Economics: The Celtic Tiger phenomenon has spawned its own ideology, a core part of which has to do with taxation. It is widely believed that the lowering of taxes has been a critical element in the success of the Irish economy over the past two decades or so.

A somewhat more extreme version of this belief also seems to have become widespread, namely that raising the tax burden from its current level would imperil our economic success. Indeed, so pervasive has this belief become that, at the time of the last election, all four mainstream political parties (Fianna Fáil, Fine Gael, the Labour Party and the PDs) felt constrained to reject the notion of raising the tax burden.

As we approach the next election, three of the four are shaping up to take a similar position, while the fourth, the PDs, has just published a policy document that appears to commit it to cutting taxes further.

So what role has taxation played in the Celtic Tiger?

To answer this question, it is useful to distinguish three periods in our recent economic history. First, the period in the late 1980s when the first decisive steps were taken to rescue the public finances from the brink of disaster. This was a period during which the psychology of crisis was rolled back, and expectations of an ever-increasing tax burden were replaced by the expectation that taxes would be reduced.

This shift in expectations about tax was a vital ingredient in the economy's recovery from the recession of the early 1980s, a recession in which the confidence-eroding effects of the prospect of spiralling taxation had played a part.

The second period extends roughly from the late 1980s to the turn of the millennium. On the tax front, the outstanding feature of this period was the reduction in the burden of income-related taxes. This had undoubted beneficial effects: it helped to moderate wage increases, thereby improving the competitiveness of Irish producers and boosting output and employment.

The reason tax cuts triggered this happy chain of consequences was that they helped stimulate the supply of labour, most notably by encouraging higher labour force participation on the part of married women. In other words, to use the jargon of economists, tax cuts increased the economy's productive capacity by leveraging off the high elasticity of Irish labour supply. In the 1980s, by contrast, tax increases reduced the economy's productive capacity by discouraging labour supply.

The third period, the period since around 2000, is one in which the role of tax reductions in boosting the economy's productive capacity has been much more difficult to discern. This is partly because the overall tax burden (defined as the ratio of tax receipts to gross national product) has declined only very modestly over this period. The more important development has been a shift in the distribution of that burden from taxes on income to taxes on expenditure.

But it is also partly because it is not clear that the continuing reduction in the income tax burden has had much stimulatory effect on labour supply. The view of labour market researchers seems to be that the capacity of tax cuts to stimulate increases in indigenous labour supply had been close to exhausted by the turn of the century, and it seems reasonable to surmise that immigration from eastern Europe, which has become a very important source of fresh labour supply in recent years, is not especially sensitive to tax, so great are the other motive forces.

Actually, I take the view that the relationship between taxes and economic growth since the turn of the century is one in which economic growth has been driving taxes rather more than taxes have been driving economic growth. In other words, I believe that what modest reduction in the overall tax burden has occurred since around 2000 has been the result of the buoyant economic conditions of the time rather than their cause.

I also take the view that, in the circumstances of recent years, the principal economic case for giving some money back to taxpayers is the faut de mieux argument - the want of something better to do with it. Why use the money to increase public spending when public spending is already growing rapidly? Why use it to run (larger) budget surpluses if the presence of budget surpluses either excites the expectation that taxes are going to be cut soon anyway or increases political pressures to accelerate public spending growth? And, of course, if the Government is already generating as much or more in tax revenue than it can sensibly spend, there is no sense in proposing to increase taxes.

There are those who demur from this. They wonder: how can we contemplate cutting taxes or reject the option of increasing them when there is so much to be done in the public sphere in terms of improving the health and education systems, addressing the gaping holes in our infrastructure and so on?

There are several elements in the answer to this question, but the two most important ones are:

l there is a limit to the public sector's capacity to absorb resources and deploy them effectively, and there is evidence to suggest that the current rate of spending growth is close to that limit and;

l there is a likelihood that, in a rapidly growing economy, big increases in public sector budgets will be dissipated in inflation.

The experience of the public capital programme in recent years speaks eloquently to both of these points.

The first point needs to be addressed by radical reform of the public sector. The second point will lose its relevance when growth in the economy slows down. In these circumstances, it will become more feasible to accelerate the pace of public spending, most obviously on the capital side of the budget. In these circumstances also, the buoyancy of tax receipts will decline.

Overall therefore, if the budget is to be kept close to balance in conditions of significantly slower economic growth than we are currently enjoying, it may be necessary to raise the tax burden a little. Will the roof cave in as a result? I doubt it very much.

Jim O'Leary currently lectures in economics at NUI Maynooth. He can be contacted at jim.oleary@nuim.ie