Who should pay for the recession?

By Vincent Browne (for the Sunday Business Post)

During the week, I posed the following question to a few people, including a well-known economist: who should pay for the economic recession?

The state’s finances are in deficit; tax revenues are down by E3 billion for the year; and the deficit is certain to be very much larger for 2009, probably in the region of around E7 billion. So who should bear the burden?

There are three possible answers to this. One is that the rich should bear the burden by way of increased taxation. This could be in the form of a wealth tax (1 per cent on all net wealth above E2million, including the value of residential property, where the annual income is over E150,000); or a residential property tax (1 per cent on all properties valued above E2 million net, where the owner of the property has an income of over E150,000). And to supplement this, an income tax of, say, 60 per cent on all taxable income above E200,000.

Another option would be to have everyone share the burden, which would inevitably mean some tax increases across the board, maybe an increase in VAT and a bit of public expenditure cutting.

A further option would be to just cut public expenditure. Cutting bureaucracies, of course, getting rid of wastage - all of which would get us about E300 million - and for the remainder of the E6.7 billion, well, just public expenditure cuts. Deep cuts on health, education and social welfare. Let’s take the last option first: that the response to the crisis should be to cut social welfare, health and education.

Only the lesser off will feel the pain if this is done. Social welfare payments will decline, certainly stagnate, which means a decline in real terms. Health services for those without private insurance will get even worse. Education, ditto. A consequence of this is that more people will live on meagre incomes.

Probably around one million people live on incomes the equivalent of E11,000 per annum for a single person or E27,000 for a family of four. More people will die prematurely as a direct consequence of inequality and hundreds of thousands will lead miserable lives.

In the case of spreading the burden, the rich will hardly notice, the middle classes will certainly notice, with some increased taxation and poorer public services and the poor will be impoverished, only slightly less than in the third option.

The case for the remaining option - letting the rich pay - is fairly straightforward. According to a report published last February by National Irish Bank, ‘The Emerald Isle: the Wealth of Modern Ireland’, the national wealth is now over one trillion euro.

That is E1,000,000,000,000. Its projected net assets (that is minus debts) would be around E900 billion by 2011. I am sure these figures would need to be readjusted now, after the fall in property prices and the decline in equities, but not by that much.

There are now more Mercedes’ in Ireland per capita than there are in Germany. More private jets have been bought here since 2003 than in any other EU country.

According to a report carried out for Bank of Ireland Private Banking, ‘The Wealth of the Nation’, net wealth in Ireland is about E200,000 (that is net of debt) for every man, woman and child. There are 33,000 millionaires. The report showed that the top 1 per cent of the population, the top 42,000 people, held one fifth of all the wealth. That is around E4 million each. The top 5 per cent had 40 per cent of all the wealth, that is the top 200,000 people having wealth of E1.6 million each. This left the remaining 95 per cent of the population, 4 million people, with 60 per cent of the wealth - E120,000 each.

So, the argument for the first proposition, that the rich pay for the recession, is simply that the top 5 per cent have 40 per cent of all the wealth, E1.6 million each. Let them pay. What would be so bad for them if their wealth declined to, say, E1 million each? That would leave a family of four in the top 5 per cent having wealth of E4 million. Not bad, huh?

But this latter option is viewed with horror by the political and economic establishment. They feel it would be economic suicide; an attempt to impose a Castro-type regime on this country; more of the failed communism that enslaved millions of people in eastern Europe for so long. It would be certain to cause the wealth-creators to flee to Gibraltar or Malta, or the Bahamas, or Geneva, anywhere.

There would be no more foreign direct investment. We would be the pariahs of Europe, even more so than after the ‘‘disaster’’ of the No vote. It would be economic illiteracy; do you really want to revert to the high-tax era of the 1980s? There would be mass emigration again; and political suicide.

Now, why is the most objectively fair response to our economic difficulties the least acceptable to the economic and political establishment? Why would the most rational and equitable option be political suicide for the party which advocated it? Indeed, why would the objectively most reasonable option be ‘‘economic suicide’’? The answer is that this is how our society is structured. This is how our political culture operates.

Economic suicide, because many of the rich would indeed take off to the Bahamas, Dubai and other culturally-enriching climes, complaining about the Cuba-esque regime that had emerged in Ireland. They would not say or even think that the real reason they were going was to avoid a fair and reasonable response to our economic problems, one in which they, reasonably, would be asked to pay for the recession, given that they did so well during the boom.

They would not see it as fair - quite the reverse. After all they gave to Ireland, this was the thanks they got. They would talk of the ‘‘crackpot Marxist’’ government we had here, of dictatorship, of ‘‘penal’’ measures, of ‘‘state robbery’’.

Remember how they did in the residential property tax of several years ago? A modest tax on hugely valuable property, applicable only to those who had an income far above the national average. RTE led the charge here, as it had done on the wealth tax. Draconian. Penal. Unjust. The usual. No cheep at all over cutbacks on social welfare (cutbacks no matter how disguised), on health, on education.

No cheep at all over the miserable incomes and miserable lives the alternative options will impose. Not a word about the thousands of premature deaths which unfairness cause.

Anyway, isn’t this premature deaths stuff mere left-wing alarmism? And we thought the Lisbon Treaty debate was for the birds!

Urgent Appeal