The EU is committed to limiting the rise in global average temperature to 2°C above pre-industrial levels and aims to achieve this through a range of policy instruments. This column warns that climate policy need not cost a lot, but imperfect implementation could cause hundreds of billions of euros’ worth of unnecessary welfare losses.
Month: December 2009
This column was not written with an Irish audience in mind, but given its trade patterns and openness Ireland is obviously one of the countries that is most exposed to the risks it discusses.
I’ve criticised Pat McArdle on a couple of occasions recently so I’m happy to say that this article on tax makes some useful points. In particular, the following points are correct and are simply not being said enough by our economic and political commentators:
Income taxes are both too high and too low. Too high because marginal rates have gone above 50 per cent – Irish people seem to be averse to parting with more than half of their extra euro. Too low because half the population does not pay any tax.
The problem is not just high rates but, critically, the low levels at which they kick in. It is astonishing that a PAYE earner on a lowly €40,000 has a marginal rate of 51 per cent.
And
From now on, the challenge is to broaden the income tax base not increase the rates.
Perhaps unsurprisingly, there some points of emphasis in the article I’d disagree with. That the 2009 tax yield has fallen below its 2008 level despite tax rate increases is not proof that “we’re into negative Laffer curve territory”. It’s proof we’re in a very severe recession. But yes, the top marginal income tax rates are too high and they could be pushed into Laffer curve territory if we’re not careful.
Moreover, whatever about the upcoming budget, it will be essentially impossible for the government to stabilize the public finances over the next few years without finding extra tax revenue. Hopefully, this can be done, as McArdle recommends, by broadening the income tax base and by implementing some of the revenue-raising recommendations of the Commission on Taxation, such as a property tax. But getting these measures through won’t be made easier by comments such as McArdle’s jibe here that “tax increases are the last resort of a weak Government.”
This week’s Economics Focus in the Economist takes a look at this issue.
The ECB has a new working paper on the sources of windfalls and shortfalls in government revenue: the paper is available here.