The Government published the Exchequer Returns for the first six months of 2006 earlier this week and economic commentators have noticed strange distortions in the figures. Jim O'Leary's column in today's Irish Times is worth consulting as is Marc Coleman's from yesterday. On the face of it the figures were good news as government revenue raising targets had been exceeded yet again: "Tax revenues surge by €2bn as property booms" was the headline in the Irish Independent. The paper reported Department of Finance officials claiming that the booming property market had overwhelmed their calculations again this year, with stamp duty and profits tax on property sales raising an extra €550m in the first six months of the year.
But of course the prognosticators of the dismal science would find something to be gloomy about. And it's just as well because economic commentators are capable of generating better points for political argument than most politicians at the moment. More of that later. Coleman uses the analogy of the headless chicken to describe Irish economic performance:
Compared with the same period of 2005, overall returns are up by 13 per cent. But for some revenue categories growth is not simply strong, it is absolutely crazy. Capital acquisition tax receipts rose by 31 per cent over the same period of comparison, stamp duties by 41 per cent and capital gains tax revenues by 59 per cent. The gyrations have become more extreme towards the end of this half-year period. In June stamp duties were growing by 53 per cent year on year, while capital gains taxes were growing by an astronomical 133 per cent. But VAT and corporation tax receipts were down, by 9 and 27 per cent respectively. Income taxes rose by 6 per cent but this is less than expected given record job creation in the economy. The dark underside of tax revenue growth lies in house price inflation, which has risen from a modest 5 per cent last summer to around 14 per cent in May, truly frightening for young house buyers.
The economic consequence of house price growth is also frightening. Inflation has also risen, from 2.5 per cent in December to 3.9 per cent in May. With every month that passes, the economy is resembling less a Celtic Tiger and more a headless chicken. Its forward motion may be fast. But it is also aimless, lopsided and unsustainable. Competitiveness, that precious lifeblood of our economy, is draining away.
Jim O'Leary notes how the Irish taxation system has changed over the last dozen years or so, notably the enormous reduction in the burden of income tax for the vast bulk of individual earners and this has been associated with a significant fall in the share of income tax revenue going into the state's coffers from close to 40 per cent down to about 28 per cent. The share of other taxes have correspondingly risen, notably capital taxes and stamp duties.
It is sometimes claimed that the shift away from income tax as a source of government revenue is the result of deliberate policy choice, and to a considerable extent it has been. But it needs to be recognised that this shift is in significant part due to the unexpectedly persistent strength of other revenue sources and, to that extent, has happened by accident rather than design. It also needs to be recognised that one of the main underpinnings for this unexpected revenue buoyancy - the extraordinary condition of the property market and the construction industry - is something that cannot be sustained indefinitely.
A straightforward inference can be drawn from all of this. When the property/construction sector cools, as assuredly it must, the buoyancy of tax revenues will subside with it. In these circumstances, given levels of public spending and borrowing, and without the will to introduce new taxes, the downward trend in income tax rates of the past 15 years will come to an end and will give way to upward pressure.
The bottom line is that if the property bubble bursts money becomes tight. The OECD, the IMF and the European Central Bank all agree with varying degrees of explicitness that our housing market is overvalued. There will be some painful adjustment ahead. It is more difficult politically to cut current expenditure given the relatively short duration of the political-business cycle. If capital expenditure slows down we face a further erosion of our competitive base, especially as new EU states in central and eastern Europe are catching up with us in terms of proportion of national income going to fixed capital formation, a point Brendan Keenan notes in his column in yesterday's Independent.
What kind of political reaction has there been to this weeks figures? Optimism from the Finance Minister is to be expected. In the Irish Examiner the Labour Party Finance Spokeswoman Joan Burton was quoted as saying that low returns in some taxes suggested displacement issues, loss of higher paid manufacturing jobs and possibly increasing numbers of people employed at lower wages. Well, there are some interesting issues raised here, especially the implication that the modest increase in income tax is at variance with strong employment growth, making one wonder what kind of new jobs are actually being created that seem to contribute so little to tax. I turned to the Labour Party press room expecting a fuller elaboration but there was none.
Taxation as a political issue has slipped well below the radar. Since 1997 government policy has widened the gap between rich and poor. The rich have always tried to lessen their tax burden but since 1997 they have less reason to resort to outright avoidance and illegality. As Brian Cooper explained in last week's Sunday Times
Because the rich, if they organise themselves properly, pay a smaller percentage of their annual income in tax each year than the vast majority of PAYE workers. There is no need for the rich to hide income — all they have to do is use the inducements offered by the state.
Taxation used to be a central issue for the left in the late 1970s and 1980s, a time when hundreds of thousands of PAYE workers took to the streets. Now it seems that people are too lazy or confused to even work how to claim tax relief or to truly understand the workings of the system, or so the Irish Taxation Institute claim.
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