Thursday, November 12, 2009

Taxing Wealth

There is a great deal of unrest with much simmering anger evident in Ireland at present. The economy is in deep recession with borrowing rapidly mounting (both in the public sector and private households).

Meanwhile the Government is making preparations to bring in a draconian budget which threatens to depress living standards further for those already struggling to make ends meet.

How have we got ourselves into such a mess? Also what is the best way forward in such trying circumstances?

On the face of it per capita income in Ireland is still very high and - indeed - well above the EU average (which - by world standards - remains a highly privileged area). Yet so many people genuinely seem to be faced here with real financial worries and potential hardship.

There are indeed many possible explanations for this.

Firstly, because of the highly artificial nature of the Irish economy. which is so dependent on multinational activity, official figures overstate true per capita income.

Secondly the cost of living is very high in Ireland - and exceptionally high - in relation to many basic services. Also because of the excesses of the Celtic Tiger, services that are provided - at inflated prices - are often of low quality.
In many cases therefore consumers could expect to get much better service for less in other countries.

Thirdly the spread of income and wealth is very uneven in Ireland with a small untouchable minority pocketing the lion's share of the gains of the Celtic Tiger era.
Furthermore the culture has evolved to offer privileged protection to this minority.

Fourthly, in the latter phases of the Celtic Tiger an explosion in credit took place. This meant in effect that it became widely acceptable to live well beyond one's means. As much of this credit creation was related directly to the financing of property, people took comfort from short-term gains in wealth (based on the escalating value of such property).

Meanwhile the financial institutions were liberally throwing money at both developers and consumers alike in a desperate attempt to maintain a continuing property bubble.
Thus now that the bubble has burst, many who had become over-commited financially are greatly exposed with negative equity growing on their homes and debt payments mounting.

Also the general standard of living has sharply contracted within the last two years and unemployment has soared.

And just as the boom distributed gains in a very uneven fashion, likewise the recession is now distributing pain in a similarly uneven fashion.

For a considerable minority, life still remains very comfortable. However major adjustments are now being forced on large sections of the population with genuine hardship looming in many cases.

At government level a chronic hole in the public finances has emerged with current expenditure massively exceeding revenue intake. In simple terms at present we are spending €3 for every €2 taken in revenue (a position which obviously cannot be sustained.)

So the clamour now regards the prospect of sharp cuts in expenditure allied to further increases in taxation.

Understandably much attention has focused on the higher income earners with many suggesting that they should bear the brunt of taxation.

Now it is certainly true that unnecessarily large amounts are paid at the top end of the public service e.g. to well known broadcasters, executives of state companies and agencies, secretaries of civil service departments. Also the state has been in the habit of paying ludicrously high amounts to consultants and advisors for legal and financial services.

And in the private sector not everyone is facing the brunt of tough competition with many professionals e.g. dentists, consultants, lawyers and accountants quite expert at maintaining their customary privileges.
In particular, the unjustifiable rewards pertaining to senior management of the major banks - who failed us disgracefully - remains a special bone of contention.

So certainly, much higher marginal rates of taxation are justified on the top income earners.

Unfortunately even with such measures are imposed, are we likely to see a major dent in the public financing gap. Also, they are unlikely to have any real impact on the distribution of wealth in our society.

Those who are most wealthy generally do not derive their gains from accountable income. Rather they are likely to be prominent business people who hire tax experts for the specific purpose of avoiding tax. And if this requires becoming "tax exiles" as for example with Denis O'Brien and U2 well so be it! Also considerable "super-normal" profits were made by many entrepreneurs e.g. large developers during the boom. However remarkably little information is available both as to to the extent of such earnings or as to their subsequent use.

So this is the real problem. The whole success of the Celtic Tiger was built on cultivating a wealth friendly ethos in Ireland. At one level this applied to the multinational companies (e.g. IT companies and financial services) where a low corporate tax and undemanding regulatory environment were skillfully used as the primary means of their attraction.
Also everything possible has been done in recent years to facilitate domestic wealth creators through offering numerous tax breaks and allowances thus increasing their power, status and privilege in our society.
Putting it bluntly, we have created a culture over the past few years which has sought to appease the wealthy and privileged in our society at every turn. And when all appeared to be going well with the economy, this was not really questioned despite the growing inequality that it actually fostered in our midst.

Now however that the bubble has burst, a dramatic clash in cultural values has emerged.

The root problem with the Celtic Tiger related to wholesale acceptance of the most dubious capitalist ethos which fostered profit, greed and monetary success as positive virtues. Though traditional community based values of service to the common good became rapidly eroded in the process, this was easily overlooked in an increasingly materialist culture where the majority could aspire to be winners.

Not only are we greatly in debt financially (both in private and public terms) but in a deeper sense we are spiritually in debt due to eagerly embracing a false set of values. These are serving us very poorly indeed in dealing with this present crisis.

Just look! Though there is now a truly great need to come together in a spirit of genuine solidarity, all that one can see is group after group attempting to look after their narrow sectional interests.

Thus the present crisis is really one relating to values. Having ignored the basic issue for so long, we finally have to ask ourselves this question. What kind of society do we really want here in Ireland? Do we wish to embrace gross materialism where monetary gain is pursued above everything else or one based on true community values (though this may risk a considerable drop in economic prosperity)?
At the moment, unfortunately we have merely the pretence of seeking the common good while remaining firmly locked in a materialistic culture. Until this issue is faced, no real solution to our immediate economic problems will be attainable.

So in the end, how we should deal with wealth depends on the kind of society we wish to choose. We now need to honestly face up to that choice!

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