Publication of the Exchequer Returns today provides more hard evidence on an aspect (previously mentioned by myself and others) which helps unravel this mystery.
Much of the answer lies in the systematic shift towards cyclically sensitive taxes over the past two decades. There has been more and more dependence on corporation tax, stamp duties and capital gains tax (in that order). These three saw their share in total tax revenues rise steadily from about 8 per cent in 1987 to 30 per cent in 2006 before falling to 27 per cent in 2007 and just 20 per cent as soon as the economy turned down in 2008.
This has been an almost automatic albeit unintended consequence of the combination of Partnership with an almost unbroken period of rapid growth. At each pay round, Government negotiators offered concessions in those taxes that are felt by the working person — Income tax and expenditure taxes. These concessions could be afforded because of the steadily soaring revenues in the cyclically sensitive taxes. But each notch in this ratchet made the tax system more vulnerable to an economic downturn.
In 2008, tax revenue fell by almost 14 per cent — but the percentage fall in the cyclically sensitive taxes was much larger, at 36 per cent.
Had Ireland’s tax structure been less cyclically sensitive, the fall in revenue would have been much lower. Indeed, if cyclically sensitive taxes had been back at their 1987 share of total revenue, the fall in revenue last year would have been much lower: 8 per cent instead of 14 per cent.
The medium-term policy implications are clear. The tax structure must be rebalanced in favour of non-cyclical taxes such as income tax, VAT and excises. Politically painfully of course but ultimately inevitable, I would say.