Taxation policies could threaten the future of social agreements

When revolutions take place in thought, culture and politics, we are often unaware they are happening. However unclear it may be to us now, I believe we are at just such a turning-point in the history of our State, one which will be seen to have been comparable in significance to the political turning-point of 1913-1923 or the economic turning-point of 1956-1961.

What makes this time a likely turning-point in our economic and social history is the potential for good or ill of the choices we make during this sudden - and inevitably finite - burst of economic growth.

In part at least, this is because of the time factor - the dramatic foreshortening of the decision-making process upon which our future now depends - and the consequent danger that crucial decisions will not be taken in time or that errors made will not be corrected in time, simply because the pace of events exceeds our capacity to react effectively and wisely.

Quite apart from this time factor, there are other elements whose chance coming-together at this time may have potentially dramatic consequences. First, there is our participation in just over a year in the sin gle European currency. This is an immensely important decision for our future.

The risk of currency instability between sterling and the euro is one worth taking but because we are to lose control of interest rates, the only effective regulator of economic cycles will then become fiscal policy.

If the economy is overheated (which is bound to happen at some point and which may be happening even now), we will need to be much more prepared than in the past to raise taxes. At a stage when all the pressures are for tax reductions, that will require a seminal change in political and public attitudes. Are our electorate, our unions and our politicians ready for such an enhanced use of taxation as an economic regulator? I see little sign of this.

Our rapid economic growth, however is vulnerable to more than overheating, for its achievement has depended in significant measure upon the triennial social contracts which, throughout the past decade, have ensured moderate pay increases in return for tax cuts.

The Partnership 2000 agreement was accepted by union leaders and was "sold" with considerable difficulty and by a narrow margin to their members on the basis of what the unions saw as an "understanding" that, over a three-year period, tax changes would be effected along the lines set out in the Option P document issued from the Taoiseach's Office on December 13th, 1996.

Mr McCreevy's Budget has increased personal allowances by only 30 per cent of the remaining amounts due under Option P in the 1998 and 1999 Budgets. It has also increased the standard rate band by only £100 - one-sixth of the amount due in those Budgets. This aberration has the perverse effect of actually increasing the already absurdly large proportion of people on low incomes who are paying the 48 per cent tax rate and who (unlike self-employed millionaires who, at most, pay 2.25 per cent PRSI), also have to pay 7.75 per cent PRSI on top of this 48 per cent.

This has left doubts about the Government's ultimate intentions - as well as a large amount of leeway to be made up in next year's Budget. However, raising the personal allowance and the threshold of the standard tax band to the levels proposed in Option P in 1999 should be feasible if the bulk of available resources was devoted to these objectives and not dissipated on further cuts in the top tax rate.

Given the mood created in trade union circles by the way this matter has been handled, something more than this may be needed to help swing the support of their members behind another national agreement. As those who heard the post-Budget McCreevy-Attley radio confrontation will know, the decision to divert over £100 million to reducing the 48 per cent tax rate at the expense of the proposals contained in this "understanding" has created a tense situation. A further complication - which should have ensured a more sensitive approach to taxation - is the impact on workers' perceptions of the gratuitously provocative and socially regressive decision to halve capital gains tax which unhappily has coincided with the announcement of the decision to reduce corporation tax on banks and services over a number of years from 36 per cent to 12.5 per cent.

This has been forced on us by a combination of the EU Commission's objection to differential taxes for different sectors and our employment-driven need to retain after 2005 a low tax rate for industrial profits.

I do not share the view of some economists that a pay free-for-all in present conditions will yield moderate increases, and I believe the damage already done to the prospect of a further national pay agreement has created a serious threat to future economic and social stability.

The priority accorded to reducing the top tax rate and to halving capital gains tax to a figure below the standard income tax rate is virtually incomprehensible. How can decent and straight politicians lend themselves to these kinds of perverse tax policies?

That is hard to answer. Clearly some are blinded by an ideology which, having given priority to economic growth over almost everything else, then asserts that this growth can be achieved only by relieving the rich of taxation. It remains a mystery that perfectly sane and intelligent politicians like Mary Harney, Des O'Malley and Charlie McCreevy - as well as some in other parties - can fall for this rubbish. Such a distortion of attitudes among politicians could emerge and prevail only in a climate of opinion unduly - if in considerable measure unconsciously - influenced by sectors of business which have little regard for the longer-term interests of society as a whole. It is important to distinguish different elements in the business community. Many - the great majority, I suspect - accept their social responsibilities and are good citizens as well as good employers but there are two other groups.

One small element comprises those unscrupulous enough to resort to tax evasion or other corrupt practices but there is a larger group which is not dishonest but which concentrates on legal tax avoidance - and which also presses upon sometimes naive politicians in all parties the merits of self-serving tax loopholes or of cuts in taxes such as capital gains tax - on the dubious grounds that these will "encourage enterprise".

With the best will in the world, politicians dependent on financial contributions from such sources may insensibly and unconsciously allow themselves to be persuaded by such arguments into adopting policies which, in ways they may not foresee, can eventually damage the longer-term economic and social interests of our people.

Finally, we have yet to tackle seriously the problem of the alienation from the rest of society of a significant underclass of long-term unemployed and their families, as well as a minority of educational dropouts, homeless people and drug-users. To meet what has become a real social crisis, we need to undertake large-scale targeting of resources upon these groups to reintegrate them as far as possible into society and in the meantime to halt the process by which their numbers are being added to annually.

Failure to do this could pose a serious threat to social cohesion, yet neither politicians nor public servants have overcome their reluctance to target the allocation of resources. The bias of the political system towards concentrating all efforts on cutting taxes does not encourage a serious attempt to tackle this grave problem.

If we fail on this agenda, the present could turn out to be a turning point for the worse, a moment of opportunity lost because of a lack of political intelligence and will.