Cassandra 2012 Headline Animator

Wednesday, 18 April 2012

The Myth of Fair Taxes

Opposition to taxes is universal. That statement looks like a truism - something so obvious that it does not need to be said. And yet there are exceptions. Few object to the things that our taxes pay for, unless it is the high salaries and expenses of those charged with the task of administering them. And lately in Ireland and in the UK there is plenty of clamour from those who see the solution to their own supposedly high taxes as the imposition of even higher taxes on others.

This is usually expressed as a move toward greater fairness. So, for example, many in Ireland would like to see the introduction of a third tier of income tax, taxing marginal income above, say, €150k at 50% instead of 41%. Meanwhile, in the UK, the run up to the 2012 budget saw a debate about whether the 50% rate already in force there should be reduced.

The other suggestion that is being made in certain quarters is the imposition of a "wealth tax"; a one off charge on the assets of the richest one or two percent of the population.

Whilst I can sympathise with the anger that lies behind such arguments I have serious doubts about the practical effects of such measures were they to be introduced.

50% Income Tax doesn't work
Consider, first, the 50% income tax band: those eligible to pay tax at that rate already have a marginal rate of 41% in Ireland. If they spend most of the remaining 59% they will pay 23% VAT on their purchases. With less to spend they will pay less in VAT so the €90 increase in tax on every €1000 of income has to be offset against a reduction of €21 in potential VAT income due to the reduced spending. The net gain to the exchequer is therefore only 90-21=69 or 6.9%.

It is also important to look at the kinds of things such individuals are likely to spend their money on. Someone on a tight personal budget will inevitably make the bulk of their purchases in British or German owned chain stores on goods imported from the Far East. Those with cash to spare are more likely to spend that spare cash on high-end Irish made artisan products or imported luxury goods that earn high margins for their Irish importers. Reduce the amount they have to spend in this way and you damage Irish businesses and put Irish jobs at risk.

Wealth Tax - the best way to export the nation's wealth?
I turn now to the idea of a wealth tax. It is my understanding that the wealth that is being talked about here is not cash lying idle in some vault. It is tied up in property, in race horses, in various valuable artefacts and, mostly, in businesses. In order to liberate cash to pay a wealth tax it would be necessary for the wealthy person to sell some of those assets. A forced sale would, of course, not realise the full value of the asset sold. And who except another wealthy person would have the means to make such a purchase? And as the only Irish people with the means to make such a purchase would be seeking to sell some of his or her own assets the only serious buyers would be foreigners; Arabian sheiks and Russian oligarchs spring to mind.

The impact on jobs would perhaps not be great; the assets and the jobs they represent would still be there but now under foreign ownership. The government would have the cash to spend but the overall wealth of the nation would have been reduced and a significant part of it transferred overseas, something that not even those on the extreme left want to see. All this, of course, assumes that the wealthy would readily succumb to the imposition of such a tax without taking avoiding action such as moving themselves and their assets overseas.

The plain fact is that the only way to reduce tax is to reduce the size of the public sector. We can all point to waste and ways in which the public services could be made more efficient. But, just as we object to paying taxes we don't like it when one person's efficiency saving leads to the removal of a perk from which we have benefitted. You may say that a particular road improvement is a waste of money; I might be grateful for the opportunity to get from one place to another more quickly and in greater safety.

In reality there is a limit to what can be achieved through increasing efficiency and reducing waste. And the most effective way of bringing those savings about is to tighten budgets and leave it to the people at the sharp end to seek and to implement the necessary changes. And isn't that precisely what Fine Gael/Labour are trying to do and what everyone seems to object to almost as much as they object to taxes?

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