Higher Taxes AND Higher Growth Are Not Incompatible - Mark 2

[grapes of wrath]

At the risk of getting into trouble with the controller of this site I repeat a thread I originally posted on January 24 as it is even more relevant today than it was then. We could do worse than go back to the income tax rates that we had in the early, truly impressive years of the Celtic Tiger when we had real growth, with thriving exports and without the need of an artificial, unsustainable housing bubble. Much more of course is required but a proper income tax system is a critical component. Fianna Fail should consign Charlie McCreevy, Mary Harney and their philosophy to history along with their predecessors Ronald Reagan and Margaret Thatcher.

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.

[patslatt]

At the risk of getting into trouble with the controller of this site I repeat a thread I originally posted on January 24 as it is even more relevant today than it was then. We could do worse than go back to the income tax rates that we had in the early, truly impressive years of the Celtic Tiger when we had real growth, with thriving exports and without the need of an artificial, unsustainable housing bubble. Much more of course is required but a proper income tax system is a critical component. Fianna Fail should consign Charlie McCreevy, Mary Harney and their philosophy to history along with their predecessors Ronald Reagan and Margaret Thatcher.

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.

The capital gains reduction led to a massive surge in reported gains and tax takes. It also freed up capital tied up in uneconomic uses,improving capital mobility and the capital allocation process.

High income taxes are not justified in Ireland given the poor level of free service provision in health care and day care.For the foreseeable future,opposition to reforms by the hospital unions and vast overpayment to hospital consultants who insanely must all be paid the same at around a quarter of a million a year will prevent improved service provision.

The lowering of the top rate of income tax rates probably attracted many highly skilled immigrants,helping economic growth. It is particularly important in the most dynamic sector of the economy,the multinationals, which employ many expats. This contribution to growth is difficult to measure,however.

The Irish tax system is relatively easy to understand and generous to business and high earners,an important competitive factor internationally. Raising tax rates would lead to the kind of opaque complexity that bedevil tax systems of most advanced countries as the Irish rich and powerful devoted resources to setting up complex,time wasting tax shelters and lobbying political parties for loopholes.

Light touch regulation of banking and finance was indeed a disaster. After the Wall Street Crash in 1929,the US government separated investment banks from commercial banks in the Glass-Steagal Act enacted in the early 1930s to prevent investment banks gambling with bank deposits. This act was gradually watered down in the past 30 years,with "Chinese Walls" supposed to separate those activities carried on under the same banking roof. After a few generations,bankers and politicians ignorant of banking history repeat the same or similar mistakes.

[Nellser]

Interesting article as usual. If you could set aside your anti-FF rhetoric in future you might evoke a more positive response.