Tax the fat cats and leave us geese alone

Jean-Baptiste Colbert who was the finance minister for Louis XIV once said that the process of taxation can be shown at geese feather plucking. You need to get the largest amount of feathers possible with the minimum amount of hissing. His description is even more suitable to our world than to his days, as the amount of money to be taken has to grow along with the social democratic state’s reach.

In modern world there’s another financial need: there have to be different taxation schemes for the ministers to tell about to the proper constituencies. They leave us their “political legacy” that way, but there’s one large drawback – all these schemes and spending commitments become so diverse and difficult that the system becomes counterproductive.

The Irish Tax Institute has recently reported that we have 53 moving parts of the taxation system, 3 charges with different points of entry, 10 rates, 22 tax credits, and 15 bands. This level of complexity is in nobody’s interest.

If I were finance minister, my priority would be to reduce the long list of special features in our tax system, with a view to making that system simpler, fairer and more comprehensible. No doubt many hornets’ nests of special concessions would have to be disturbed in the process. That may explain why nobody has rushed to take this course of action.

This largely technical challenge — that wouldn’t change the state’s overall tax take — should be ideally suited to today’s “new politics” of budgetary restraint and the requirement to consult with opposition parties. It’s a pity then that we have an exhausted finance minister, Michael Noonan, who is nearer the end of his political career than the beginning.

The complexity of our tax system benefits those who can afford clever tax accountants at the expense of those who cannot. It allows investment funds to register as charities and use favourable legislation avoid tax. As finance minister I would propose a constitutional amendment to allow for a retrospective change in the law to subject these funds to tax. The system must be made to serve the public rather than clever and cynical professionals.

Perhaps Noonan will produce the world’s first homeopathic tax cut — that should at least win the support of the Green Party

A public policy area that is related closely to the complexity of our taxation system is the untrammelled growth in the regulatory burden faced by business. The Central Bank of Ireland’s director of markets supervision, Gareth Murphy, said in 2013: “The economic and political impetus for reform is strong. There were significant market failures. There have been cries of ‘never again’.” There is a danger that the ills that regulation seeks to confront are so urgent that even an ill-considered regulatory response will enjoy public support.

Thus we risk a “blank cheque” regulation mentality where the need for additional regulation is deemed so obvious that its costs can be ignored. But regulation is not cost-free, regulators must be paid. Their costs are typically passed on to the sector they are regulating. That sector must face, in addition, the compliance costs of heavier regulation.

A study carried out by the Competitive Enterprise Institute in America estimated regulatory compliance and economic costs of $1.88 trillion a year. Convert that figure into euros and scale it back to reflect our smaller GNP, and the equivalent Irish figure comes out at €23bn annually. If the real figure is just a quarter of this amount, it still requires urgent attention.

My second budget-day announcement would be to order a formal cost-benefit analysis of all regulation with a view to simplifying its focus and reducing its cost while still achieving its goals.

While I was at it, I would have a stern look at Ireland’s competition law enforcer, the Competition and Consumer Protection Commission. A core policy in the UK of Lord Sutch’s Official Monster Raving Looney Party concerned competition policy. Sutch asked the subversive question: “Why is there only one monopolies commission?”

Today in Ireland, farmers may ask, how can Larry Goodman amass such a large market position in meat processing? Publicans may ask, how can Diageo and Heineken amass such large positions in brewing? And we may all ask the ­question, why does our competition law seem so ineffective?

I fear that we are witnessing a rerun of the errors of financial regulation from a decade ago. At an intellectual level it is clear what is wrong. Yet, at a political level, there is too little willingness to take on big and powerful vested interests. So we get all the costs of competition law, and the even greater costs of several industries characterised by monopolistic/oligopolistic domination.

Cowardice also looks set to prevail on the most important question facing the finance minister as budget day approaches: the balance between spending and taxation. Fine Gael promised during the election (table 3 of the party’s long-term economic plan) that 51% of any fiscal space would go towards increased public spending; 24% to reducing taxation; and 25% to accelerated deficit reduction, via a “contingency and stability reserve”. The tax-cutting promises were already remarkably modest for the mainstream Irish party that is furthest to the right on the political ­spectrum. Can you imagine our Conservative friends next door setting the tax-cutting bar so low? But it looks as though even this modest scheme of tax reduction is to be scaled back. Speaking at the Fine Gael Parliamentary Party think-in in Kildare, Noonan said that people voted more for spending on public services than tax cuts at the general election, and added that cuts to the universal­ social charge (USC) would be smaller than promised.

Perhaps Noonan will produce the world’s first homeopathic tax cut — that should at least win the support of the Green Party. You won’t feel it or see it. There will be little or no economic effect. But the authorities will insist there are atomic traces of it somewhere in the system.

Despite recent talk of buoyant corporation tax receipts, the state has relied upon a sharply increased income tax burden to escape insolvency in recent years. At a time when most economic indices have just about recovered to their prior 2007 peaks, government revenues from income tax and the USC are running at 40% above their 2007 levels.

Sadly, our elected government officials do not regard taxpayers as fellow citizens who deserve a break now that the crisis has passed. They are geese to be plucked so that they have more money to spend on projects of dubious merit. Please pluck off and give us our money back instead.
PS: This year the Irish government is budgeting to spend €486m on international co-operation. The aim of this programme, in the words of the government, “is to address poverty and hunger in some of the world’s poorest countries”. Nobody can argue with that. But there is a risk in sending development aid workers with big budgets to poor countries: it is the danger of well-intentioned naivety that may generate counterproductive results.

As ebola spread across Guinea, Liberia and Sierra Leone two years ago, there was mounting fear that poor disease control might lead the virus to spread out of control. And there was barely concealed irritation that locals who were reluctant to change traditional burial patterns were thereby assisting the proliferation of the virus. In particular, unhygienic funeral practices — that required the ritual washing of the dead — risked condemning the region to an epidemic­ of biblical proportions.

As the West worried, Africans adapted. It was Africa’s rational response to the disease which meant the scariest predictions — the hundreds of thousands of cases prophesied by some epidemiologists at the height of the crisis — never materialised. This is the argument of Paul Richards, a British anthropologist specialising in the region where Sierra Leone, Guinea and Liberia intersect and where the 2014-15 epidemic first appeared.

In his book, Ebola: How a People’s ­Science Helped End an Epidemic, Richards argues that the most important lesson is that money and technology mattered much less than indigenous knowhow. Sierra Leone’s rural southeast saw ebola decline much earlier than the northwest, despite receiving less aid and technical assistance. Tribal elders, far from being a reactionary force standing in the way of disease control, turned out to be the most effective at it.