Economics: In my last column I referred to a recently published position paper from ICTU on taxation and public spending.

That paper contains three core propositions: one, that insufficient tax revenues are currently being raised to fund the required level of public services; two, that raising the tax burden will not harm the country's economic performance because, in the words of the paper's title, "tax cuts did not create the Celtic Tiger"; and three, that the current tax burden is inequitably distributed, so the increase required to fund a higher level of public services should be obtained from sources other than expenditure taxes and income taxes on all but the highest incomes.

Let's take these propositions in turn. First, are tax revenues currently too low to fund the required level of public services? ICTU's answer is based on the fact that the ratio of public spending to GNP has fallen in Ireland over the past decade and is now much lower than the EU average.

However, this situation has not come about because public spending has been growing slowly. Au contraire, public spending has been rising rapidly; it's just that GNP has risen faster still. Indeed, public spending in Ireland has been growing much more strongly than anywhere else in the EU. OECD data show that between 1993 and 2004, real public consumption grew by a cumulative 85 per cent in Ireland, more than four times the average rate across the EU.

Given this extraordinarily rapid growth in spending, I believe the onus is on those who think that even higher spending is required to demonstrate the public sector's capacity to absorb a greater quantum of resources, to deploy them effectively in pursuit of well-defined and worthwhile objectives, and to manage them efficiently. The onus is also on them to demonstrate how the public sector would increase its share of the workforce (a likely concomitant of a higher ratio of spending to GNP) at a time of virtually full employment, without pushing up wages and accelerating the deterioration in cost competitiveness now facing the private sector.

Let's move on. Did tax cuts create the Celtic Tiger? Probably the fairest way to approach this question is to pose two questions in its place. First, did tax cuts play an important role in creating and sustaining the Celtic Tiger? Second, was it necessary to reduce taxes to the levels of 2001/2002 in order to achieve the economic growth of the Celtic Tiger period? The answer to the first of these questions is a resounding and uncontroversial "yes". Uncontroversial, because even ICTU, despite the title of its paper, agrees. It states on page two of its document: "Yes, it can be said that very high taxes impede economic growth and encourage evasion. And yes, Ireland did have exceptionally high taxes in the early 1990s."

The answer to the second question is a resounding "no". The reason is, as ICTU correctly points out, that the tax cuts delivered in 2000 and 2001 came too late to have helped create the Celtic Tiger. So, what was the justification for those tax cuts? Well, I have always felt that their principal justification was simply that the Government didn't need the money. It was running a very large budget surplus, and public spending had been growing very quickly over the previous seven to eight years, so quickly that there was good reason to suspect that a large fraction of any additional allocation would be wasted.

Viewed from this perspective, the question is not whether pushing the tax burden back to its level of the late 1990s would damage the economy; it is whether the Government could justify a tax increase in terms of the efficiency, effectiveness and desirability of the public spending programmes it would be used to finance.

What about the proposition that the current tax system is inequitable? One of ICTU's points here seems to be that the taxman is not extracting enough from the corporate sector but is taking relatively too much from the PAYE worker. Another related point made by ICTU is that "the purveyors of the 'low tax economy' have conveniently ignored the distribution of the incidence of taxation". Methinks ICTU is guilty of precisely this sort of convenient ignorance.

Consider this. Who ultimately bears the burden of PAYE income tax? The answer is: the employer. Research carried out by the ESRI shows that Irish workers manage to fully pass on taxes on their incomes to their employers¹. The reason is that ICTU successfully bargains on their behalf in terms of real after-tax income. This, after all, is the type of bargaining that has been institutionalised in the national pay agreements since 1987: governments have cut taxes and workers have received smaller (pre-tax) wage increases than they would otherwise have settled for.

Don't take my word for it. Here's what Paul Sweeney, ICTU's economics advisor, wrote in a recent article ²: "The national agreements allowed the social partners to have a say on take-home pay - that is, on the level of income tax. This shifted the emphasis from the illusory gross wage (emphasis added) to take-home pay and, if there were tax reductions, a lower gross could therefore be acceptable. This actually happened - gross pay increases were moderated, but tax cuts ensured that take-home pay of workers increased in real terms."

So, in effect, it is employers who bear the burden of PAYE income tax. Their labour costs go up when income tax is raised and come down when income tax is reduced. And, an important factor in all of this, it seems, is the perception of workers, or more accurately the perception of ICTU, that the gross wage is illusory. What does this say about the value that ICTU and its members attach to the public services that are funded by income tax and the other deductions from gross wages?

1. See, for example, ESRI Working Paper No. 147 by John FitzGerald and Jonathan Hore.

2. Paper to Canadian Colloquium, May 2004.

Jim O'Leary lectures in economics at NUI-Maynooth. He can be contacted at jim.oleary@may.ie