Brian Keegan: Bigger government will come at a cost

Two very different organisations, Social Justice Ireland and Ibec have in recent weeks been making proposals on how Ireland’s problems can be tackled.

It does seem there is a trend towards having greater government involvement in resolving social and economic issues. This trend may be borne from impatience with the queues in our health service and the difficulties associated with commuting and public transport. The continuing lack of affordable accommodation is now affecting more sectors than the “typical” homeless — the problem is extending to other areas such as student accommodation, borne out by the protests in UCC and other third-level institutions. If these are to be fixed by bigger government, their resolution requires more public funding.

That means more borrowing or higher taxes.

Compared with many other OECD countries, Ireland takes only a modest slice of its GDP through taxation. If we want to provide more money for health care, housing, education, environment and transport, 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.

In a comprehensive report, Social Justice Ireland is positing an additional per annum tax target of some €3bn. To achieve this, they’re putting forward ideas like a minimum effective corporation tax rate of 6% (which is lower than the current effective corporation tax rate) and the removal of tax breaks for high-income earners, coupled with providing refundable tax credits for those whose income threshold is insufficiently low to avail of them.

None of these ideas are bad in themselves, but they all involve impractical targets with dubious yields. For instance, income tax relief at the top rate of tax has been abolished for many years except for pension contributions and nursing home expenses. Surely pension provision and elder care contribute to social justice?

Ibec’s vision is business has gotten too big too fast. Their argument seems to be that public — in particular transport — infrastructurehas not developed at a rate comparable to the recovery in Irish business over the past few years. Rather than state specific tax measures Ibec is proposing the establishment of a new commission on taxation to identify sustainable tax streams.

Again, there is something of a contradiction here.

Generally speaking, tax yields grow in direct proportion to GDP. All else being equal, a 1% increase in GDP signals a 1% increase in tax yields. If Ibec’s arguments are accepted, this one-to-one relationship has not been adequate in the past few years to fund the infrastructure required for the Irish commercial environment. The inevitable consequence is a commission on taxation would have to look not just for sustainable taxes, but for ways to raise taxes more quickly than GDP increases.

Irish people are not fond of new taxes or levies — remember the water charge?

The politicians in the next government who are charged with tackling Ireland’s social and infrastructure problems will be caught between a rock and a hard place. Both Ibec and Social Justice Ireland are part of an emerging consensus that more public investment is required with a corresponding requirement for higher levels of taxation. There is no consensus whatsoever on how that can be achieved.

Brian Keegan is director of public policy at Chartered Accountants Ireland