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The end of Ireland’s low-tax model?

We can have low taxes and low quality of life; or open ourselves to fresh thinking

As lobby groups have organised to try to reverse some of the cutbacks in Brian Lenihan’s first budget, little attention has been paid to the fact that the cutbacks and their impact are the direct consequence of policies that gave us 15 years of unprecedented economic boom. For Ireland’s successful model, which was eyed with envy by small countries around the world, was based essentially on keeping taxes low. It is the consequences of this that we are now facing, in the decision to cut back social services already woefully inadequate for a country with Ireland’s level of wealth, instead of reforming an unjust and inadequate taxation system.

Even if protests succeed in reversing some of these cutbacks, this does nothing to change the fundamental realities now facing the population. If citizens want well resourced, efficient and equitable health, education and social protection systems, adequate to protecting the vulnerable in their time of need, there is no way to do this other than through higher levels of taxation. Yet, as Budget 2009 showed yet again, our government remains committed to trying to keep taxes low, thereby ensuring that the most vulnerable among us will continue to pay a high cost. The addition of so-called stealth taxes, including PAYE income tax levies, shows the gyrations this government is prepared to go through to be seen not to raise basic tax rates, in particular corporation tax and income tax.

Yet, as former Taoiseach Garret FitzGerald has pointed out, the growing dependence in recent years on asset-based taxes such as stamp duty, capital gains tax and capital acquisitions tax has made the Exchequer extremely vulnerable to the sudden reduction in such taxes that inevitably accompanies an economic downturn. But this was the means through which a steady reduction in income tax was funded. As he has written: “The idea that when the boom ended, our public and social services could be maintained with such a miniscule level of income tax payments was patently absurd, although clearly many people fell for it – including our economically unsophisticated business community” 1.

This gets us to the heart of the issue that public debate needs to centre around if we are to chart a way forward out of the mess in which we now find ourselves. For the benefits of the boom went disproportionately to a small, wealthy elite, while successive governments failed to invest sufficiently in public infrastructure and services.

There is plenty of evidence for this. For example, the ESRI points out the “substantial increase” in the share of national income that went to the top one percent of income earners at the height of the Celtic Tiger boom. As they put it, “By the end of the 1990s, the share of the top one percent was more than twice the level prevailing through the 1970s and 1980s”2.

Similarly, if we examine EU figures on the share of national income going to profits as against wages, we see just how dramatic has been the change in Ireland over the course of the economic boom. In the 1980s workers gained 71.3% of the national income, slightly more than the EU average of 69.6%. However, by the 2000s, this had fallen to 55.1%, while the EU average stood at 64.4%. Even allowing for the growing presence of multinationals in the Irish economy, these figures show a huge increase in the amount of Ireland’s national income going to profit rather than people3.

As Ireland’s wealthy elites increased their income spectacularly, state spending on social protection fell as a proportion of our national wealth over the course of the boom. The Central Statistics Office tells us that social expenditure in Ireland as a proportion of GDP fell from 17.6% in 1996 to 14.1% in 2000, but that it subsequently rose to 18.2% in 2005. Over the same period the EU average hovered at around 27%4. To quote Garret FitzGerald again, “Our chaotic health service and our grossly understaffed education system, together with the many serious inadequacies of our social services, reflect very badly upon a political system that has massively maldistributed the huge resources we have created. The harsh truth is we have allowed far too much of our new wealth to be creamed off by a few influential people, at the expense of the public services our people are entitled to”5.

It is not surprising, therefore, that Ireland turns out to be one of the most unequal countries in the developed world. But what may surprise many is that the government has no policy to try to reduce the wide gap between rich and poor. In other words, it does not seem to believe that it is worth worrying about. This is dangerous. International research shows that the more unequal a society, the higher its levels of poverty and crime, and the lower its standards of health and public services6. It is an issue we neglect at our peril.

In 2005, the Economist magazine published a global quality of life index for 111 countries in which Ireland came out top. This ranking got a lot of publicity at the time, but what received less attention was the fact that Ireland’s highest scores were for family and community life, factors that owed more to the legacies of the past than to the Celtic Tiger; what the Economist called “the interplay of modernity and tradition in determining life satisfaction”. This is consistent with the fact that life satisfaction levels in Ireland in the late 1990s were no higher than they were in the 1970s. Meanwhile, other surveys have shown that Irish people report a deterioration in their quality of life during the Celtic Tiger7.

This points to the importance of examining more critically where Ireland’s low-tax model has got us if we are to learn the lessons of the past and plan for a better future. A system of low taxation may attract a lot of investment for a period, but its weakness as a development strategy is that it undermines the state’s capacity to respond when a downturn comes. Yet the government has consistently shown itself wedded to the view that low taxes are essential to our future economic success. This is the issue that needs to be faced head on, but none of our political leaders, from either the government or the opposition side, have the courage (or seemingly the conviction) to do so. David Begg, general secretary of the Irish Congress of Trade Unions was the only public figure to try and raise this issue before the 2007 general election, but his concerns were completely ignored.

Why is it such a vital issue? On the one hand, as is now becoming obvious, low taxes mean that the state has insufficient resources to service the needs of the poor, the elderly, those with disabilities, the vulnerable young – the list could go on and on. In other words, a low-tax economy must also be a low-spend economy, and with investment in economic development getting the lion’s share of such investment, inevitably it is public services for those on the margins of society that bear the brunt. If this was true during the boom it will be doubly so in a recession that looks set to be deep and long-lasting.

Even in the midst of the present convulsions, we hear politicians and commentators repeat – without challenge – the mantra that low taxes are essential to our competitiveness. But the lessons of successful and sustainable development anywhere in the world show that no country has managed to become a successful economy, offering a high quality of life, especially to its most vulnerable citizens, on the basis of low taxes.

Ireland likes to see itself as comparable to the Nordic states. Yet tax receipts as a percentage of GDP in Norway (56.8%), Sweden (53.4%) and Denmark (53.9%) dwarf those of Ireland (35.4%). Ireland is consequently far less able to afford the sort of quality public infrastructure and public services that citizens in the Nordic countries are used to. Low taxes and low public expenditure have left Ireland with more (private) golf courses than (public) playgrounds.

It is true that over the past decade the Irish government has decided to make significant investments in research and development, aware that without such investment Ireland cannot succeed in a globalised world. Belatedly, it has begun to invest billions of euros in building up a research capacity in our universities, particularly in biotechnology and information technology. This is very welcome. However, at the same time, it is failing to invest in the everyday services provided by those same universities – as pointed out by both the president of UCD and the provost of TCD in an article in The Irish Times last March.

Hugh Brady and John Hegarty wrote that since 1995 core funding has been reduced by one third, meaning the maintenance and upgrading of the physical infrastructure for third-level teaching has virtually ground to a halt and Ireland is fast falling behind countries like Denmark and Scotland8. Therefore, our low-tax model imposes severe limitations even on the sort of public investments that our government acknowledges is the key to Ireland’s future success.

It is urgent that we now look back at our boom years to learn from and analyse their legacy in a self-critical way. There has been far too much smug self-congratulation about what we did right and far too little robust debate about what we did wrong. The central lesson to be learnt is that low taxes undermine a country’s capacity to make the longterm investments, both economic and social, that are essential for sustained success.

This obsession with low taxes is a malign hangover from the Progressive Democrats; one that we seem unable to either shake off or debate in a rational way. This may be due to the fact that the Irish tax system has for so long been gravely unjust, imposing a relatively high burden of taxation on average and low income groups and a far from punitive one on those on higher incomes. If anything, this perverse situation grew even worse over the period of the economic boom.

What is required now is the vision and leadership for a root-and-branch reform of our taxation system, ensuring that the groups who so lavishly benefited from the Celtic Tiger pay their due. It evokes no confidence that one of the conditions set for the Commission on Taxation, that is currently deliberating, is that it maintains a low-tax regime. Instead, we need to learn from our Nordic neighbours where citizens vote for high taxes since they have come to realise their long-term benefits. The challenge is not just a technical one – designing a fairer taxation system – but also a moral one – how to change the values of the Irish people so that they can take a longer-term view based on the needs of building a more successful and sustainable society.

This, then, is a defining moment for our society and our political system. Budget 2009 showed no sign that our political leaders can do more than crisis manage, and they are pretty woeful at that right now. For the past decade Ireland has been seen around the world as a model of success for small countries in this era of globalisation. With the depth of the recession we are now facing, and the speed of its onset, the issue has suddenly changed to one of explaining the collapse of this model and what it tells us about the its vulnerabilities. From being a model for others, have we suddenly become a warning?

Back in 2006, this author wrote that the boom years of the Celtic Tiger have “served to camouflage rather than resolve Ireland’s standing development problems”9. As we emerge from the boom, we survey again the familiar landscape of poor public services, poverty and marginalisation, and a political class seemingly unable to confront with any decisiveness and vision the huge challenges now confronting us

Peadar Kirby is Professor of International Politics and Public Policy at the University of Limerick.

1 Garret FitzGerald: End of asset boom reveals foolishness of tax cuts, in The Irish Times, October 11th, 2008, p. 14.

2 Brian Nolan and Bertrand Maitre: Economic Growth and Income Inequality: Setting the Context, in Tony Fahey, Helen Russell and Christopher T. Whelan, eds: Best of Times? The Social Impact of the Celtic Tiger, IPA, 2007, p. 34.

3 European Commission: Statistical Annex of European Economy’, spring 2007.

4 CSO: Measuring Ireland’s Progress 2007, Table 4.1.

5 Garret FitzGerald: Short-term pain should not blind us to bright future, in The Irish Times, May 17th, 2008, p. 16.

6 Robert H. Wade: Should we Worry about Income Inequality?, in David Held and Ayse Kaya, eds: Global Inequality, Polity Press, 2007, pp. 104-131.

7 See, for example, the writings of Dr Elizabeth Cullen on the high price in health, quality of life and the social environment paid by Irish people for the economic boom. Elizabeth Cullen: Growth and the Celtic Cancer: Unprecedented Growth but for Whose Benefit? in Tom O’Connor and Mike Murphy, eds: Social Care in Ireland, CIT Press, 2006, pp. 141-160.

8 Hugh Brady and John Hegarty: We must invest now in our universities or pay later, in The Irish Times, March 18th, 2008, p 11.

9 Peadar Kirby: Ireland’s economic “miracle”: challenges from development theory, in Majda Bne Saad and Maura Leen, eds: Trade, Aid and Development, 2006, pp. 301-317.