Originally posted on Business Post 10 September 2022.
The findings of the current Commission on Taxation and Welfare come at a moment where inflation is rampant, and they could well prove to be a harbinger of impending economic mayhem.
What is the best early predictor of economic chaos? Is it a slump in GDP, or a surge in inflation or interest rates, or perhaps a dip in the purchasing managers index? In this country, it may be the establishment of a Commission on Taxation.
While the findings of the current Commission on Taxation (and Welfare, to give it its full title) have been seeping out in the press in the past few days, its report will land at a time of inflation not seen since the 1980s, and of energy chaos not seen since the 1970s.
Its predecessor commission, the second of that name, was announced in early 2008 when we still thought things were booming, but published in 2009 when it was clearly evident they were not. The original of the species, the first Commission on Taxation, was mooted in the late 1970s, but concluded in the grinding economic difficulties of the mid-1980s.
All of these tax commissions were made up of knowledgeable and committed people. Their reports were careful and informed, and there is no reason to think that the report of the current commission will be any different.
Only their timing is lousy. Taxation is based on technocratic principles, but ultimately it is a political process. The maxim of that long-ago and otherwise forgotten French minister for finance, that taxation is the art of plucking a goose with the minimum amount of hissing, remains true.
This maxim tells us all we need to know in advance about the likely shape of the budget which is now just a fortnight away. Those of us in industry associations who lobby at the annual National Economic Dialogue and write anxious pre-budget submissions to government may have been troubling deaf heaven with our bootless cries. Instead, there are likely to be just two imperatives as Budget 2023 is framed.
The first is to look after citizens and businesses whose livelihoods are being crippled by energy costs and inflation. Here, we should benefit from the lessons of the pandemic. The pandemic budgets of 2020 and 2021 were interventionist to an extent not seen in the previous decade.
The 2007-08 crash left politicians and policymakers with a horror of manipulating the tax system to any purpose other than maximising tax collection. No serious attempts were made to help address homelessness, infrastructure deficits, or education and healthcare capacity shortfalls with tax incentives and reliefs.
By contrast, interventionism was the watchword during the pandemic. The income tax system was thrown into reverse and used to subsidise wages, businesses were given what were in effect interest-free loans by deferring collection of Vat and PAYE, and Vat rates were temporarily reduced.
This year’s economic rebound strongly suggests that temporary interventionist tax policies can work extremely well. Temporary reductions in Vat and excise can make inflated prices more manageable for people. Income tax reductions (unlikely to be as temporary because, after an exceptional inflationary period, not all prices go down) will make goods feel more affordable, particularly fuel. Sentiment is everything.
An attractive and effective tax package should, from the political perspective, also quieten potentially noisy opposition benches. A percentage income tax or Vat reduction trumps a fancy tax policy or a principled position any time.
The second imperative is to ensure that the exchequer continues to be able to provide help. The exchequer returns published on September 2 are unusually rosy. Perhaps more important, though, from the budgetary perspective, was the Department of Finance Annual Taxation Report published the previous day. This report confirms that the Irish exchequer is funded by higher income taxpayers, corporate activity and consumer spending.
As long as those three sources are guarded, an appropriate exchequer response to a serious crisis such as the current situation is possible. There are no steps that any government can take to guarantee their preservation, but a prudent budget will ensure that at least these sources are not threatened.
Amid all these considerations, it is unlikely that the concerns of any individual business sector or industry group will feature large in the budgetary arithmetic. Nor is it likely that there will be anything too new or innovative in how taxes are raised or collected. Instead, we may well see a series of targeted and reversible tax-relieving measures to supplement direct help provided under the social welfare code – an income tax relief is not much help if you’re not paying tax in the first place.
The report of the Commission on Taxation and Welfare is due to be formally published shortly after budget day. Its conclusions will surely not be discarded, but new tax ideas are more likely to feature in future national budgets framed during less stormy economic times. And if, at some stage, a future finance minister announces the establishment of a fourth such commission, history suggests it will be time to prepare for the worst.
Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland
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