Government may not have stomach to implement reforms

ANALYSIS: The commission challenges Fianna Fáil to reverse its tradition of buying off vested interests

THE COMMISSION on Taxation has given the Government plenty to think about with its detailed plan for reforming the tax system. The question is whether the Coalition has either the capacity or the will to implement it in the face of the chorus of disapproval from an assorted array of disgruntled interest groups.

The comprehensiveness of the report and the detail of the work that went into it should inspire a full and open debate about how the country can arrive at a tax system that best serves the common good. Given recent history it is probably wishful thinking to expect such a debate. Those who shout loudest and longest will probably succeed in setting the tone for the debate and ensure that the report is never implemented.

The Government faces two fundamental problems in trying to get the electorate around to a proper debate on the tax system. The first is that, going back to 1977, Fianna Fáil was involved in dismantling a tax system that produced a significant amount of revenue from property.

The second and more immediate problem is that the Fianna Fáil-Green Party Coalition is now so unpopular that it does not have the authority to implement fundamental changes in the tax system that are bound to cause controversy.

Taoiseach Brian Cowen and Minister for Finance Brian Lenihan are clearly aware of the constraints they face in trying to get a property tax off the ground and both have been very circumspect in the run up to the publication of the report about their likely response to its well-signalled recommendations.

There is no immediate pressure on the Government to deal with the report as it is supposed to be revenue neutral. Politically, the carbon tax recommendation is the only one that will have to be dealt with in the short term for the obvious reason that the Green Party will demand its implementation as the price for staying in Coalition.

The Greens also favour a water tax and a property tax, but Fianna Fáil will probably treat both of those recommendations very warily in an attempt to avoid alienating further chunks of the electorate. The same will probably apply to a range of other proposals, although the introduction of a new top rate of tax for the well off might prove attractive to Fianna Fáil as a way of assuaging an angry electorate.

While there is no arguing with the fact that the tax system is badly in need of reform, the immediate pressures on the Government are to get the Lisbon Treaty passed and get the National Asset Management Agency (Nama) up and running. Both issues represent substantial hurdles, but even assuming that they can be crossed, the budget, with decisions to be made on whether to implement the cuts recommended in the McCarthy report, will then loom into view.

Assuming that Lisbon and Nama go through, the Taoiseach’s objective will be to get to Christmas with his Government intact. That means getting the budget through the Dáil will be the immediate priority.

There is a strong feeling in Government that if it can make it to the Christmas break, then it will be able to survive for at least another year and possibly even pull out of the trough in which it is wallowing. Reforming the tax system, with all the pitfalls that entails, is likely to go on the back burner while survival is at stake.

It will be a pity, though, if the commission report does not provoke a genuine response from the political system. Part of the reason the country is in the current mess is because the tax system is so skewed. A broadly based property tax, as exists in almost every other democratic country, would have provided at least some disincentive to the property bubble getting quite so inflated, and the dependency on short-term taxes such as stamp duty would not have arisen.

All rational argument is in favour of some kind of property tax rather than a return to unfairly high taxes on income, which are costing jobs. There is also an overwhelming case for a water tax for both environmental and budgetary reasons, and there are strong arguments on the grounds of both equity and good budgetary policy for taxing child benefit and reforming the current pension arrangements. This is as long as reform of the public service pensions system is also put on the agenda.

Introducing major changes in the tax system is never easy, as the narrow arguments of those who have something to lose almost always outweigh the interests of the silent majority who stand to gain but probably don’t realise it.

The easiest option for the Government in the current budgetary crisis is to rely heavily on raising income tax, as it does not provoke the level of animosity from vested interest groups as either tax reform or spending cuts. Fianna Fáil has been so dominant over the years precisely because it was so adept at buying off vested interests, but the commission’s report demands that it take them all on at the same time.

That would represent a new departure for Fianna Fáil but, given the party’s current low standing, it would have very little to lose if it took the report on board as its next major objective once the budget was out of the way. It might even confound an Opposition which is coming to believe that power will inevitably fall into its lap.