Brian Keegan: A lesson from Ukraine is that Western economies will need to become more self-sufficient

The Commission on Taxation and Welfare should bring tax policy ideas to support indigenous business

Sun, 06 Mar, 2022 - 14:10

The Commission on Taxation and Welfare must be cursing its luck.

Just like its predecessor Commission on Taxation, which started work in February 2008, the frame of reference for its operation has changed utterly since it was established.

The 2008 Commission was established at a time of economic plenty. By the time it finalised its report in August 2009, the effects of the great recession were already evident.

Now its successor may well be consigned to a similar fate.

Established during a pandemic, but at a time of relative price stability, the report of the Commission on Taxation and Welfare will issue at a time of sharp inflation, and in an era where there is complete revamping of Western government priorities because of the horrific attack on Ukraine by Russia.

The most immediate impact of the war in Ukraine in economic terms will be that it will perpetuate the momentum of high inflation as many commodities become scarce.

So much of taxation policy is short-term by necessity. The primary purpose of taxation is to fund government services and we are at present in an era of unusually strong tax receipts.

Inflation both drives up the cost of providing government services while at the same time limiting the capacity to pay tax.

The Commission held a round of public consultations last week, and there must be a sense that many of its recommendations will have to take a back seat as government struggles to deal with inflation and the risk of higher interest rates that might damage the current tax take.

Tax policy should also support an economic environment in which individuals and businesses alike can prosper so as to be able to pay taxes in the first place.

If indeed the recommendations of the Commission, due in the summer, are deferred or even swept away by the prevailing economic circumstances by then, there are some totems which hopefully the work of the Commission can still dispel.

Chief among these is the lack of voter recognition that some current benefits demand higher taxes in future.

Another commission, the Commission on Pensions, delivered its report some months ago.

It provided costings and suggestions for how to finance retirement benefits for an ageing population, which everyone seems to want.

Nevertheless, recent opinion polling suggests that the population is quite unwilling to fund the costs of keeping the national retirement age at a tolerable 66.

Similarly, the Commission could help break the notion that Irish business is synonymous with corporate business.

In tax policy terms, individuals and partnerships going into business have the dice loaded against them in comparison with their corporate colleagues.

Almost all business tax incentives — the low corporation tax rate, investment incentives and the like — are aimed at corporates that make and sell products for a living.

A trading company with employees can get a reduction in Corporation Tax for the first five years of its existence while an individual service provider — a decorator, a designer, a doctor, or a teacher receives income tax, PRSI, and USC bills from the get-go.

Their only tax concession from the State is an extra year to pay up after starting.

One of the lessons from the appalling and unacceptable invasion of Ukraine is that all Western economies will need to become more independent and self-sufficient by looking after indigenous enterprise.

If the Commission on Taxation and Welfare can land some tax policy ideas to deliver on this, its time will not have been entirely wasted.