Ireland Needs a Grand Coalition

A heavy load.

Photographer: PAUL FAITH/AFP/Getty Images

Ireland's next government will inherit strong economic growth and a lopsided tax system. Its main task will be to fix the second without spoiling the first.

Friday's parliamentary election result showed deep public dissatisfaction with the established political order, and it's no surprise: When Ireland's banks imploded in 2008, the cost of bailing them out fell entirely on the nation's taxpayers. A special charge of up to 11 percent was imposed on almost everyone, so that marginal rates for many in the middle class now routinely exceed 50 percent.

Although Prime Minister Enda Kenny's Fine Gael re-emerged from the vote as the largest party in parliament, it has been diminished and its coalition partner, Labour, decimated. If he cannot find a new partner, the uncertainty and further election could endanger Ireland's healthy but fragile economic recovery.

It would also be unnecessary. Very little divides the two main parties -- Fine Gael and Fianna Fail -- in terms of ideology. Their origins derive not from left and right, but from the civil war that was sparked by the terms Ireland accepted for its independence, in the 1921 Anglo-Irish Treaty. Fine Gael included those who favored the treaty's compromises with the British; Fianna Fail, those who rejected them. Nearly a century on, the parties should bury the hatchet. Governing together, they could ensure the recovery -- and reform the country's tax system.

Their opposition -- and the party that made the biggest gains in Friday's vote, taking 14 percent to Fine Gael's 26 percent and Fianna Fail's 24 percent -- is Sinn Fein. Formerly the political wing of the Irish Republican Army, Sinn Fein is rebranding itself as a party of the left. It promises to not only keep the special tax charge but also impose new taxes on people earning more than 100,000 euros.

Yet Ireland already has one of the developed world's most progressive income-tax regimes. The rates are so uneven, in fact, they undermine the vaunted ability of Ireland's 12.5 percent corporate tax rate to attract global companies to this relatively small island. The prospect of marginal rates as high as 65 percent makes it hard for companies to hire the skilled foreign workers they need. It also weakens the incentive to work.

Ireland needs to broaden its tax base. At present, thanks to giveaways during the pre-crisis boom years, 32 percent of earners are paying no tax at all (the comparable share in the U.K. is 11 percent). The special tax charge has at least brought 500,000 new payers into the system. It could be made equitable and efficient if it were turned into a social security fund for pensions. That would lighten the fiscal load that will build as Ireland's youthful population begins to age.

More broadly, the next government should cut income-tax rates and shift the burden toward less economically damaging levies on consumption and property, as the finance ministry has proposed. That would be an agenda worthy of a grand coalition.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.