Tax incentives produce perverse effects – another nail in the Celtic Tiger’s coffin

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The Irish Sunday Times ran an interesting article today. Anyone should read it for the mixed package of messages it offers.

First of all ordinary Irish people are paying more tax then they need to. They suggest that's because they don’t understand the tax system and so don’t claim the reliefs that are due to them. I will be more prosaic. It’s because middle income PAYE earners can’t afford accountants and accountants can’t be bothered to market their services to them in a way they can afford. There’s also the real chance that they are actually behaving rationally — the reliefs aren’t worth claiming at their level of income. Which suggests that in this case those who support flat tax have an argument — complexity can favour the rich. Just be careful not to relate this argument to the UK though. We can’t claim deductions for medical expenses and bin collection charges here, so that does not work.

Second. They point out that the average tax rate paid by the top 400 taxpayers in Ireland has fallen from 28.9% to 24.4% - a depressing confirmation that around the world the rich are getting richer at the expense of the population in general.

Third it suggests that in the last six months 150 people paid tax penalties amounting in all to €55 million. As it says “On the list were prominent priests, jazz musicians, hurlers, publicans, farmers and conventional businessmen, many of them pillars of society.” No surprise there then. The biggest penalty appears to have been a pair of builders. As it says “The €22m in tax and penalties the Baileys paid to the Revenue Commissioners is just a small fraction of the wealth they accumulated during the years they used unpaid tax to fund their business expansion.” Experience in the UK says small offenders pay much higher rates of penalty than large ones. There is no level playing field in this area of taxation.

But perhaps most significant is the fact that 6 of the richest people in Ireland paid no tax at all due to tax schemes that are available for them to exploit. Ireland offers very generous tax reliefs for investment in property. The result is obvious. As the article points out “Reputable independent consultants have calculated that property reliefs may have cost the state €2 billion in foregone revenue. They also resulted in unnecessary construction in unsuitable locations, solely so rich people could claim tax relief. And they contributed to rampant inflation in property prices.” Put it another way — far more than the tax collected from Microsoft in Ireland has been given away in tax relief to Ireland’s already wealthy elite.

And as the article makes clear, rampant property prices are the result of wholly inappropriate tax reliefs given at considerable cost to the state with the benefit going to the few.

And that’s only the direct effect. Ireland is losing out enormously from the tax driven distortion of its economy. House price inflation has forced wages up as property inflation has increased the cost of living. And tax driven property inflation has denied many the opportunity to simply buy their own home. This is the external cost of giving tax subsidies to the rich. Those on ordinary pay — teachers, health professionals, civil servants, small business people, middle income earners — let alone the poor, all bear the cost of subsidising the rich each and every day through the extra cost of living they suffer.

It’s happened in Jersey. It’s happening in Ireland. Please don’t call it the Celtic Tiger. And please don’t say it’s a success story. It’s just a story of what happens when greed takes over an economy.