Higher taxes AND higher growth are not incompatible

[grapes of wrath]

During economic and political discussions in Ireland it has for some time been regarded as axiomatic that low taxes – income, capital gains and corporation taxes - were critical factors in creating the Celtic Tiger and are also preconditions for future growth in the economy. This idea was strongly promoted by Charlie McCreevy and the PDs, and is a central tenet of what I call we might call the K Club Charlie School of Economics. Low corporation tax undoubtedly was critical and capital gains tax probably much less so. However, the Irish evidence strongly refuted the idea that low income tax rates were critical to the development of high growth rates during the Celtic Tiger era.

Dr Anthony Leddin and Prof Brendan Walsh in an article in the Irish Times in December described the Celtic Tiger economy as a game of two halves. The first part, 1994-2000, was described as essentially an export, investment, consumer-led boom. Subsequently, growth in output was increasingly concentrated in the non-traded construction sector, fuelled by an irrational bubble psychology (and will become a case study in how not to manage an economy).

When Ruairi Quinn (1995-97) was Minister for Finance and during the earlier part of Charlie McCreevy’s tenure in the position overall growth rates, particularly growth in exports, were very impressive. Growth under Ruairi Quinn (95-97) was higher than under McCreevy or Brian Cowen. Growth was in fact quite high in 1994 in the last year of Bertie Ahern as Minister for Finance. The low and high income tax rates were 27% and 48% from 1994 to 1997. In 1998 and 1999 the low and high rates were 24% and 46%. In 2000 the rates were reduced to 22% and 44% by McCreevy and were further reduced to 20% and 42% in 2001. Therefore, in the first, truly impressive phase of the Celtic Tiger era income tax rates were approximately 20% higher than the current rates. The claims of the K Club Charlie School of Economics that low income tax rates are critical for economic growth are, therefore, simply not supported by the evidence.

A freeze in public sector pay seems justified at this stage and/or adjustments to the funding of public sector pensions. However, unless very draconian cuts in salaries in the public service are imposed it is probable that increases in income tax rates (and some other taxes) will be required. The burden needs to be carried fairly if we are to avoid social disruption. An income tax surcharge, probably time limited to 2012, (and which would replace the crude income levies) would be fair.

Charlie McCreevy, aided and abetted by Mary Harney and Bertie Ahern gave us a taxation regime that is not fit for purpose. McCreevy, as EU commissioner, then promoted regulation with a light touch for banking and the financial services. He and his ilk have a lot to answer for, and should be banished into outer darkness when solutions to our current problems are being sought and when economic policies for the future are under consideration. Brian Cowen did not cover himself in glory when Minister for Finance but the seeds of destruction were well established before his tenure in finance. He and the government have to do a lot better this time round and he should cast a cold eye on the current pontifications of the high priests of the K Club Charlie School of Economics.

[TradCat]

However, unless very draconian cuts in salaries in the public service are imposed it is probable that increases in income tax rates (and some other taxes) will be required.

So rather than cutting the salaries of public sector workers they would raise taxes on the private sector where people earn less. I think that would be a crazy road. It's a job killer and it's not fair.

[euroboy]

I've been calling for higher taxes for some time now. I dont believe that our problems can be solved by spending cuts and think the current mantra in political debate and media are leading us down a very dangerous path. I dont have anything aganist cutting wastage in spending but as a nation the govt spend very little as it is. They do however spend it wrongly and that must change.

You mention have a income tax levy until 2012, you are still thinking in the old ideology. Our tax system needs to be changed and permanently, that includes higher income taxes permanently and applied to all, public and private.

It is frankly ridiculous that 1/3 of PAYE workers do not pay income tax. The tax free allowance at 18k needs to be lowered to bring in more people into the tax net. If this was any other country, someone earning 18k would be on perhaps a 2nd tax band, Britain excluded.

Tax rates need also to be considered, but not to high as to act as a disincentive to to take money out of the economy(remember taxes act as transfers and when spend by govt have higher mulpile factor).
There is a a false mantra within political discourse that any rise in taxes is bad, it is not bad. Excessive taxes are bad but when we have such a low tax bruden we can AFFORD and it is ONLY FAIR that we pay higher taxes.

As it stands, there is a rapid and sharp fall in government tax revenues and no-one seems to want to address that apart from token tax increases of 1-2%. Instead govt and media find it more acceptable to talk of spending cuts. Our tax burden is dangeroulsy low(was never very high) and thats just being accepted and spending much take the pain. We are slowly and willingly walking oursleves into a country that will have small govt activity in the economy.

The debate must move on from spending cuts, it diverts attention(no-one has the appitite to) from discussing how to create a fair, balanced and sustainable tax system and how the burden of taxation will fall upon people. That is lacking in media and on discussion boards like this.

It is never nice to have to pay higher taxes but during the boom people had it VERY good, they paid very low taxes and that was 'fine' because construction windfall taxes subsided it. We now know(though politicans, media and the public are in denial about that) that situation was never fine, it was unsustainable and the fall off of revenue from housing has crippled the govt finances.

There needs to be a challenge to the misguided but understandable argument that higher taxes will drain more demand from the economy. Higher taxes will be spend by govt and that will create demand since govt mulplier effect is usuallly higher than households. As the economy improves due to govt spending(govt is the biggest consumer), households will feel more confident about employment and will begin to spend again.


As a side note, did anyone see the Late Late last night and the amount of hands raised in the audience when Pat asked who was willing to take a pay cut. Well the Celtic Tiger might be gone BUT THE GREED OF THE TIGER IS STILL ALIVE AND WELL. I felt very disappointed when just a handful raised their hands.

Another thing that has to be stopped is the blame game, public against private. We are all to blame for the govt mess, no-one is exempt. Its unhelpful and a misuse of time to be blaming the other side for the crisis(in the belief that it will exempt you from resolving the crisis). Everyone has to play their part. Pay cuts might be part of that to help employment in the short term, BUT tax increases must happen and it appears that it will be come time before that happens, judging by the absence tax increases have been from debate. Tax increases must be larger than token 1-2% increases..

[stringjack]

When Ruairi Quinn (1995-97) was Minister for Finance and during the earlier part of Charlie McCreevy’s tenure in the position overall growth rates, particularly growth in exports, were very impressive. Growth under Ruairi Quinn (95-97) was higher than under McCreevy or Brian Cowen. Growth was in fact quite high in 1994 in the last year of Bertie Ahern as Minister for Finance. The low and high income tax rates were 27% and 48% from 1994 to 1997. In 1998 and 1999 the low and high rates were 24% and 46%. In 2000 the rates were reduced to 22% and 44% by McCreevy and were further reduced to 20% and 42% in 2001. Therefore, in the first, truly impressive phase of the Celtic Tiger era income tax rates were approximately 20% higher than the current rates. The claims of the K Club Charlie School of Economics that low income tax rates are critical for economic growth are, therefore, simply not supported by the evidence.

Correlation; causation.

[greengoose]

Raise taxes? Indeed, let's raise taxes. It it the wealty ones who give us this mullarkey!

Why not inform us on how the money is being spent (frittered away) and we can then see if value is being had for same and we can then consider the wisdom of increasing taxation.

If you look at the abysmal performance of the highest paid premier in the world and his finance minister it is obvious that we are not getting value there. There were to have been serious meetings with the "social partners" and the boys were out of town. They do not seem to want to accept the reality that we are in catastrophic meltdown, this being shown by Lenihan's waffle on BBC about our thriving economy!

It seems that the "social partners" were to be left to fight it out in the absence of Government representation and then CowAn could come along and do a Bertie in peacekeeping the dogfighters.

If the Taoiseach is absent in thes serious timesalong with the finance minister and two deceased TDs are not being currently replaced it might be honest to say that there is an ineffectiveness that were are paying for.

The Irish elector is a prize fool. In years to come, when history is written by the vanquer (sp) the youngsters will believe that our present shower of wasters were real performers...

[wombat]

We have a basic division between those who believe govt. services are sacrosanct and need to be funded by increased taxation and those who believe that govt. needs to stand back and let people who want particular services pay for them - govt. cannot solve all your problems and should not try.

[Seos]

So rather than cutting the salaries of public sector workers they would raise taxes on the private sector where people earn less. I think that would be a crazy road. It's a job killer and it's not fair.

Public sector also pay taxes, also he never mentioned not cutting salaries in the public sector...

[20000miles]

When Ruairi Quinn (1995-97) was Minister for Finance and during the earlier part of Charlie McCreevy’s tenure in the position overall growth rates, particularly growth in exports, were very impressive. Growth under Ruairi Quinn (95-97) was higher than under McCreevy or Brian Cowen. Growth was in fact quite high in 1994 in the last year of Bertie Ahern as Minister for Finance. The low and high income tax rates were 27% and 48% from 1994 to 1997. In 1998 and 1999 the low and high rates were 24% and 46%. In 2000 the rates were reduced to 22% and 44% by McCreevy and were further reduced to 20% and 42% in 2001. Therefore, in the first, truly impressive phase of the Celtic Tiger era income tax rates were approximately 20% higher than the current rates. The claims of the K Club Charlie School of Economics that low income tax rates are critical for economic growth are, therefore, simply not supported by the evidence.

Empiricism never was the correct methodology for economics.

[patslatt]

During economic and political discussions in Ireland it has for some time been regarded as axiomatic that low taxes – income, capital gains and corporation taxes - were critical factors in creating the Celtic Tiger and are also preconditions for future growth in the economy. This idea was strongly promoted by Charlie McCreevy and the PDs, and is a central tenet of what I call we might call the K Club Charlie School of Economics. Low corporation tax undoubtedly was critical and capital gains tax probably much less so. However, the Irish evidence strongly refuted the idea that low income tax rates were critical to the development of high growth rates during the Celtic Tiger era.

Dr Anthony Leddin and Prof Brendan Walsh in an article in the Irish Times in December described the Celtic Tiger economy as a game of two halves. The first part, 1994-2000, was described as essentially an export, investment, consumer-led boom. Subsequently, growth in output was increasingly concentrated in the non-traded construction sector, fuelled by an irrational bubble psychology (and will become a case study in how not to manage an economy).

When Ruairi Quinn (1995-97) was Minister for Finance and during the earlier part of Charlie McCreevy’s tenure in the position overall growth rates, particularly growth in exports, were very impressive. Growth under Ruairi Quinn (95-97) was higher than under McCreevy or Brian Cowen. Growth was in fact quite high in 1994 in the last year of Bertie Ahern as Minister for Finance. The low and high income tax rates were 27% and 48% from 1994 to 1997. In 1998 and 1999 the low and high rates were 24% and 46%. In 2000 the rates were reduced to 22% and 44% by McCreevy and were further reduced to 20% and 42% in 2001. Therefore, in the first, truly impressive phase of the Celtic Tiger era income tax rates were approximately 20% higher than the current rates. The claims of the K Club Charlie School of Economics that low income tax rates are critical for economic growth are, therefore, simply not supported by the evidence.

A freeze in public sector pay seems justified at this stage and/or adjustments to the funding of public sector pensions. However, unless very draconian cuts in salaries in the public service are imposed it is probable that increases in income tax rates (and some other taxes) will be required. The burden needs to be carried fairly if we are to avoid social disruption. An income tax surcharge, probably time limited to 2012, (and which would replace the crude income levies) would be fair.

Charlie McCreevy, aided and abetted by Mary Harney and Bertie Ahern gave us a taxation regime that is not fit for purpose. McCreevy, as EU commissioner, then promoted regulation with a light touch for banking and the financial services. He and his ilk have a lot to answer for, and should be banished into outer darkness when solutions to our current problems are being sought and when economic policies for the future are under consideration. Brian Cowen did not cover himself in glory when Minister for Finance but the seeds of destruction were well established before his tenure in finance. He and the government have to do a lot better this time round and he should cast a cold eye on the current pontifications of the high priests of the K Club Charlie School of Economics.

Cost competitiveness explains much the differences in export growth rates between the first half and second half of the Celtic Tiger years. Ireland was extremely cost competitive in the early 1990s,thanks to the grinding deflation of the late 1980s austerity programmes. This caused exports to soar and the productivity of labour soared with it,allowing wages to rise very rapidly with a lag of a few years, given that wages tend to equal the marginal productivity of labour.

Ireland began losing cost competitiveness after 2000.With rising wages,though a welcome development, wage costs became less competitive.As well, Ireland started to become complacent about its economic performance,with costs of waste disposal,electricity,rates,rents and stealth taxes rising too fast. For example,rents soared unnecessarily despite the housing construction boom largely because of lack of planning for high density in Dublin and Cork.

The stealth tax increases were used to finance excessive,mismanaged government spending-especially in health care and benchmarking pay awards-designed to win elections.

As well,the government failed to restrain the bubble stages of the property boom. McCreevy raised the stamp duty to very high levels on commercial property development,possibly to restrain the boom but also to raise tax revenues and he should also have raised it on housing sales.However, with the government already collecting VAT on new housing sales,a stamp duty increase would have been very unpopular.

[W..R.H]

But the problem with tax, reguardless of rates, is that it is put too good use. A lot of money was thrown down the drain when it could have been put to good use.

We could have higher tax now ( with FAIR tax bands) but whose to say FF won't stop continuning to throw it away instead of using it wisely.