Originally posted on Business Post 08 November 2021.
Excessively taxing one particular cohort in society may be politically expedient, but it’s not a realistic long-term strategy.
Mary Lou McDonald and Joe Biden make strange bedfellows, but they share similar aspirations. The US president’s investment plans aspire to provide enhanced social supports for his country. So too does the alternative budget of McDonald’s party.
The Sinn Féin plan majors on affordable housing; so does Biden’s. Both feature enhanced childcare policies and proposals on climate change, and while these differ in detail the direction of travel is similar. In each case initiatives are to be paid for by increasing the burden of tax.
Every fair-minded person wants improvements to the social fabric, be it in housing or environment or infrastructure. Yet both leaders seem to assume that few enough fair-minded people might be willing to pay for those improvements.
For the Democrats, reforms are to be paid for by those earning more than $400,000 a year. The Sinn Féin threshold is considerably lower, with €100,000 of earnings apparently being the sweet spot over which citizens cease to be citizens and become mere taxpayers. Both parties are also comfortable with the notion that industry should contribute more to cover the funding gap for their spending aspirations.
This progressive taxation policy approach is acceptable and works up to a point, but when it passes an excessive burden onto any one cohort, no matter who is in that cohort, government finances are left in a vulnerable position. That was the lesson in Ireland in 2008 with the property crash, when tax receipts had become too reliant on the cohorts making their living from the property sector. This is not a hazard peculiar to left-wing ideology, it is simply the way the world works.
Even the most fashionable tax policy can go astray. In a week where the news in the developed world is dominated by COP26, only brave souls will argue against carbon taxation. Yet the lack of choice in our fuel and transport infrastructure renders carbon taxes useless at influencing behavioural change.
It makes no sense to increase social welfare fuel allowances and increase the standard income tax bands and allowances so that people could afford to pay carbon tax, but that was the key feature in last month’s budget. Not only are carbon taxes not delivering change; they have a negative exchequer impact.
There is an argument that the most successful tax policies are the ones which are the least specific to a particular cross-section of the population. A change up or down should apply to the general body of taxpayers. Not everyone pays income tax but everyone pays Vat on many foods and most services. A Vat increase may well be the most equitable way of raising additional revenue. It is certainly the least divisive.
The Sinn Féin alternative budget makes no reference at all to Vat, which is the second largest source of money to the Irish exchequer. Instead, their alternative budget depends on more payments from fewer people, topped up with borrowing. That looks even more risky because it assumes their new policies will cause no disruption to the existing level and source of tax receipts.
The only way the reforms that the US Democrats and Sinn Féin alike are proposing can be paid for, on a sustainable basis, is if the cost is shared. It may be politically expedient to promise largesse to be funded by a small group who mightn't vote for you anyway. Yet the big risk is that those promises can only be delivered for a short period of time before the small group either ups sticks or simply runs into financial difficulties.
It’s hard to collect tax when the small group being relied upon to pay it is not earning much. It gets even harder when short-term tax receipts fail in the face of long-term spending programmes.
The Irish tax system is not perfect, but it is relatively broad-based; higher earners pay proportionately more, and any allowances and reliefs are generally available to most taxpayers. The extent of the US political divisions along party lines limits such policy choice and nuance. That is not the case here yet. The Sinn Féin proposals risk a polarising effect on the policy debate because they narrow the tax base.
Joe Biden and his Democrats may be in power but his party is not fully behind him, his economic and tax plans have made it through the House, but have yet to make it through the Senate. McDonald’s Sinn Féin party seems to be fully behind her, but were they to be in power, would their tax plans survive the rigour of the Irish parliamentary process?
A narrative is emerging that, following its Ard Fheis, the party is in some way moving towards the centre ground. That might be so, but it still has some distance to go with its fiscal policies.
Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland
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