some things out for themselves.

Take the sectoral analysis of professional services for example, which covers areas such as legal, accounting, research and development, along with areas like advertising, market research and human resources consultancy.  According to the British government analysis there are almost 600,000 firms in the UK providing such services and sustaining 4.6 million jobs, adding £186 billion to the value of the UK economy and generates some 27% of UK exports.  About 60% of the firms in the sector are outside of London and the south-east, and the vast majority are small firms. 

The analysis goes on to list the advantages and supports offered to the sector by EU membership.  This includes recognition of professional qualifications across borders and the entitlement to establish and provide services in other EU territories.  Post Brexit such recognition and entitlement cease to be guaranteed within the EU.  Comparisons are then drawn between EU membership and other existing trade agreements which cover the provision of professional services between countries, none of which seem as favourable.  There is no official conclusion offered on the consequences for the sector of the UK’s leaving the EU.  It’s so obvious that there doesn’t need to be one. 

No Change

Against such a backdrop it may well be that in 2018, stability will be at a premium.  An unwillingness to make sweeping policy changes could be a most useful selling point for a small country like Ireland, highly dependent as we are on external markets and for foreign direct investment.  Maybe the lesson of 2017 was that to sustain the growth in the number of jobs and the overall economic recovery, less change works best when there is chaos all around in other countries. 

While there are intolerable shortfalls in our capacity to deliver on infrastructure, housing and education, having a minority coalition government with a built-in inability to deliver radical change might have been crucial to some of the Irish economic successes of the year.  At least that way, there are fewer unintended consequences.

 Happy New Year.

 

Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland