In a long forgotten time, at the start of the 18th century, Britain began to slowly make its way as a modern global superpower. After a chaotic 200 years, from the war of the roses that delivered the Tudor dynasty and the cruelty of Henry the VIII, to the English Reformation, to the civil war and ultimately regicide, from the puritan republic of Oliver Cromwell to the violent restoration of the monarchy, Britain found itself in almost perpetual political and religious turmoil, destroying national wealth.
In 1688 William of Orange invaded England with 35,000 troops and ultimately
usurped the Stuart dynasty. The Act of Settlement in 1701 confirmed only protestants could sit on the throne and a German royal family, the Hanovers were parachuted in to rule England, under George I. The religious succession issue that had dogged the political order since the Tudors, was permanently resolved. The British head of state had to be a Protestant by law. Another separate but related political problem was the fiercely independent kingdom of Scotland where dissent to the new order was likely to materialise and sympathy for the displaced Scottish Stuarts was common outside the gentry. The Act of Union between Scotland and England was finalized in 1707 and the new single Royal Kingdom of Great Britain had arrived. (A constitutional matter likely to be re-opened in the coming years).
The chaos of the old times gave way to a period of peace and prosperity in a new Georgian golden era. No-one needed to tell anyone in Britain, war was bad for trade and appetite for going back to the war years of the pre Georgian period was limited. However Britain through its people, a mixture of French conquerors, Celts and German tribes, its ancient trading links and new monarchy was an integral part of the European order. The rest of Europe was not done with wars and continued with dynastic squabbles over thrones and influence. Mainland Europe continued to fight with everyone and each other. Britain, growing ever richer, still needed to assert its influence over who sat on what throne and protect its trading empire which was beginning to grow rapidly, with the help of its colonies, into the world’s most powerful economy.
Britain’s first prime minister, Robert Walpole was appointed in 1721 by the King to manage his government and the nation’s finances. Under Walpole, Britain arrived at a solution to its need to maintain influence without spilling British blood. Rather than fight wars to protect its interests, it would support others to do so. Mercenaries, buccaneers and friendly regimes could do the fighting and do so away from Britain. A neat idea, Britain itself could continue to prosper peacefully but it would cost money to pay others to wage war. Extra taxes were needed. Despite their necessity, paying taxes was never going to be popular. Walpole devised a neat rule of thumb to navigate the likely political minefield. Walpole believed there were those like the landed gentry who were like hogs who would squeal loudly when called upon to pay but others, like merchants, were like sheep who yield their wool without complaint.
All tax regimes operate in the same way to one degree or other. Taxes must ultimately pass a budget process, through political bodies. Despite a principle of equity supposedly underpinning a tax and budget regime, taxes are not necessarily levied in the fairest way but in the most politically expedient path of least resistance. In other words, politicians are mindful of hogs who squeal and target sheep who yield their wool.
Why is that important now? We are not quite at the end of the Covid crisis but at the beginning of the end of the crisis. Fiscal authorities from Beijing to Brussels, Washington to Berlin have thrown out the rule book, to run massive deficits, to keep the global economy going. No-one could reasonably argue that was not the right thing to do. It is not over yet. Both the US and the EU, among others, are about to launch massive fiscal stimulus programs to ensure the global economy does take a catastrophic lurch south. Prospects of national economies returning to their flight path are not encouraging but government money will help, along with an avalanche of fiat money poured into economies by central banks.
The problem is that at some point, the money will have to be repaid, mostly through taxes but also cuts to expenditure. The question is who are the hogs and who are the sheep?
The following is a rough guide to some hogs and sheep. There is no judgement, just an analysis of the loudest and quietest members of the farm. Nor is the list exhaustive or weighted. Everyone understands someone must pay. As long as it is not me or mine.
Corporates.
Ireland has a generous regime for corporates. Our neighbours do not like it much because it diverts tax revenue from their coffers to our coffers. Double Irish anyone? Our tax policy helps to drive foreign direct investment (FDI) and has a second round impact on income taxes. Any mention of moving the tax rates in line with other OECD countries is met with howls of outrage by accountants, politicians and industry groups. In 2019, corporates account for 19% of the overall exchequer tax take at €10,888m from a low of 10% in 2013 (off a lower base). Corporates will not be paying any more than 12.5% any time soon. They are definitely hogs.
The Public Sector.
Last time around, in the financial crisis the problems were so deep that those in the public sector found themselves out of room for manoeuvre. There are plenty of better qualified people than I to make the case for or against how well, or otherwise, Irish public servants are paid. The health sector are in here too and post Covid, they have signaled they are much less interested in claps and want to be looked after financially. Public servants have powerful unions representing their interests and believe they were sheep last time around. Bets are they will be hogs about any cuts to come.
The Horse and Greyhound industry.
If I did make that bet through a bookmaker or online, I would have to pay 2% to the horse and greyhound industry on the value of the bet. The industry has managed to levy its own tax on everyone else through the betting tax. Whether you bet on football, rugby, GAA or tennis, you finance the horse and greyhound industry because all the proceeds go to Horse Racing Ireland and Bord na gCon, plus an additional subsidy from the government. Any move to eliminate the tax, or say distribute the tax to grassroots sports on a per bet basis, will be furiously resisted through industry lobby groups. The equine industry are incredibly effective hogs.
Private Pension Holders
After the previous financial crisis, in 2011, the government dipped into private pensions and helped themselves to a little levy. Last austerity time around, along with cutting reliefs, the government sucked a cool 2.4 billion euros from pensions. From the government perspective, it was relatively painless. Private pension holders are powerless, relatively unorganized and assets are difficult to move. Furthermore, cutting back reliefs on higher earners might deliver more short term returns for the government. The problem in the long term is that savers would probably avoid funding pensions, giving government a bigger headache down the line. Nonetheless, private pension holders are potential sheep.
Property Owners
This is a curious one, brought in to expand the tax base in Ireland after the financial crisis, the property tax really has not lived up to its billing. Property tax does not go to the exchequer in Ireland, but rather directly to local authorities to fund local services. That means, that local councillors must vote to increase property taxes. County councillors are not well known for making hard decisions if they can be avoided. Funerals yes. Tough calls? not so much. Therefore property owners will neither yield wool nor squeal and are more of a house cat.
The Middle Class
And so we land on the flock of sheep who will provide its wool and shiver. Income receipts are the biggest tax head in the Irish system at €22,934m (c39%) of 2019 exchequer receipts, almost double the 2010 figure. Ireland has one of the most progressive tax regimes in the world. What that means is that people who have less income, pay very little tax whilst those who earn more, pay a higher and higher proportion of their income. The rate at which income tax payers begin paying tax at a higher rate, €35,300 is just off the average industrial wage. Relatively small amounts of income fall into the higher bracket pretty quickly.
Income tax payers from the middle class look set to wear this one again, though lower threshold bands (in real terms), reduced credits or higher rates. Given that most people struggle to understand the thresholds or credits, expect lots of fiddling around here or through the universal social charge (USC). The middle classes through the income tax system are the guaranteed sheep.
The funny thing is that Robert Walpole expected one thing and got another. Those he thought were sheep turned out not to be so feeble. The merchants, organised and turned on him, disrupting his political agenda, forcing him into a series of damaging U turns on taxes.
Alexander the Great once said, ‘I am not afraid of an army of lions led by a sheep but I am afraid of an army of sheep, led by a lion’. I have not seen any Lions to lead yet but it is early.
Blue Oak Counsel provide Wealth management and Advisory services
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