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?

Car on Fire? Don't Call the Fire Brigade!

I was listening on Midlands Today this morning to an interview with a poor man who has received a huge bill from Laois County Council. Back in July last year he was returning home to Portlaoise from working a night shift in a homeless centre in Dublin when smoke started coming out of the cooling vents in his car. He did what any of us would in the circumstances; pulled over onto the hard shoulder, took out his mobile phone and called the emergency services.

As the fire took hold a couple of trucks pulled up and the drivers attempted to tackle the blaze with fire extinguishers from their cabs. The blaze was too severe. By the time the fire brigade arrived half an hour after the call the car was destroyed. A few weeks later the man was shocked to receive a bill from the County Council for €3.5k. After he had contested the amount it was reduced to a little over €3k. His insurance company will contribute €1k leaving the man with €2k to find.

In my previous post I discussed the forthcoming Household Charge and noted that whereas most services provided by local councils in the UK are free of charge with a proportion of the cost raised via a locally determined tax called the Council Tax, here in Ireland most services are either funded centrally by the state government or charged for. This incident illustrates precisely what is wrong with that system. Local councils are free to charge whatever they deem to be appropriate for a fire service call-out. In the case of Laois County Council the charge is based on the number of men attending and the length of time that elapses between receipt of the call and the return of the men to their respective stations. The charge is doubled for calls received between midnight and 7am.

Nineteen Men to Extinguish a Car Fire

On this occasion two fire tenders turned out from two different stations involving a total of 19 men. I have no idea to what extend that level of turn-out was determined by the firemen's terms of service but it is well known that public service workers in Ireland are grossly over-indulged; it's one of the reasons the country is bankrupt. Leaving that aside, however, the iniquity of having to pay for a service when you have absolutely no control over the cost of providing that service and no alternative is obvious.

At this point it is worth looking back at the history of fire services. Long before they were taken over by local authorities they were provided by insurance companies. You paid an annual premium to the company and in return they came and put out any fire that occurred on your premises. It was fair because the company published statistics about the number of fires attended together with an account of income and expenditure. Prospective clients could judge whether the proposed premium matched the cost of the service and whether or not it was worth paying on the basis that if they didn't pay up front they would not get the service should they ever be unfortunate enough to need it.

Where the service is provided as part of a package funded by local taxes the general point remains true. The local councils in the UK publish annual accounts showing the actual cost of running the service in order to justify the level of tax being levied. In Ireland there is no such requirement. So the council, no doubt aided and abetted by the fire-fighters, can determine how many men to send to an incident and what to charge. Moreover, where such arbitrary charges are met from the vehicle owner's insurance it has the inevitable effect of pushing up premiums for everyone.

The remedy, at least for car owners, is to have a fire extinguisher and use it should the need arise. Whatever you do, don't call the fire brigade!