US in chaos but Ireland practises grown-up economics

Dysfunction at the heart of the US government arises from the single driver of the policy platform of the ruling Republican Party: the desire to cut taxes.

The trouble with these kinds of beliefs is their tendency to become both messianic and the ways in which they become detached from rational discourse. It is tempting to conclude that the GOP now believes there is no floor to taxes: they should always be cut, no matter where you start from. If the question is “How big should the State be?”, the answer is always “Smaller”. The debate, such as it exists at all, can never reach a conclusion. No level of taxation is low enough.

Obamacare (the Affordable Care Act), is the latest casualty of this inability to provide stable government. Apart from the visceral hatred of all things Obama, the Republicans want to repeal the previous president’s healthcare reforms in order to provide tax cuts. And not just cuts across the board: the proposals embody a shameless attempt to endow the vast bulk of the cuts on those who earn the most. This is ideology at its most bare-knuckled: no attempt has been made to pretend that the US as a whole will benefit from these suggested “reforms”.

That seems to be as a good a description as any of what an unhinged economic policy looks like. We end up with a government with total power but without the means to exercise it. Various factions have thwarted the GOP, one such being the Freedom Caucus, which wants, of course, even bigger cuts to taxes and, correspondingly, less involvement in the government’s ability to provide basic healthcare for its poorer citizens.

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When there is no chance of a broad agreement as to what constitutes “enough”, compromise on anything is impossible. Someone will always demand more. It looks like stasis but it is just chaos.

What works?

Closer to home, the debate is slightly more nuanced. But echoes of the “not enough” school of policy-making are sometimes found, often the mirror image of the the US variety. But we do have a more-or-less grown up debate about the structure of the tax and welfare system, largely devoid of an ideological drive to either increase or reduce the role of government in the economy.

Our pragmatism involves comparing Ireland’s system with its EU counterparts (and sometimes the broader OECD). Rather than starting from an entrenched position that imagines the size of the State should be fixed at something or other we tend to ask “what works?”

Which means looking at the data, the numbers and the facts, examining what looks reasonable – particularly in a comparative context – and reaching conclusions about priorities given the obvious fiscal constraints (EU budgetary rules). One of the few beneficial consequences of the financial crisis (Irish version) is a greater awareness of priorities and difficult choices.

We know, despite much propaganda to the contrary, that we have one of the most progressive tax and benefit systems in the world. The more you earn the more you pay. High tax rates kick in earlier, at lower levels of income, than elsewhere. Our welfare system is relatively generous. We may have high levels of gross income inequality but, once taxes and welfare spending are properly accounted for, we don’t look too bad.

Fairer society

Statistical fist fights break out once we dive into the numbers but most neutral observers reach the same conclusion: Ireland does a lot of redistribution, people on below-average incomes don’t pay much income tax and, overall, the system does a lot to make society “fairer”.

If the overall tax take is a bit low by international standards, that has a lot to do with meagre levels of corporate taxation both in terms of the take from profits and also how much companies pay in social insurance contributions.

Lobby groups such as Social Justice Ireland argue that we still need to increase welfare payments. It is a shame that they leave us with the impression that that there is no social spending programme that they wouldn’t increase: no State benefit is ever deemed to be “enough”. No taxes on higher incomes are ever “enough”.

Few fundamental questions are asked about why young people of sound mind and body should get similar welfare benefits as the more elderly; what interaction the welfare system has with incentives to work; and why there was still so much long-term unemployment at the height of the Celtic Tiger.

That impression is a pity because some of their other proposals do have merit: corporate taxation could be further reformed; land and site taxes similarly. There is a lot that can be done to improve the tax take and make the system even fairer – all without damaging the economy. But anyone, anywhere, who always starts the debate with the shout “more”, risks contributing little to the discussion. If you want to be heard, first lower your voice.