The Cedar Lounge Revolution

Talkin’ bout our taxation! March 18, 2009

Posted by WorldbyStorm in Economics, Economy, Irish Politics, media.
2 comments

This very day Sarah Carey in the Irish Times is talking about the ‘cosy consensus on tax’. In between making some startling comments, for instance did you know that Ireland has “the most generous social welfare payments in the EU”, I didn’t and I strongly doubt it (indeed I’ll point you towards this OECD chart which would seem to indicate otherwise and in a spirit of near unlimited generosity check out this benefits and wages calculator, also from the OECD, which very clearly demonstrates… well, go on, give it a go), she comes to the conclusion that the Irish electorate is ‘right-wing bunch who want the government to leave as much money in their own pockets so that they can spend that money in a manner of their choosing’ and that ‘we [sic] were warned repeatedly what would happen when the property bubble burst].’ Although intriguingly she immediately switches from “we” to … “No one can say that they weren’t told. If they didn’t listen, they have only themselves to blame”. Hmmm… As it happens Carey is a self-proclaimed supporter of Fine Gael, so perhaps her view might be just a trifle skewed towards the right.

And yet again an Irish Times commentator takes it upon themselves to argue that they somehow are ‘we’, but… is the overall analysis entirely fair? After all, what of the pages of the Irish Times itself?

So, in a stray moment this week I thought it might be interesting to collate some of Stephen “Severe Budget alert” Collin’s, political editor of the Irish Times, statements on taxation. These days, of course, he is absolutely in lock step with the idea that only spending cuts and increased taxation can save us from ourselves… but it wasn’t always thus.

It sure wasn’t.

Consider his thoughts on the demise of the Progressive Democrats from…er… four months ago in November 2008:

Widely portrayed as the party of the rich, the PDs in fact focused on lifting the crippling tax burden on middle-income earners and ordinary workers. The rich, who have all sorts of ways of avoiding tax, never had much time for the PDs. The well-off, including our super-rich tax exiles, have always tended to favour Fianna Fáil.
…
However, the party went back into office and participated in what may come to be regarded as one of the worst governments in the State’s history. The key mistake of the PDs, whose core value was low tax, was to participate in a government that recklessly increased public spending to unsustainable levels.
…

The benchmarking award to the public service was a spectacular example of the profligacy of the post-2002 Fianna Fáil-PD government. These pay increases coincided with a rapid expansion of the public service to meet the demand for better health and education systems. It was paid for by a construction boom which delivered huge but unsustainable tax revenues. That boom would turn to bust was inevitable; the only question about it was the timing.

Now some of us might be forgiven for thinking that the unsustainable part of the problem was the pretense that an advanced liberal democratic economic system could provide public services on the fiscal equivalent of a sneeze into a handkerchief.

Two months previously Collins had been even more lavish in his praise:

On the economic front, it undoubtedly played a role in the transformation of Ireland from an economic basket case in the 1980s to one of the most prosperous countries in the world. The extent of that role is a subject for debate but things would hardly have turned out the same if the party had never existed. From the very first, the PDs set out with a liberal economic agenda and a heavy stress on tax cutting. This agenda was reviled by all of its opponents 20 years ago yet in the intervening period most of it was implemented.

So good of the Progressive Democrats to take us on a trip from being an economic basket case to… er… being an economic basket case. And by the scenic route… just to show us what we could have had. Note again the heavy stress on the ‘heavy stress on tax cutting’. That agenda, reviled then, is once more out of favour. How strange.

The presence of the PDs in government allowed Fianna Fáil to agree to policies it would have been slow to implement on its own. To be fair to Fianna Fáil, Fine Gael and Labour, all of those parties wrestled with the economic problems of the 1980s and came to accept the need for stringent control of public expenditure to get borrowing down.

What was unique to the PDs was that the party laid such emphasis on the need to cut taxes on work to stimulate economic growth, job creation and prosperity.

The PDs were in the right place at the right time, but it took some courage to propose and develop its agenda in the face of deep hostility from its political opponents, almost all of the media and the social partners.

But the best is kept for last, as when he drags forward as a means of legitimising this view…

One of Ireland’s most distinguished economists, Prof Dermot McAleese, [who] commented some years ago on the general reluctance to acknowledged the role the PDs had played in promoting the economic changes of the past two decades.

And who would the good Professor be? Why none other than a:

The former member of the Central Bank board, [who] remarked that the emergence of the PDs in 1985 had a more positive influence on the economy than many were prepared to recognise.

He expressed the firm opinion that the low-tax, pro-business economy that developed in the 1990s was based in large part on PD policies.

“They proved that there was a constituency for this and they gave the intellectual power to it,” he said.

Yeah. A grateful nation… is… not so grateful.

As we wind the clock back to July 2008 the tone changes as the first indications of a slump appear on the horizon:

THE SUPREME challenge facing the Government, and the one on which it will ultimately be judged, is its capacity to deal with the rapidly deteriorating economy. The constant complaint from the Taoiseach and his Ministers about people talking the economy down is futile and even counterproductive. The mantra only suggests they don’t know what to do in the face of the biggest economic crisis to hit the country since the 1980s.
…
For a start, the Taoiseach and his Ministers need to admit to themselves, if not to their opponents, that much of the problem is home grown and that they made a serious mistake over the past few years by placing so much reliance on the construction boom to fuel the economy. It didn’t take a genius to know that it would inevitably end in tears but repeated warnings were ignored and critics denounced for the sin of “talking down the economy”.

Indeed. But in the ‘low-tax, pro-business economy developed in the 1990s… based in large part on PD policies’ the concentration on the construction boom was inevitable.

In any event, the imposition of the EU guidelines has been good for this country and was one of the main factors in dragging us out of the mire of the debt-ridden 1980s. There is a strong argument against slipping back down the road of excessive borrowing and instead getting to grips with public spending.

Ah-hah.

March 2008 brings us that spin again:

Fianna Fáil’s love affair with the construction industry inflated the property bubble to dangerous heights making the inevitable downturn far worse that it need have been. All the indications are that we are still in the early stages of the collapse in property prices and it is impossible to predict the scale and impact of the crash.

And…

It was, however, certainly possible to predict over the past few years that it would all end in tears. Instead of adopting policies designed to rein in a runaway property market, at a time of record low interest rates, the Government piled fuel on the fire with a range of incentives that enabled construction companies and property speculators to make undreamed-of profits.

it was indeed… and those incentives – tax based incentives – were again part and parcel of ‘low-tax, pro-business’ policies.

Collins now tells us that: “…it didn’t take an economic genius to see what was coming.”

Okaaaay…

Yet curiously in the piece he once more implies that taxation should have stayed where it was and that the public finances could only be addressed by cuts:

The rapid deterioration in the public finances since the beginning of the year is an equally ominous indicator and that is something that is directly under Government control. With spending rising and tax revenues falling, the only question is the scale of the problem that will face the Government as the year rolls on. Given the refusal to face reality for so long, the critical question is whether the Taoiseach and his Minister for Finance are capable of guiding the country through the very difficult times ahead.

And the analysis of the 2007/08 Budget (where the heavy lifting is shared between Paul Tansey and Collins) from the previous December is telling:

The 2008 Budget will be stiffer than expected due to the emergence in recent weeks of a surprisingly large shortfall in this year’s tax receipts. This shortfall will make it much more difficult for Minister for Finance Brian Cowen to deliver any substantive reliefs to taxpayers in next Wednesday’s Budget.

Clearly though, he is right when he says some four or five months later that ‘It didn’t take an economic genius to see what was coming’.

Despite:

The principal cause of the revenue shortfall is a steep decline in stamp duty receipts, reflecting the stalling of activity in the housing sector. Stamp duties are now projected to yield revenues of €3.195 billion in 2007, some €730 million or 18.6 per cent less than was expected at the time of the last Budget.

But more telling again, is a piece from August of 2007 where he contemplates the future of the Labour Party. Here he argues that:

One of the great failures of the Spring era was that while the party was a modernising force on liberal issues it remained rooted in traditional Labour economics.

Dear, dear. Tut, tut.

It watched as Tony Blair shifted the British Labour Party away from its traditional support for trade unions and state enterprise but did not follow suit in this country. Blair actually learned some lessons from the way Spring expelled the Militant Tendency, instilled discipline and projected a modern image for his party but he went much further and reaped the rewards as a result.

By contrast, Labour in Ireland remained wedded to support for those employed by State enterprise rather than representing the customers who use State services.

The crazed fools.

The various tax cuts introduced by the Fianna Fáil-PD governments were opposed vehemently, the privatisation of State companies opposed vigorously, until the unions jumped aboard the PD bandwagon. Popular government law and order initiatives were also resisted until they were suddenly embraced during the election campaign.

Outrageous… but there was one light on the horizon…

It was not until Rabbitte proposed cutting the low rate of tax to 18 per cent shortly before the general election that Labour gave the impression of accepting the huge changes in taxation which have given workers control of far more of their own income than in the past.

Too little, perhaps too late for Collins.

And yet read his thoughts from April of 2007, just before the General Election:

The fact that the emphasis was not on the commitment of the parties to cut the lower rate of tax, or to provide considerably more tax relief for one-income families than the present Government has chosen to do, was frustrating for the two party leaders, Enda Kenny and Pat Rabbitte, who both emphasised the historic nature of their joint policy platform on the economy going into the election campaign.

[Fine Gael and Labour] have performed the unprecedented feat of agreeing all their major tax and spending plans in advance of the election. Both parties are agreed that there will be no increase in either corporation or capital gains tax and they are both committed to the reduction of the standard rate to 18 per cent as well as the indexation of the bands and an extra tax allowance of €5,000 for one-income families.

Wait a second, isn’t that dangerous profligacy with the public finances?

Why, no! It’s prudent…

Brian Cowen maintained that the plan was not as generous to low-income earners as the Fianna Fáil tax plan and he also claimed that the Fine Gael-Labour spending plans would mean that the national debt would start to rise by the end of their term of office. Whether those criticisms are valid or not, the remarkable thing is that the tax and spending plans of the alternative governments are actually quite similar. The Fine Gael-Labour coalition has adopted a relatively prudent approach to the national finances, even if its spending plans appear to be a bit more generous than those of Fianna Fáil.

Again… where are those economic geniuses pointing out the pitfalls ahead?

Well, perhaps they were listening to Michael McDowell also in April 2007 who laid out the bare bones of the strategy championed by large parts of the media…

“Ireland is in the process of continuing radical transformation – it is not something that is yet complete or to be taken for granted. This country is unrecognisable from the failed economic wreck of the mid-1980s. The pace must be kept up if Ireland is to remain at the forefront, to remain the envy of nations across the globe – and most importantly, remain a country that can deliver employment and prosperity to its population,” he said.

….

“Tax reform is an effective instrument in wage moderation and inflation control. We reject the analysis of the left that suggests tax reform follows prosperity. In fact, we consider inaction on tax reform as a threat to continued growth and prosperity, and devise our policies in this context.”

And…

“In 1997, a single person on the average industrial wage paid 22 per cent of their income in income tax. In 2007, such a person will pay just 9 per cent.

“In 1997, the top 1 per cent of income earners contributed 14 per cent of the total income tax take. Now they contribute over 20 per cent. As a result, unemployment has tumbled from “old Europe” levels of over 10 per cent with emigration under the Rainbow, to less than 5 per cent with considerable immigration today.”

And the proposals?

Reduction in the higher rate of income tax to 38 per cent and the lower rate to 18 per cent in the lifetime of the next government.

Adjust tax bands so that a couple, both earning, can earn at least €100,000 and only pay income tax at the standard rate. A single worker could earn €50,000 before hitting a higher tax band, while a married couple with one earner could earn up to €59,000.

Increase tax credits so that couples earning up to €40,000 will pay no income tax. A single worker could earn €20,000 and pay no income tax.

Continue to increase tax credits and bands so that inflation is not used as a tax-raising mechanism.

Abolition of stamp duty for first-time buyers by a new government before the summer.

Remarkable to note that everything was about cutting taxes as if that in and of itself was sufficient in an economy.

Nary a word in all that there was any other element of fiscal management that should be considered… and ponder finally Collin’s words when from the previous February he lauds Pat Rabitte for the Labour tax cuts proposal aired at the Labour Party conference (incidentally, I’m guessing Pat is glad he never had to stand over that particular policy in government):

The cost of the Labour proposal will be more than €1 billion a year but, as Rabbitte pointed out in his conference speech, Minister for Finance Brian Cowen last year pulled in over €5 billion more than he had forecast in his budget projections. In that context, a tax break costing €1 billion looks affordable.

The real appeal of Rabbitte’s proposal is to the middle- and low-income earners, many of them in the private sector, who have not had the benefit of benchmarking and who often don’t even get the national agreement pay rises. These are usually the same people who have to endure long commuting times and who derive little benefit from social partnership agreements.

Labour has been struggling to make itself relevant to these workers, most of whom are not even members of trade unions. The radical tax cut proposed by Rabbitte is designed to widen Labour’s appeal and it has every chance of succeeding.

And lest people worry about leftwingers…

That is why the pitch to the workers on lower and middle incomes makes eminent sense for the party if it wants to widen its base and attract new supporters. Some of its older traditional supporters, who think in terms of “tax and spend”, may be puzzled by the new departure but in fact it was long overdue.

And how to pay for all of this?

Rabbitte can make the case that he proposes to cut the taxes of “the little people” by contrast to Fianna Fáil and the Progressive Democrats, who have focused on higher-rate taxpayers and who have failed to honour the commitment in the Programme for Government that only 20 per cent of taxpayers would actually pay the top rate.

Apart from promising to cut the standard rate to 18 per cent in two years, the Labour leader pledged a series of improvements in public services, all of which will also cost money. He will be asked where it is going to come from but again he can point to the massive unbudgeted surpluses of recent years.

Yeah. Right. Commentators who uncritically accept profoundly ideological policies as economic verities. And a media which then directly shapes the discourse using these ideological policies that then further informs the response of our political parties (who thankfully have backed away from such policies – sharpish!). And we wonder at the state we’re in?