AT A recent party in Paris, in a room full of OECD economists, someone remarked to me: "You live in a low-tax Ireland."

I looked at him in amazement.

He had never heard of VRT or stamp duty. He had never considered VAT at 21% to be a form of egregious double taxation. He never saw a problem with extorting about 50% of the price of every new house in taxes, levies and social costs. He never imagined that people on the average industrial wage can be facing a 41% income tax band. He never thought that Ireland's sky-high cost of living is almost entirely due to the policy experiments of our state apparatchiks.

In contrast, people who live, work and pay tax here have no such illusions. Since the early days of independence, governments managed the economy like a social science experiment . . . state intervention after state intervention pillaged and devastated private incomes.

By the 1980s, successive Dr Frankensteins ruling this country brought Ireland to its knees.

Then, Dr StrangeloveHaughey changed the record and reduced the tax burden on private economy. The country reaped handsome benefits. No one noticed, but this was also an experiment.

In 1987 Haughey declared: "The policies which we have adopted are dictated entirely by the fiscal and economic realities. I wish to state categorically that they are not being undertaken for any ideological reason". This claim said it all . . . the state that gives back can always take it away again.

And so it did. Over the last eight years we saw various interest groups raiding the economy, taxpayers' and consumers' wealth under the guise of social partnership.

Today, as the country is staring into the abyss of falling competitiveness, declining productivity, rising costs and deteriorating quality of life, our great social experimenters are presiding over ever-rising government spending.

In just five years, the government increased its share of the economy by a whopping 19%, while state workers helped themselves to almost 40% higher wages.

The unions got fat on privatised companies' shares flowing into their pensions and the quangos are stuffing themselves silly with grants and social funding. With the latest jobs losses in the multinational sector, all of this is starting to look like a feast amidst an advancing plague.

Finally, someone decided to learn the lesson. Following the Labour Party promise to cut the lower rate of tax, the PDs unveiled a tax agenda aimed at reducing both bands of income tax.

In terms of economics, the PDs are now well ahead . . .

Labour's reduction in the basic tax rate to 18% alone is inferior to the PDs' simultaneous 18%38% reduction in both bands.

Here is why.

Reducing the lower tax band will fuel inflation by giving new income disproportionately to the people who are more likely to spend it on consumption than on savings and investments.

This will have no added real growth effect. Consumption expansion in an economy that is running with no surplus capacity will simply go into price hikes and imports.

On top of inflation, the state will immediately claw back around 40% of the tax break in the form of VAT and other charges. Price rises will then lead to renewed demands for wage increases from our taxpayer-subsidised public sector.

The average punter will pay for this too. In fact, Labour's proposal is a con game . . . first you see the tax break, then you don't. And finally, you are asked to pay for playing.

Our productive capacity will stay fixed following the reduction of the standard rate alone because it will do absolutely nothing to incentivise greater supply of productive labour or transition into employment. Worse than that . . . by widening the tax gap between the two bands, the Labour proposal will discourage future investments in skills and education. Although this effect is likely to be small, we hardly need it, given our already declining productivity.

Reducing both bands simultaneously will incentivise higher labour supply . . .

something we badly need in order to compete globally.

Currently, those thinking about returning to work are faced with a 41% tax on virtually every penny earned. The PDs' tax cuts will reduce this barrier to work, at least for some. They will also encourage savings and investment, as people in the upper tax bracket are more likely to save additional income.

New investment from the upper band cut will go to expand our production capacity, while a reduced lower tax rate will support higher consumption by the poor.

Yet there is more to the PD proposal than solid economic logic. Speaking at the conference, tanaiste Michael McDowell said: "Government doesn't create prosperity, the people do. Government doesn't own prosperity, the people do.

Tax reform means sharing prosperity with the people who create it."

And herein is the main difference between the two tax proposals. Labour believes in using tax breaks as a social welfare subsidy experiment.

The PDs define their tax breaks in terms of their belief that the fruits of labour belong to those who earn them.

Dr Constantin Gurdgiev is an economist and editor of Business & Finance magazine