There is much discussion about the tax code; whether it is broad based and whether we should be running surpluses. It is assumed that surpluses are the definitive measure of fiscal responsibility, though this isn’t always the case. Governments ran surpluses during the 2000s, though these did not constitute responsible budgeting given that the tax revenues were ephemeral, and the collapse of which caused massive deficits afterwards. The measure of fiscal responsibility is having robust sources of revenue. Only by having such can even one reliably forecast future budgeting.
It is said that we should be running surpluses during an expansion in order to reduce the National Debt, which it is assumed will increase during a recession. This supposes that a recession will cause large deficits, though this will only happen if the exchequer is reliant on cyclical revenues. However, a broad based source of revenues will withstand a recession. It is said that we should put surpluses into a rainy day fund to have money in the future, though one could put a portion of revenues aside even if running a deficit.
There then is the question of whether deficits and debt matter. The reason the government is seeking to run surpluses to reduce the National Debt is to meet the arbitrary EU debt to GDP ratio of 60%. National debts are usually rolled over rather than paid down and we need not reduce ours for any empirical reason. We already run a primary surplus- we tax more than we spend except what we spend on debt repayments- which means that the government takes more money out of the economy than they spend. All other things being equal this is a recessionary action.
The growth factors in an economy are the creation of bank loans, the balance of payments and the primary fiscal deficit. Given that bank loans are being paid off more than are being created, which ameliorates our trade surplus, the basis of growth will be primary fiscal deficits, and having a surplus would not be a good policy.
As to the suggestion that the economy might overheat, the only way an economy can grow in a way that is too fast which will cause a recession is if the growth was the result of exponential bank loan growth or massive fiscal deficits. The current expansion is not caused by these factors, so claims of overheating are meaningless.
As to the nature of a tax code, there are three general ways of taxation: upon capital gain, accrued capital or expenditure. Capital gain taxes encompasses taxes on personal income, corporate profit, capital gains, capital acquisition, interest and gifts. The accruance taxes that are most practicable and widely used are site or house taxes. The accruance taxes, as such, that pertain in Ireland are Local Property Tax and Business Rates. Expenditure taxes encompass VAT, duties, carbon tax and prescription charges.
Given that the vast majority of taxable capital is in site value, a broad based tax code would predominantly tax site value. In terms of the robustness of revenues in a recession, given that capital gain and expenditure, and taxation thereupon are cyclical, revenues from such will markedly decline during a recession. Site values and revenues are less cyclical and will be more sustainable during a recession. In Ireland, the vast majority of revenues come from taxes on gain or expenditure, which is why recessions lead to public finance crises.
In terms of progessionality, expenditure taxes are regressional. Gain taxes, though technically progressional, are primally regressional given that capital gain is the only way how someone without accrued capital can gain some such. A progressional tax code would consist of only accruance taxes.
A robust, progressional tax code would see the abolition of expenditure taxes such as fuel, alcohol and cigarette duty, carbon tax, prescription charges and stamp duty. VAT should be abolished, though EU membership requires a minimum general rate of 15%. It would see the abolition of all gain taxes- if there were to be gain taxes, equanimity would dictate that all forms of gain should have the same flat rate.
There would be a single tax in the State: a Site Value Tax. This would tax wealth rather than income and would cause economic development where it is needed. It would be unavoidable for those liable, though avoidable by not owning land. It would generate stable revenues by which surpluses or deficits could be reliably measured, and public expenditure could reliably depend. The rate of the tax could start at that which would generate the same revenue as all current taxes.
Current political discourse around taxation assumes either that more cyclical taxes amounts to broadening the tax base, or else that we should be running surpluses in anticipation of presumed public finance problems during the next recession. Such misunderstanding of taxation is certain to cause such problems.