Austin Hughes: I worry higher taxes is the reflex remedy for all manner of ills

We need to pay much more attention on how a range of carbon taxes can contribute to a sustainable Ireland

The strength seen in the March tax returns suggested that, for some time to come, recommendations of higher taxation may be ignored.

It used to be said that the only certainties were death and taxes. While most of us still die only once, the view now is that much higher taxes are inevitable.

The Irish Fiscal Advisory Council has echoed last year’s Commission on Taxation and Social Welfare that higher taxes are needed to future-proof the Irish public finances. In a different context, the Economic and Social Research Institute hinted that taxes might need to rise sooner rather than later to reduce the risk that the Irish economy might overheat.

So, whether the problem is judged to be too much money in the economy today or not enough tomorrow, the solution seems to be higher taxes. It is quite possible that the Irish economy will need higher taxes in the future to deal with complex issues such as climate change and ageing, but it is not inevitable and it could be costly.

More importantly, I worry that higher taxes is emerging as the reflex remedy for all manner of ills. Although this is not the aim of recent analysis, the risk is that, softened up by expert commentary proclaiming the inevitability of higher taxation, it becomes the default option when we fail to properly manage public spending and/or adequately address other economic and social failings.

Pressures for higher public spending are clearly growing. But could some of these be met by offsetting cuts or increased efficiencies in other spending? Will we have higher taxes because we won’t raise the pension age, focus more on private-funded pensions, or manage health spend more efficiently? If so, we will need ever-increasing tax levels as public spending rises inexorably as a share of the economy.

Implicit in some recent commentary is the view that the level of taxation is simply a residual to ensure preferred levels of public spending can be sustained and/or the level of economic activity controlled. This mirrors the view of Jean-Baptiste Colbert, Louis XIV’s finance minister, that "the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.

Is there a risk that we pass a tipping point on taxes? For a small economy like Ireland’s, taxation policy is central to our capacity to sustain economic activity on this island.

The Exchequer returns last week suggested that we are at a ‘sweet spot’ in terms of taxes and economic activity. Taxes aren’t onerous by international standards, but given Ireland‘s size, location and relatively high consumer prices, wages, and house prices, some element of domestic costs would need to be comparatively low.

There is a point at which materially higher tax rates would reduce rather than raise the amount of tax revenues collected. It would be unfortunate to discover that point by mechanically moving beyond it. We need to move away from a one-dimensional discussion of taxation. 

For example, I personally, would favour notably higher taxes on property that are focussed on dampening demand, and which are then partly offset by lower taxes on income. And we also need to pay much more attention on how a range of carbon taxes can contribute to a sustainable Ireland.

More difficult discussions lie ahead on how to pay increasing pension costs. Again personally, I have problems with the idea of simply placing extra taxes on work, effectively to fund leisure, particularly as the physical and financial capacity to enjoy older age varies so widely. 

Separately, if overheating risks now coincide with cost-of-living struggles, tax measures might be better directed towards boosting the effective supply of land and labour rather than reducing spending power.

The strength seen in the March tax returns suggested that, for some time to come, recommendations of higher taxation may be ignored. Indeed, a far more threatening prospect in coming years is that Government surpluses become far too big to handle properly, either politically or economically, and are simply squandered. 

As I have noted previously in these pages, we can’t ignore the need to deal with pressing problems in infrastructure and climate change, and simply hide the money away in long-term funds.

If, or when, we have a major downturn, we will again resort to looking for the fastest feasible way to raise taxes. It would be so much better if we could have an early and adult discussion linking the range of choices on public spending and taxes with the sort of future Irish economy and society these are likely to produce.