FORMER Finance Minister Charlie McCreevy warned against governments raising taxes and targeting the rich in an effort to balance their budgets.
He also said that countries that bailed out banks should recover their capital from them as quickly as possible to allow them reduce debt levels he described as having risen to alarming levels.
His advice comes just days before the current Finance Minister Brian Lenihan is due to unveil what is expected to be the country’s harshest ever budget, cutting €4 billion off public spending.
The Internal Market Commissioner, who oversaw Ireland’s Celtic Tiger era and a decade ago drastically cut Irish tax rates, advised that it’s better to manage the public sector more effectively, get costs down and drive up efficiencies.
“It is at times like this that governments succumb to foolish approaches to taxation and spending to close the huge gaps that have opened up between government income and government spending,” he told the Baker Tilly International Tax Conference in London. Since the lion’s share of public spending is on socially sensitive areas like health, social welfare and education, cutting these services is “political dynamite”, he acknowledged.
As a result governments are drawn towards raising taxes to plug public sector deficits – and forget that it could force capital and skilled labour to flee the country and go to where conditions are more friendly.
Despite this “the pressures to make the rich pay by taxing the rich more can become irresistible” he said with the result that the rich flee and the taxes flee with them.
“The end result is that in real terms, as tax yields fall, welfare benefits fall with them and those at the bottom of the ladder – not the top – suffer most. I hope that in their policy making on taxation, government across Europe will face up to this reality,” he said.
Mr McCreevy warned that governments that have bailed out banks should exit their involvement and recover as much of the money they have given the sector as soon as it is prudent and sustainable.
“Throughout the Anglo Saxon world and in many other parts of Europe as well government debt levels had risen to alarming levels as a result of the financial crisis.
“It leaves many member states vulnerable to another shock because they will have little ammunition left to deal with it”, he said.
Mr McCreevy, whose five-year term comes to an end in January, warned against efforts to introduce a common European tax base which he said is a forerunner for the harmonisation of corporate tax rates and which would destroy tax competition between EU states.
It would not reduce company costs and, in the long run, he insisted, would lead to a whole host of problems. But he warned that while the drive for a common tax base has been slowed down just now, it will be back on the agenda of the next commission.
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