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Against the Grain –Constantin Gurdgiev
an opportunity to introduce
reforms that do not seem seem feasible in the
times of the ordinary. By this standard, Irish
policies over the first nine quarters of the cur-
rent crisis qualify as an abject failure. And it is
political ideology, not economic rationality that
has maintained this nation on the brink of total
insolvency. Two of the most potent myths that
shaped the emergence of the current economic
crisis are still driving our policy today. These are
the myths of social and economic benevolence
of Government spending. Both have inhabited
the pages of the official media and the halls of our
political, judiciary and executive power, since
Independence. The brief period of the Celtic
Tiger - marked by vast increases in public spend-
ing and employment - was no exception. These
myths shaped our pre-Budget debate and
the Budget itself, and now underlie the analysis
of the Budget’s measures. The debate on whether
to raise public spending is now contrasted with
the debate on whether to raise the tax burden,
in Ireland. It is along these mythological lines
that our élites divide the world into black (entre-
preneurs, consumers, investors and ordinary
workers) and white (public workers, State organ-
isations, quangos and NGOs). In the Left corner
an army of Mary Robinsons and Jack O’Connors
are warming up to battle the imaginary Mr ‘Top
Hat’ Capitalism on the right.
The argument that social fairness requires
that the so-called rich should pay a greater
percentage of their income in tax, hinges on
the argument that taxes provide direct bene-
fits to society at large. According to the latest
Budgetary definition the rich in Ireland includes
everyone on an income in excess of €,
or just €, above the average earnings of
professionals and managers in financial services
and €, less than the average employee
earnings in the electricity, water-supply and
waste-management sectors. Actually, accord-
ing to Terry McDonagh from NUI Galway whose
research was supported by the Irish Congress of
Trade Unions (ICTU) and the unions’ intellec-
tual outfit, Tasc, it’s anyone from a household
with €, in annual income, or for a two-
earner family anyone with an annual income
of €,.
These and other ‘rich’ employees, as Tasc and
the ICTU will never tell you, consume a smaller
share of public services than lower-earning
residents, yet already pay close to % of the
entire tax-take. They further subsidise the pub-
lic sector by purchasing supplementary or sub-
stitutable services. In fact, of Ireland’s top .%
of income earners some , residents with
income in excess of €, pay almost %
of the entire income tax revenue – around €bn
in total. They also heavily subsidise state serv-
ices they never receive and,
incidentally, through gra-
tuitous tax breaks and state
subsidies, they subsidise
ICTU and the ludicrous stud-
ies the union commissions
on how to tax the ‘rich’.
The best example of sub-
sidies from the upper-mid-
dle-classes to the state is
found in the private health
insurance held by over %
of Irish people. This is used
to co-finance public health-
care provision. Double
standards apply to redis-
tributive social ‘justice’ in
Ireland, meaning that one
person can be required to
pay three times over for the
same services. In some cases,
private insurance patients are actually made to
wait longer for services than those who do not
contribute at all either through tax or insur-
ance. So the very idea that steeply progressive
and higher taxation achieve some sort of eth-
ical objective is bonkers. Instead, progressive
income taxes are guilt charges on those with
higher productivity.
“The best example of subsidies
from the upper-middle-
classes to the state is found in
the private health insurance
held by over 40% of Irish
people”
-
Taxes benefit society less than
has been assumed as ‘the
Keynesian Multiplier’ is finally
being reassessed
— village December - January
Constantin Gurdgiev
The only remaining argument that can
in theory support the idea of the Left’s battle
cry for ‘higher tax, not lower spending’ is that
higher taxes lead to higher spending that in
turn supports a more productive economy. But
is state spending, financed out of either current
or future tax revenue, the source of economic
growth? The answer to this lies with the size
of the so-called Keynesian Multiplier – a term
that for many will conjure up the imagery of the
“Improbability Drive” from The Hitchhiker’s
Guide to the Galaxy. The Keynesian Multiplier
is supposed to work by using public spending
to stimulate private demand. No one really buys
this idea in normal economic times. But at times
of crises, as the last months have shown, the
Keynesian stimulus reigns supreme amongst all
economic policies.
The trouble is that evidence from around
the world shows that, in practice, Keynesian
Multipliers have been yielding less than one-for-
one increases in GDP per unit of increased public
expenditure. This year the Centre of Economic
and Policy Research (CEPR) published a large
study using data for countries for the period
from through . For developed coun-
tries the cumulative long-term impact of a €
increase in public expenditure was an average
increase of €. in GDP over a period of
years. After that, the entire effect dissipated to
zero. Sound like a good deal? Not really – private
consumption multipliers over the same period of
time suggest that leaving cash with households
would provide more than €. per € spent.
But the above study found even more disturb-
ing (from a Keynesian propagandist point of
view) facts.
In highly open economies with flexible
exchange rates – in other words countries like
Ireland with a large share of traded goods and
services, and foreign investment from trading
partners outside the Eurozone – deficit-financed
fiscal spending actually has a negative cumula-
tive impact. That’s right – negative as in ‘you’ll
never see this money in the economy again’.
An average open economy trading in a flexible
exchange rate environment at the moment of
fiscal stimulus will lose between five and seven
cents on the euro spent and this can rise up to
cents depending on other factors. Over six
years, this negative effect will add up to perma-
nent annual losses of cents.
So economic evidence strongly asserts that
The Left’s argument against budgetary cuts on
the grounds of Keynesian-Multiplier theory,
simply hold no water. Social ethics and democ-
racy suggest that the same arguments are falla-
cious. And yet, the Irish Left continues to beat
the drum of ‘tax and spend’ politics as a sacred
ritual for its ideologically-driven and (in the
case of Social Partnership-bonded segments of
the Left) self-interested agenda. The legacy of
decades of state-sponsored socialism lives on.
The crisis, caused by this very socialist system’s
support for over-proliferation of skewed incen-
tives and clandestine backroom deals across
the economy has been wasted since we have
failed to learn the lesson. Or as Salman Rushdie
summed it up: “The idea of the sacred is quite
simply one of the most conservative notions in
any culture, because it seeks to turn other ideas
- uncertainty, progress, change - into crimes”. In
truth, the sacred Multiplier is largely a figment of
economic imagination that provides an intellec-
tual veneer of plausibility to the Left’s efforts to
expropriate an ever-growing chunk of economic
value from those who have earned it.
“the Irish Left
continues to
beat the drum of
‘tax and spend’
politics as a
sacred ritual for
its ideologically
driven and ...
self-interest
aligned agenda”
PHOTOS: GETTY IMAGES
Progressive taxation
