The nature of economics and the approach of many economists have changed subtly over the past decade.
The change in approach was forced on the profession and the subject due to its abject failure to provide a proper theoretical framework in the run-up to and, more particularly, in the aftermath of the ‘great recession’, which commenced in 2008.
The mathematical or sophisticated model-based approach to economic analysis has been found sorely lacking, and much more attention is now being focused on behavioural economics.
That area tends to place a much greater emphasis on human behaviour, which is totally appropriate, given that economics is very definitely a social science, rather than a physical one.
Many academic economists, in particular, came to believe that economics is more akin to quantum physics rather than a social science. If something could not be proven using sophisticated mathematical equations, then it should not be considered. Such a view of the world has been blown out of the water, and not before time.
Notwithstanding all of this, the permanent truth about economics is that it is first and foremost a discipline that seeks to solve the quandary about the most appropriate allocation of scarce resources.
The reality of life is that demands and desires are basically insatiable or virtually infinite, while the resources available to satisfy those demands are, by definition, limited. We all want more and better public services, but unfortunately this is not possible in the real world, due to the permanent truth that resources are limited.
Economics seeks to provide a theoretical framework to analyse how these scarce resources can be allocated in the most efficient or equitable manner possible. That is, of course, accepting that there is a significant distinction to be made between economic efficiency and equity. That is a debate for another day.
This whole theoretical framework is particularly relevant to Ireland at the moment. It has become increasingly obvious since 2008 that fiscal austerity has drained valuable resources from public services such as health, education, and law and order and more besides, with the result that many of those services are now considerably poorer than one would expect in a modern first-world economy.
The resources to fund public services in Ireland come from the taxes that are collected in the main.
Income tax and expenditure taxes deliver the bulk of the taxes that are collected. Once the fiscal crisis hit here a few years back, the dreaded Universal Social Charge (USC) became an addition to the income tax take.
This year, the USC will contribute roughly €4bn to a projected income tax take of €19bn. Hence the USC does represent a significant part of the tax base, but it is not terribly popular, to put it mildly.
In the run-up to the last election, the main political parties pledged to either abolish or significantly reduce the USC burden. The reality is that such a move would be neither desirable, nor indeed possible. It would have to be replaced by other taxes.
A recent paper from the Department of Finance suggested the options to replace the USC revenues would include the Local Property Tax being increased by 600% and €1.50 added to a pint of beer, among many other draconian possibilities.
We need to get real. Due to demographics and the impact of permanently low interest rates and bond yields on pension provision, there will be massive pressure on spending over the coming decades.
To fund this necessary spending, the tax base will have to be broadened and the tax burden increased to meet these demands. There is no other option, unless of course we strike oil off the coast. That looks unlikely.
In my view, the most economically efficient tax system is one where there is a broad base from which it is collected and marginal rates are kept as low as possible. The incentive effects of the tax system are very real, as are the disincentive effects. These need to be recognised.
A delicate balancing act will be required to satisfy the demands for necessary expenditure on public services and maintaining a tax burden that is not so large as to destroy incentive and effort within the economy. Abolition of the USC would not be a wise move and in fact would be akin to ‘leprechaun economics’.
In relation to the €13bn Apple windfall, I think the Government would, on balance, be unwise to appeal the ruling. Global changes to tax collection will put pressure on Ireland as a location for FDI in any event, so whether we appeal or not, the employment risks look pretty balanced.
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