Politicians are supposed to have superhuman powers of empathy (all those chats in their clinics every weekend must surely demand it) and yet they cannot put themselves in the shoes of the people they want to tax and ask themselves 'what would I do if it got more expensive/less rewarding to do something because of this tax'? But they're going to have to extend their empathy to taxpayers pretty soon because the gap between government spending and taxes is yawning widely - as illustrated in the chart from a recent post on The Irish Economy blog by Patrick Honohan.
The message from the chart if you are a taxpayer is pretty clear: you've got to cut expenditure. The message the government seems to be taking from it is that it must increase taxes. The problem is that the government's taxation options are extremely limited:
- the folks who want to introduce higher income tax rates for incomes over, say, €70,000 have failed to notice the surge in married women's participation in the workforce which has raised many two-income households' incomes to this and higher levels: good luck to the politicians who want to raise taxes on the earnings of Ireland's working wives.
- the generous increases in social welfare payments during the good times means that the introduction of income taxes on those previously outside the tax net will leave many low earners wondering why they're bothering to work at all.
- reducing tax allowances on pension contributions (already down to a ceiling of €150,000) will stem money going into Irish pension funds (and therefore Irish equities) just as they're already scraping along at 1996 price levels (by the way: a company director contributing the maximum possible under the existing tax allowance regime would still come nowhere near to enjoying the pension entitlement of any moderately senior civil servant upon retirement).
- the Levy-Kalecki formula means that the remaining affluent consumers may 'go on strike' and save even more/spend even less if the uncertainties created by a shifting tax regime leave them even more worried about the future.
Any government that thinks it can simply increase taxes without consumers, workers, employers and mobile phone users responding negatively in the current climate is delusional. I sincerely hope they're not.