One of the first equations one learns in logic class is that A is not B is not C. For instance, right-wing economists are fairly united on a number of themes such as high-tax-bad, low-spend-good, and no, don’t, no, don’t interfere with market ‘forces’. But given all this A is still not B, never mind C.
Constantine Gurdgiev and Jim O’Leary recently reflected on the issue of tax cuts and though these two economists share similar perspectives, they took qualitatively different positions on this issue.
Mr. Gurdgiev is always an enjoyable read with his populist prose and a devil-take-the-hindmost treatment of facts, figures and coherent argumentation (one of his finest moments was when he argued that families in Sweden had a lower living standard than here). Writing in the Sunday Tribune he was opining on the relative merits of Labour’s and the PDs’ tax cut proposals. He claimed that Labour’s tax cut would:
‘ . . . fuel inflation by giving new income disproportionately to the people who are more likely to spend it on consumption . . .This will have no added real growth effect. Consumption expansion in an economy that is running with no surplus capacity will simply to into price hikes and imports.’
Mr. Gurdgiev also suggested that the state would ‘immediately claw back around 40% of the tax breaks in the form of VAT and other charges’ and the tax cut would ‘ discourage future investments in skill and education’. Don’t mind that (this is Mr. Gurdgiev in devil and hindmost mode).
He quite rightly identifies an issue that has hardly been raised – the inflationary impact of flooding the economy with ‘new income’. This at a time of legitimate concern over prices and inflation. So I read on breathlessly. For if he thought Labour’s proposal would exacerbate this what would he say about the PDs proposals which would return up to three times the amount of ‘new income’ into the economy. In a perverse way, Mr. Gurdgiev didn’t disappoint
‘ . . (the PDs tax proposal) will incentivise higher labour supply. They will also encourage savings and investment . . New investment . . will go to expand our production capacity . .’
But Mr. Gurdgiev, what about inflation? The PDs would do exactly what Labour is proposing, only more. Of course, Mr. Gurdgiev is not interested in consistency, only in cheer-leading right wing parties and slamming left-wing ones. And, like a good cheer-leader, he can somersault with his eyes closed. He ends up praising the PDs belief that ‘the fruits of labour belong to those who earn them’ while ridiculing Labour’s tax cut as ‘a social welfare subsidy experiment’. Good grief.
So what is the nub of Mr. Gurdgiev’s argument? It is this: Labour’s tax cut would give new income to people ‘who are more likely to spend it on consumption rather than on savings and investments.’ The PDs would give money to those on the higher rate who would do the reverse. Get it? Ordinary income people would squander their tax cut on fags and drink and made-in-China shoes for their children.
High income groups are much more responsible. They would spend their money on savings and wise investments. Not for them the €1,000 Yves St. Laurent ‘Muse’ handbags or a Porsche Carrera GT (sticker price: €950,000) or Crème de la Mer Essence face cream, retailing for a humble € 2,100, or Black Sea condos. No, it’s the average income earners, with their 2% tax cut (works out at €1.86 a day), who blow their new income on these items. The wealthy would invest in factories and R&D centres and innovation clusters.
Let’s leave this nonsense for something more prosaic. Jim O’Leary defers to no one when it comes to ‘low-tax, low-spend’ arguments. Writing in the Irish Times, he had this to say about what he called the ‘obsession’ of tax cut proposals:
‘ . . cutting taxes is not the priority of economic policy at this juncture . . . to conduct an election campaign on the basis that the question of how much to cut tax by is paramount would betray remarkably blinkered vision.’
Why does he think this? He is concerned that the current proposals are predicated on the continuation of robust rates of GNP growth and a benign relationship between that and the growth of tax revenues. That this should not be taken for granted is obvious.
‘ . . . the Government’s revenue stream is now so highly leveraged off the fortunes of (the construction and property sector) that a sharp contraction of building output together with a sharp drop in the aggregate value of property transactions would almost certainly produce a fall in total tax receipts.’
I would suggest that it wouldn’t take a ‘sharp’ contraction; it need only begin to wind down. The decline of even a few thousand housing starts combined with sluggish growth in property values would start to undermine revenue growth. And one could add that, with short-term interest rate increases on the cards, combined with further rate increases predicted later in the year, even a mild slowdown in consumption would further dampen growth.
Mr. O’Leary believes the economic priority is ‘the effectiveness and efficiency of public expenditure programmes’. I’d go along with that if I knew exactly what it meant (I suspect its code for expenditure cuts). I would have thought that enhancing the effectiveness and efficiency of our enterprise base was the priority – in the same edition the Irish Times reported that Ireland lagged towards the bottom of the tourism sector in the EU.
But then Mr. O’Leary comes up with a provocative proposal:
‘. . . each party should be required to produce the list of things it would do in circumstances where rates of economic growth and tax revenue growth were halved . .
Hopefully, Mr. O’Leary’s suggestion will be taken up by political journalists. It would make for a more enlightened debate.
So two economists – both sharing similar economic perspectives. The one, however, merely propagandises, using economic arguments as a crude polemical cover. For the other economic argument is central to constructing a political position. We may agree with the former, but it won’t add to our knowledge bank. We may disagree with the latter, but we must contend with the argument and, in so doing, learn from it.
There is an important lesson here for the Left. For those who argue that all you need do is ‘soak the rich’ and enough resources will flow freely – well, give us the numbers and asses any effect this soaking will result in.
For those who claim you can qualitatively increase public expenditure while at the same time cut taxes, again, show us the numbers, the impact on inflation and productive capacity.
For both, the political proposals they put forward must be grounded in a verifiable and sustainable economic analysis. Otherwise, we’re just cheerleading. And that ultimately means being on the sideline.
In other words, if the Left wants to be treated seriously, it must treat seriously. If we can grasp that, then these two economists will have told us a beneficial tale indeed.
Notes on the Front 
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