Monday 16 September 2019

Government taking easy route by overtaxing the squeezed middle

Minister Paschal Donohoe
Minister Paschal Donohoe

David McWilliams

With the Budget just ahead of us, it is timely to remind ourselves of the original Colbert report. I don't mean Stephen Colbert, rather Jean Baptiste Colbert. He was the extraordinarily talented finance minister of Louis XIV who radically overhauled the French economy of the early 17th century, generating the revenues that were subsequently squandered by Louis and his free-spending grandson.

Ultimately, Colbert's ability to raise taxes emboldened the French royalty to build more and more monuments to their own vanity, fuelling the discontent that led to the Revolution. His attitude to taxation can be summed up by this brilliant, but rather cynical, quotation: "The art of taxation consists in so plucking the goose as to obtain the largest number of feathers with the least possible amount of hissing."

The goose that hisses most gets taxed least. Normally, in any society, those who hiss most tend to be those either at the top, who are extremely powerful and have most to lose, or those at the bottom, who are the neediest and thus have least to give. Those in the middle are taxed most because they hiss least.

Over the years, as tax systems have been constructed with the hissing goose in mind, the outcome is economically inefficient. This is because the decent hard work of the many is taxed the most in a gradual way so that this approach to taxation becomes regarded as normal.

In contrast, the hissing goose gets overlooked, thus no taxes are levied on his assets and, over time, this ends up being regarded as normal.

Bear this hissing goose in mind when the Government unveils its tax proposal in a few weeks. Colbert's cynical and deeply political advice to Paschal Donohoe (pictured inset) would be to do nothing radical, prevent the goose from hissing and suck it up.

However, if we want to create a tax system that is both equitable and efficient and prepares this country for the deep challenges of globalisation, it would be wrong to be politically expedient at Budget time.

What about being bold? (And maybe smart as well as bold - after all, those with a knowledge of history will appreciate that following Colbert's cynical advice ultimately led to the guillotine!)

When we look forensically, ignoring the hissing geese, at the Irish tax system we can see clearly that the system contributes enormously to the twin problems of the "squeezed middle" and their children. The first dilemma for the squeezed middle is that even on decent salaries, they have no money left at the end of the month. This prevents them from saving for a deposit to address the other problem: affordable accommodation. The Irish tax system contributes enormously to rendering most people broke at the end of the month. As this column pointed out last week, the Irish tax system penalises work over wealth. In addition, excessive reliance on excise duty and Vat means that the indirect tax system pushes up the cost of living directly.

The twin impact of these choices is to lower take-home pay and increase retail prices. Both factors undermine workers' incomes, which is why so many people here have nothing left at the end of the month.

Property wealth should be taxed more than income to make working hard worthwhile. Moreover, increases in property taxes should be directly offset by cuts in income tax.

The Taoiseach this week said he wouldn't increase property taxes. This makes no sense because a country with a housing problem needs to eliminate the speculative aspect to our housing bubble, therefore a property tax and a tax on "house hoarding" or second houses is even more essential.

But with one eye on the notion of the hissing goose, let's look at our tax system to reveal who pays what.

Our Government took in just over €47bn in taxes last year. More than €19bn of this was raised from taxes on wages. These are taxes on effort and hard work. A further €12bn was taken in Vat. Vat is a tax on buying and selling almost everything (except for food and children's clothes). It's a tax on economic activity, commerce and the wheels that make the system go around.

Nearly €6bn was raised in excise duty - basically petrol, fags and booze. Once electric cars become a reality, the petrol component of this tax will collapse. Excise duty also pushes up prices directly and eats into take-home pay.

On the other hand, land is not taxed at all despite the fact that land - with the exception of agricultural land that is being actively used - is the least productive of all assets.

People create innovation, capital increases productivity and the economy is increasingly moving to being a service economy. Innovation and creativity doesn't depend on land or housing.

Yet despite this, we raise only 1pc of our tax from houses. So investing in property is seen as tax-efficient. Is it any wonder that the first-time buyer is being priced out of the market by the 'cash buyer'? Without any tax penalty for holding property, wouldn't you put your money in there too?

Also when we look at inheritance tax, we see that less than 1pc of the total tax-take comes from taxing inheritance. Inheritance is the most socially divisive concept known to man because it replicates inequality of opportunity from the start. By the way, before you think I've gone all Marxist, I'm arguing here from the free-market perspective that we should try to give all the kids a chance so that their talents, rather than their inheritance, determines how far they go in life.

The societal problem with this is that we know that wealth inequality in Ireland is quite dramatic. Latest Central Bank figures show the top 10pc in Ireland own more than 40pc of the country's wealth. We also know that most of that wealth is made up of land and property.

And furthermore, we know that the majority of wealth in Ireland is "earned" in the traditional way - you get it from Daddy!

Clearly, a tax system that penalises workers through high marginal rates of personal taxation once they start to make incomes over €35,000 - but doesn't tax the assets that account for most of the wealth inequality in the country -, is a deeply unfair system.

But talk of taxing land and you will hear the goose, a big loud one hissing about his constitutional right not to be taxed!

Because the PAYE worker doesn't hiss so loud, she gets taxed most. And the Vat and excise golden goose hardly makes a noise, so she gets her feathers plucked at will.

The overall conclusion is that expediency rather than vision will continue to drive Irish tax policy, making the rich richer and rendering the squeeze of the middle more suffocating.

The moral of the story is that the people who get up early in the morning don't hiss.

Irish Independent

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