If we want more money for public services, then more than just the rich must pay

Mar 30, 2020

Originally published on Business Post, 16 February 2020

It seems we now have the most left-leaning Dáil in decades. And although at this stage we are not yet clear on what shape the government is going to take, there is a good chance that we may also end up with the most left-leaning administration in decades too.

As a result, it’s apt to ask whether Irish businesses should be concerned about the kind of economic and fiscal policies that might be introduced.

Daft economic policies that are damaging to business prospects are not the exclusive preserve of left-wing politicians. The daftest economic policy anywhere, Brexit, was the brainchild of a British Tory government which could be described as many things, but certainly not left-wing.

Developed economies tend to have robust governance and civil service implementation structures which ensure that the worst excesses and pipe dreams of politicians don't automatically get anywhere beyond the pages of their manifestos.

Those structures at times may seem undemocratic, but just as often, they are the badge of a country which is not a failed state.

Ireland has had such public governance arrangements and civil service institutions for a very long time. Some of the checks and balances, for example, the special rules to raise taxes with a finance bill, are written into the Constitution.

Some tax-raising mechanisms are almost a century old – the Office of the Revenue Commissioners was founded by an order of a Sinn Féin TD you may have heard of called Michael Collins. Other controls are relatively new, such as the so-called ‘Two Pack’ EU budget rules for the eurozone countries.

The result is that the tax policies of any government, be it left-wing or right-wing, must survive triage both from parliamentary and constitutional rules, and from the civil service which must implement them.

At this point, there’s little value in revisiting in minute detail the manifestos of the political parties – to do so would be to re-fight the election. Suffice to say that the tax plans of Sinn Féin, the Green party, the Social Democrats and Labour reflect a change in approach to the taxation of income and capital from what we have become accustomed to over the last decade, with wealth taxes and financial transaction taxes in the mix.

The degree of fiscal conservatism of the last decade has been unusual. Previously, the cornerstones of our tax policy – inheritance tax, capital gains tax, even corporation tax itself – were all introduced by coalition governments with a left-wing component provided by the Labour Party.

Even the 12.5 per cent rate of corporation tax, which for over 20 years has been the effective shorthand for the policy of successive Irish governments’ approach to companies, was the brainchild of a Labour finance minister, Ruairi Quinn.

But since then, fundamental changes to our tax system have been rare. USC is just income tax by another name. The local property tax collects less than 1 per cent of the total tax. Instead of reform, we have tinkered with bands and rates, narrowing the base and all the while pushing the system in a more left-wing direction.

Our income tax system is based on the 80/20 rule. Roughly 80 per cent of income tax is collected from 20 per cent of individuals. Most goods and services in this country, particularly essential items such as food, healthcare and housing, are either exempt from Vat or are taxed at the lower 13.5 per cent rate.

The 23 per cent Vat rate applies to a relatively small category of goods by European standards. The vast amounts of corporation tax collected means that companies pay about €2,000 in tax each year for every person in the country. In tax policy terms, this is about as left as it gets.

However, the position at the macro level is different and might even be described as right-wing. Compared with many other OECD countries, Ireland takes only a modest slice of its GDP through taxation.

If we aspire to provide more money for healthcare, social welfare, retirement benefits, housing, education, environment and local government, then the choices are not about simply raising the top rate of tax for higher earners. The real choice would involve a major policy decision to increase the overall levels of taxation within the economy.

This could involve introducing things like a broader-based local property tax at higher rates. It could involve introducing higher Vat rates and higher PRSI contributions for employers, employees and the self-employed alike.

It could mean bringing in a Swiss-style wealth tax, which currently contributes 6 per cent of total revenue in that country, while exempting many gains, gifts and inheritances so that there is some wealth to tax.

It could also mean risking our successful corporation tax regime by increasing rates, or reducing incentives for research and development and capital investment. It should mean taxing everyone a little more, because while tax is about redistribution, it is not about punishment.

The next government will claim to be more attentive to voters’ concerns and requests, but will it make the big fiscal choices? Will the ground truly tilt left? History suggests not.

Dr Brian Keegan is director of public policy at Chartered Accountants Ireland