Monday, 29 September 2014

Responding to IBEC's Analysis of Taxation

Nat O'Connor: IBEC have claimed TASC's analysis of income tax is "factually incorrect and technically flawed" (report: Irish Independent). Having looked at IBEC's analysis, published here, what follows is just some of the flaws and errors in IBEC's headline five arguments.

1. Ireland is not a low income tax country, particularly for middle and high earners: Since 2010, income tax as a percentage of national income has risen from 8.7% to 11.6%, well above the EU average of 9.5%. Ireland is now the fifth highest personal income tax jurisdiction in the EU.

IBEC are using an unusual measure 'personal and household tax' rather than the standard Eurostat comparison of all Direct Taxes as % GDP (see Table 14, p. 187 of Tax Trends in the EU). In this table, Ireland ranks 10th out of 28th, not 5th. IBEC's analysis ignores the very low employer's social security contributions in Ireland, which reduces total labour taxes. An unusual omission, since total taxes on labour is the standard unit of analysis for employers when calculating the cost of employing people.

2. Over half of all taxpayers would benefit from a cut in the marginal rate: Suggestions that only 17% of income taxpayers pay tax at the marginal rate and that the average tax rate is only 14.1% are factually incorrect. The analysis shows that the majority of taxpayers are paying tax at the marginal rate.

Minister Noonan said "I am informed by the Revenue Commissioners that they estimate that just over 17% of income earners were liable to Income Tax at the 41% rate in 2013". Minister Noonan also said "Regarding a reduction in the marginal tax rate, it is assumed that the Deputy refers to a reduction in the 41% Income Tax rate. On this basis the Revenue Commissioners estimate that, a reduction of that rate would affect approximately 392,000 (18%) income earners." That's where TASC's one-in-six comes from.

IBEC arrive at the figure of 'half' (actually 54%) by some contortions of the data. Firstly, they identify that some people are liable to pay a small amount of tax at 41%, but their tax credits are sufficient to take them out of the higher tax net, and Revenue do not count them as part of the one-in-six who currently pay some income tax at the higher rate. IBEC estimate that 607,000 people may be liable to pay the 41%, although many have sufficient credits not to. The point, which is valid, is that a change to the rate would benefit some of these people, although it may be marginal in some cases - e.g. a single person on €32,801 who pays 41% on just one euro would gain 21 cent if the 41% rate occurred at a higher income but would count as a '41% payer' in IBEC's calculation.

Even if one accepts the sum of 607,000 people, this only represents 25.3% of the 2.4 million people represented by Revenue's 2.1 million tax units in the relevant data. But IBEC then exclude pensioners and seasonal workers, and others, and reduces the total of tax payers to around 1.2 million. A further estimated 50,000 are added in on the basis that although they are not currently eligible to pay tax at 41%, they are within two hours of overtime per week of doing so. This brings up the total affected by changes to the higher income tax rate, allowing IBEC to claim 54% of income tax payers would benefit. Except, as shown, this is only achieved by contortion and by ignoring many people who do not have the opportunity to work full-time but who are nonetheless income tax payers.

3. The Irish tax system is highly progressive and redistributive in a European context: The income tax system is the most progressive in the developed world and Ireland’s tax and transfers system is the most redistributive in Europe.

Great. So why change it? But also, Eurostat show that Ireland has the fifth highest level of income inequality after tax, but before social transfers and pensions (2012 data). More strikingly, the OECD database shows that Ireland has the highest level of income inequality before tax and transfers in the whole OECD (data here). So, Ireland needs a progressive tax system to reduce some of this inequality. Even so, Ireland doesn't reduce inequality to the same extent as some others do. After tax and transfers, Ireland is around the EU average for income inequality.

4. Middle and high earners pay the vast majority of tax: Low earners pay less tax than the OECD average, but at the average wage and above Irish tax rates are relatively high. Those earning €39,000 upwards are taxed higher than their OECD counterparts.

It is certainly true that low paid workers pay less tax and social insurance in Ireland, but they also face more out-of-pocket costs for health, education, etc. that would be provided as public services in other countries. Total labour taxes - the 'tax wedge' - is low on average wage workers too. Again, employers' social insurance is very low in Ireland. The tax wedge on average and above average workers can be seen in these OECD charts (choose Ireland from the drop-down menu to highlight Irish data in the bar charts). In every chart, Ireland is below average for taxation.

For higher earners, Ireland does increase income tax, USC and PRSI, to higher levels - but this is for relatively few workers. Note too, that married couples don't pay the higher rate until their joint income is between €45,400 and €65,600 (see post here). Sharing tax credits takes a lot of married couples out of the higher tax rate. Tax breaks - like the generous pension tax breaks - also reduce the actual amount of tax paid by people on higher incomes.

5. Certain features to the Irish tax system are a major disincentive to work, especially the marginal rate at average earnings: A skilled graduate moving from gross pay of €20,000 to gross pay of €60,000 over the first ten years of their career will see an increase of annual net pay of just €22,888 in Ireland; the same person would see an equivalent increase of €30,287 in the UK; a difference of €7,399.

The argument here seems to hinge on Ireland competing with the UK on low tax, which is a race to the bottom. The UK has announced major cuts to public services and social transfers (see, for example, The Guardian's coverage). Ireland has the option of taking a different path, by following a North-West European model of higher quality public services, real security against ill health, strong pensions, public investment in infrastructure, and an overall higher quality of life. Ireland can surely offer much more than 'tax incentives' for its own people to remain in the country!





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Friday, 26 September 2014

Budget 2015 Warmups

Nat O'Connor: Interesting remarks by Minister Noonan reported in The Irish Times.

On tax breaks, he is quoted as saying “I use tax breaks to get a particular economic or social response in the short term but I will not have it bedded in as a permanent feature of the tax code.” TASC has pointed to the problems of tax breaks for years, so keeping such tax breaks on a short time horizon represents a progressive move. However, tax breaks are still problematic because they disproportionately benefit high earners and distort business decision making.

“Because of the buoyancy in taxation from the growing economy” there will be no new austerity measures in the budget, Mr Noonan is quoted as saying. However, the devil is in the detail in this one. Presumably, the Minister is still banking on the €500 million from water charges and the €300 million efficiency savings due under the Haddington Road Agreement and other carry-overs from previous budgets. That means despite a genuine easing from higher tax yields and the IMF loan repayment deal there will still be a contraction of €800 million, which will dent GDP.

But the most illuminating quote was the following: The Government’s approach to the upcoming budget was simple, he said, “if we can continue to control expenditure and grow the economy, all things are possible. If the crazy spending starts again, not only will you use up the resources on the spending side but the signal will go out that the discipline has been removed from Irish economic management.”

This reinforces the message that this Government is fixated on cutting spending rather than striking a balance between tax and spending. To be clear, spending on health, education, housing and social protection needs to be funded by adequate tax and social insurance. However, if this Government is fixated on capping taxation at its current level, which is three-quarters of the EU average, it is clear that there will not be extra funding for a serious social housing policy nor extra funds needed for pre-school education nor increased provision for Ireland's growing number of pensioners in terms of State Pensions and health care, and so on.

Adequately and sensibly funding public spending is not "crazy spending". On the contrary, it is crazy not to invest in quality public services as an investment in people working and living in Ireland. Tax cuts represent just as much loss of "discipline".




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Tuesday, 23 September 2014

Another False Claim Around Cutting Higher Income Tax

Nat O'Connor: It was reported in the Irish Independent that "Under new figures released by Mr Noonan's department, a 0.5pc decrease in the top rate of income tax from 41pc would cost €82m in 2015 and €117m in a full year, and would benefit 700,000 workers. A 1pc cut would cost €164m in the first year and €234m in a full year."

The figure of 700,000 is unlikely to be correct. According to Minister Noonan's response to a Parliamentary Question, only 17 per cent of income tax payers pay anything at all at the higher rate. Table IDS1 in this Revenue report, shows there were 2 million income tax payers in 2011, representing 2.4 million adult income tax payers. 17 per cent of them represents 340,000 tax units or 408,000 adults. Plausibly more of the relevant tax payers are couples, which brings the beneficiaries up to as much as 480,000 - but not 700,000.

(The calculation: if all 340,000 were couples, then 680,000 adults would benefit but that's not possible because we know from the same Revenue data that more than 200,000 single people pay the 41% tax, as well as some one earner households, so the logical maximum number of workers who could benefit from a cut to the higher rate is 200,000 singles and 140,000 couples = 480,000 adult workers).

On the other hand, although one in six of Ireland's 2 million tax units would benefit from a cut to the 41% rate, five in six (83% or 1.67 million) will not benefit from cuts to the higher rate of income tax - representing on average nearly 2 million adults.

Out of Ireland's 3.6 million adults, even if 700,000 did benefit, they would do so to the exclusion of 2.9 million other adults, including 1.2 million other workers (out of Ireland's 1.9 million people in employment).

There is no good way of looking at these figures. Tax cuts to the higher rate, even by 1/2 a percentage point on the rate, are a tax cut for higher earners. Fine Gael may want to do this, and they may arguably even have a mandate to do so, but they should give up the pretense that this will benefit low or middle income households.

Part of Minister Noonan's response in the Dáil was a claim that "an increase in the standard rate band could ensure that those workers that are on the brink of paying the higher rate of income tax currently, could benefit from a pay increase, without becoming subject to the higher rate of income tax going forward". What this boils down to is that if the 17 per cent paying the 41% ever grows to 18 per cent or 19 per cent, then those extra higher paid workers will benefit too.

Of course, over five or ten years, if there was ever significant wage growth across the economy, one might expect a Government to widen the income tax bands. However, not in the context of recovering from a massive recession and collapse in public finances, with high long-term unemployment becoming structural, public services under severe strain and social welfare incomes frozen for nearly a decade. Tax revenue is needed to tackle inequality, not to mention the looming Fiscal Compact requirements to spend an additional €5 billion or more per annum (from 2019) to pay down the national debt. And it is all too likely that when 2019 comes around, money will be found for the debt through more cuts, not more taxes.

None of this is to say that everyone paying the 41% rate is living a life of luxury. Many may have large mortgages or other debt that are weighing them down. But there are more homeowners without major mortgages than with, and if the Government want to target money at reducing personal debt, it should take on the banks directly not use the inefficient mechanism of giving money to those who already enjoy the highest incomes.

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Friday, 19 September 2014

Why reduce 52%?

Nat O'Connor: Why reduce the 52% marginal tax rate? Taoiseach Enda Kenny joined the chorus of Government spokespeople to call for its demise (Irish Times)

“The Government has agreed that the next priority [as regards taxation] is to reduce the 52 per cent income tax rate on low- and middle-income earners,” ... “The 52 per cent marginal tax rate, comprising income tax, PRSI and the universal social charge, is – I believe – anti-enterprise, anti-investment and anti-jobs. It is damaging not alone our businesses, our workers and their families, it is equally damaging to Ireland’s attractiveness as a location for foreign investors. I believe it will make it harder to get our emigrants to come back home as the recovery continues.”

The debate about taxation is being made on the basis of misleading statements, false logic and little analysis. But here are some facts...

(1) Minister for Finance, Michael Noonan: "I am informed by the Revenue Commissioners that they estimate that just over 17% of income earners were liable to Income Tax at the 41% rate in 2013." (Dáil Questions)

So, if only one in six income earners pay the higher rate of tax, how can changing it benefit low or middle earners as the Government claims? While the one in six earners (less than one in ten adults) benefits from tax cuts, everyone else is likely to experience public services with less funding or weaker social transfers.

(2) The OECD compares taxation in different countries in an annual publication, Taxing Wages, which is a reference for investors and employers. In this chart the total of income tax, employee social insurance and employer social insurance is shown. The OECD average was 35.9%, but Ireland has the lowest tax wedge on labour in the EU on average single workers at just 25.9%. For a one earner couple with two children, Ireland is the second lowest in the entire OECD at 6.4%, against an average of 26.4%.

Any returning emigrant on average pay will see that he or she will pay less tax in Ireland, regardless of the 52% marginal rate. Any employer will see that, even for high salary employees, employers' social contributions in Ireland are just a fraction of what they are in other countries.

(3) Marginal tax rates are NOT the same thing as effective tax rates - that is, how much tax you actually pay. First of all, if you move into the higher tax band, you don't pay all of your income at that level - just the top wedge. And also Ireland gives far more tax credits, tax reliefs and tax breaks than most other EU countries, so we pay less effective tax than others with lower headline tax rates.

And Ireland is far from being the highest tax country. The OECD lists 'all-in' personal income tax rates by family type.

  • Single Person, No Child, Average Wage: Ireland 18.7%; Lowest tax in EU
  • Single Person, Two Children, Average Wage: Ireland 13.6%; Lowest tax in EU
  • One Earner Married Couple, No Child, Average Wage: Ireland 13.6%; Lowest tax in EU
  • One Earner Married Couple, Two Children, Average Wage: Ireland 11.1%; Lowest tax in EU
(OECD Stats here)

More OECD data on different family types is given here. And if you want you can also try the Deloitte tax calculator and work out your own tax and social insurance payments as a percentage of gross income.

52?
So what's really going on with the 52% rate? Well, for the relatively small number of people on twice or three times average pay, Irish taxation gets close to EU norms. And at the highest levels, it can be higher than UK or USA tax rates on personal income (although still lower than other EU rates). Those who would benefit most from cutting the 52% marginal rate are the top 10 per cent of earners.

Business lobbyists in Ireland and some multinationals are using their influence to seek tax cuts for high earners, claiming this is pro-enterprise or will lead to investment. But where's the evidence for this? Maybe some investment decisions will change, but public investment decisions will also change if there is less tax revenue available. (And anyway, high-tax Nordic countries score consistently high on entrepreneurial surveys, so low tax does not equal entrepreneurial, see e.g. The Economist).

No one pays tax for the sake of it. But Ireland needs public services, social transfers and public investment for sustainable job growth spread around the country, as well as social justice and a decent quality of life for all. Tax is the price of that, and giving tax cuts to high earners will not boost the economy sufficiently to provide for everyone. (See here for more detail on an IMF finding that public investment boosts the economy more than income tax cuts).

TASC has put these and other facts in a series of Policy Briefs here.

The current one-sided chorus has created a mythology around a cutting a totemic 52% marginal rate, but it fails to engage with real evidence about effective tax rates or meaningful comparison between the tax system in Ireland and other countries. (Even those earning €150,000 pay less than 45%, not 52%; and probably much less due to pension tax breaks). Ireland's total tax take is three-quarters of the EU average, and the effect of this is seen in service charges for health and education, weak job growth in rural areas and small towns, years of weak investment in infrastructure (as Irish Water keeps telling us) and growing deprivation and inequality.

Anyone with a progressive vision for public services must defend the tax base - and that includes the marginal rate. In fact, taxes could and should be higher for the very top earners, certainly not cut at their behest before recovery is even felt around the country.

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Tuesday, 16 September 2014

The score at half time: OECD 7, Tax Avoidance ??

Today the OECD announced the deliverables on seven of their fifteen planned actions to tackle global corporate tax avoidance. (for background, see here). 


So what’s in today’s release? Quite a bit, actually. Work will continue on the digital economy, which is a good thing, as they are taking a broad holistic approach to this rather than confining their focus to techie firms. As the interim report says – digital economy is the economy now, and almost all sectors including health, education, media and financial services are impacted by the issues of mobility, reliance on data, user-created content, flipped supply chains and business models, near-monopolies and a pervasive virtuality that makes the old-fashioned taxing questions of who, what and especially where very challenging. 



There are concrete proposals on hybrid mismatches and on harmful tax practices which promise to tackle patent-box regimes. There are new proposals on preventing tax treaty abuse, but more interestingly, they’ve moved on the feasibility of a global multilateral tax treaty to replace the thousands of bilateral ones now in place. That in itself would be a game-changer. There is a lot more by way of country-by-country reporting, particularly for those patent-box regimes. The devil will be in the detail here, and of course this all poses massive challenges for developing countries who may lack the ICT infrastructure to cope. 


That and other issues will be addressed next year when the OECD report on the remaining eight actions on their original list of fifteen. This includes a lot more on aligning transfer pricing, and on data methodologies. In the meantime, because of the very public and comprehensive nature of today’s disclosure, we may see a lot of quiet tweaking of individual countries’ tax rules, in anticipation of more imposed changes. 


There are issues of democracy and mandate in all of this. None of these rules can officially be imposed on the world – they have not been voted in democratically anywhere yet. The OECD can change their model rules and the member countries will abide by them. The G20 are on board in general terms and together, they control 90% of the world’s economy (as Pascal Saint-Amans pointed out happily today). So there is an economic mandate, but not a democratic one. Developing countries are consulted, and the UN can observe, but what they are observing is a small group of rich nations acting in concert. But act they have, and next year, when the remaining eight proposals are brought forward, we will see a significantly-changed corporate tax landscape. Winners, losers, yet to be determined, but certainly some companies will pay some more tax. Somewhere. 

Sheila Killian
@sheilakillian

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Monday, 15 September 2014

Political Economy and Media Coverage of the European Economic Crisis

A book by UCD academic Julien Mercille on the Irish media and the economic crisis has just been released: The Political Economy and Media Coverage of the European Economic Crisis: The Case of Ireland (Routledge, 2014).

"The media have played an important role in presenting government policies enacted in response to the economic crisis since 2008. This book shows that the media have largely conveyed government views uncritically, with only a few exceptions. Throughout, Ireland is compared with contemporary and historical examples to contextualise the arguments made. The book covers the housing bubble that led to the crash, the rescue of financial institutions by the state, the role of the European institutions and the International Monetary Fund, austerity, and the possibility of leaving the eurozone for Europe’s peripheral countries. The Irish Times, Indo, Sindo, Sunday Business Post, Sunday Times and RTE are all covered."

The book is available here (use code FLR40 for 20% discount), and also via Amazon here.

Reviews:
"A book of record... An exceptionally rare example of an academically rigorous analysis forcing the powerful light of transparency and exposure into the murky world of Irish policy advocacy and punditry... A captivating account."
Constantin Gurdgiev, Trinity College Dublin

"One of the most important political economy books of the year... Set to become the definitive account of the media's role in Ireland's boom and bust."
Dr. Tom McDonnell, Macroeconomist at the Nevin Economic Research Institute (NERI)

"Tells the story of the economic crisis well and explains the media's role in convincing the public that it was all very complicated and that government policy can do little to improve the situation."
Dean Baker, Center for Economic and Policy Research

"Anyone who cares about democracy and economic policy should read this book and be deeply worried by it."
Mark Blyth, Professor of International Political Economy, Brown University and author of Austerity: The History of a Dangerous Idea

"A stinging critique of how Irish media narrowed the debate on crisis and austerity.”
Seán Ó Riain, Author of The Rise and Fall of Ireland's Celtic Tiger

"Outstanding research... Meticulous, balanced and clear."
Costas Lapavitsas, Professor of Economics, School of Oriental and African Studies, University of London

“Engaging, lively, critical... A must read.”
Professor Rob Kitchin, National University of Ireland Maynooth

"An invaluable concise history of Ireland's public discussion of economic issues."
Terrence McDonough, Professor of Economics, National University of Ireland Galway

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Monday, 8 September 2014

Wealth distribution in Ireland

Cormac Staunton: New figures from the Central Bank show that the total net worth of individuals in Ireland is €508.5 billion or €110,312 per capita. This is a 0.9 per cent increase during the first quarter, and the seventh consecutive quarterly increase. This is still down from the peak in mid-2007 which was €719 billion.

Yet we know remarkably little about how this wealth is distributed.

The Central Bank defines “total net worth” as the difference between the stock of total assets and liabilities. Assets include land, real estate, business equity, agricultural assets, vehicles, cash, life assurance reserves, pension fund equity, and personal property.

The ECB estimates that across Europe households in the bottom 10 per cent own €1,200 in net wealth while households in the top 10 per cent have on average €506,000 in net wealth. This means they have 422 times the net wealth of the bottom 10 per cent. The household main residence makes up over half of all net wealth in the euro area.

The most reliable data on the distribution of wealth in Ireland comes from Brian Nolan, in 1991. Nolan used 1987 data from an ESRI survey, Income Distribution, Poverty and Usage of State Services, to estimate the wealth of Irish households.

Nolan estimated that

  • The top 10 per cent of households held 42.3 per cent of net household wealth
  • The top 5 per cent held 28.7 per cent of net household wealth 
  • The top 1 per cent held 10.4 per cent of net household wealth
  • The bottom 50 per cent of households held just 12.2 per cent of net household wealth
Applying these same ratios (assuming 1,658,243 households) to the latest figures would give us this:




What the figures don’t show is the distribution within the bottom 50%. Although the average is €74,823, it is likely to be very unevenly distributed, with some in the bottom 50% having much more than this, but many having close to zero or even negative net wealth.

A survey of households finance and consumption (Household Finance and Consumption Survey HFCS) is due out in Ireland in October 2014. While this is very welcome and will give an indication of the dynamics of wealth, assets and debt, it is likely only to be a snap-shot in time (the survey was done over the last year) and so won’t tell us about the changing nature of wealth inequality in Ireland over the boom and bust period. It will also be a survey, which typically underestimates wealth inequality.

Nevertheless, it will be useful to add to our knowledge of the role of personal wealth in the economy, and a broader understanding of the extent of economic inequality in Ireland.

Cormac Staunton is Policy Analyst with TASC. You can follow him on Twitter: @Cormac_Staunton


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Tuesday, 2 September 2014

The Cost of Disability - Conference

Inclusion Ireland are holding a conference on the Cost of Disability on Thursday, 25th September 2014, at the Hilton Hotel, Kilmainham, Dublin 8.

The conference seeks to reopen the debate on how to address the costs associated with having a disability. Speakers will highlight evidence of the direct, indirect and opportunity costs of having a disability and how official measurements of poverty do not consider these costs. The benefits to the economy and society of expenditure supports to households and person(s) with a disability will be explored.

Opening address
Simon Harris, T.D., Minister of State at Department of Finance.

Speakers
  • Dr John Cullinan, J.E. Cairnes School of Business & Economics, NUI Galway
  • Dr Dorothy Watson, Associate Research Professor at Economic and Social Research Institute
  • Ms Claudia Wood, Chief Executive of DEMOS
  • Mr Martin Naughton
  • Ms Ita Mangan, Chair of the Tax and Social Welfare Advisory Group
  • Mr Michael Taft, Unite the Union
  • Ms Eileen Daly
Conference fee and booking
The fee for this conference is €40. Places can be booked by going to the following link: http://www.eventbrite.ie/e/cost-of-disability-conference-tickets-12717994865?aff=eac2

A small number of places have been set aside for people on low incomes.

Full programme on www.inclusionireland.ie

For information about the venue please visit: www.hiltondublinkilmainham.com

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Monday, 25 August 2014

Budget 2015 and Tax Cuts

Nat O'Connor: Minister for State, Simon Harris, has joined the chorus calling for income tax cuts. His argument, as reported in The Irish Times, is that paying 41 per cent income tax from €32,800 is at a "low point". Changes would, he said, "incentivise work".

He added, the Government should "look at how could we incentivise people who are working to continue to work, to do the extra hours". From his European election campaign he claims that many people he canvassed were reluctant to work overtime because of the risk of entering a higher tax band.

As TASC has outlined in great detail, Ireland is a low tax country (tax 30.2% GDP versus EU average 40.7% GDP). Moreover, someone moving into the higher tax band of income tax only pays the higher rate on that slice of income above the theshold. So the total percentage tax paid is very low.

A single person on €28,500 pays a total of 15.9% of their salary in income tax, PRSI and USC combined. At €37,500, he or she pays 21.6%. At €45,000 (well over average earnings), the total tax paid is 26.1% (far beneath the marginal rate of 52%).


(Table 3 from page 5 here).

The argument that people are refusing extra work or extra hours just doesn't make a lot of sense. There is a clever play on words that says that you pay 52 cents out of every euro in tax for money earned in overtime. This is only true if you also argue that many of the hours you work in your basic time are completely 'tax free'. In reality, we pay tax on a weekly, monthly or yearly basis on the total we earn in that period.

Bearing in mind that married couples don't begin to pay the higher rate of tax until their income is between €45,400 and €65,600, only one in six pay anything at the higher rate of income tax (click here).

At 18.7 per cent, the actual level of tax paid by people on average earnings in Ireland is among the lowest in the Western world (see page 2 here). The OECD average is 26.6 per cent. In Belgium, Germany or Denmark, a person on average wages pays over twice as much tax as in Ireland, in addition to higher local taxes and charges.

The real question is who will pay for tax cuts? The likely answer is that people reliant on health services, education or social protection will receive less or pay more for services. This will deepen inequality, while also sucking demand out of the economy. Like as not, vital infrastructure spending will be further cut and delayed, which slows down Ireland's long-term economic recovery.

Ireland is already at the low end of all EU countries in terms of taxation. We cannot grow our economy by constantly cutting taxes, as this undermines the role of public services and infrastructure that are the fabric of society and the economy. The hope that Ireland will return to boomtime growth levels is unlikely to appear as a silver bullet to balance the budget. So a mature debate on tax levels and public spending is called for.

Given that, for example, the new Minister for Health is seeking an extra €500 million for the health budget, and there is still a gaping hole in the public finances, how will tax cuts be funded?

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Monday, 28 July 2014

The Inequality Debate

Cormac Staunton: The ESRI today released a Research Note on The Distribution of Income and the Public Finances.

It adds to the growing debate on economic inequality in Ireland. The paper asserts that the level of inequality in Ireland has fallen since the onset of the crisis in 2008 and that “the burden of increased taxation had to be carried by those on middle incomes.”

Given the importance of inequality and the continued discussion of helping those on “middle incomes” these claims require some analysis.

Inequality – on the rise again
The paper says that Ireland has seen “a significant fall in the Gini coefficient in the crisis years 2008-2012”. The Gini Coefficient is a measure of income distribution. A high figure implies higher inequality and a lower figure implies more equal distributions of incomes.

However, according to CSO SILC data the Gini for Ireland in 2008 was 30.6. In 2012 it was 31.2. This means that in this period, overall income inequality actually rose.

While inequality as measured by Gini did fall in the immediate aftermath of the crisis, and hasn’t returned to the heights of the boom (it was 32.4 in 2006), the change in Gini in the period up to 2012 does not show any clear reversal of the trend towards rising inequality in Ireland.

The rise and fall (and rise) of high incomes
The paper also shows the decline in the incomes of those earning more than €100,000 a year from 2007 to 2011. The number of tax units earning over €100,000 fell 14.7 per cent. The total income of that group declined by 22.9 per cent and average incomes fell 9.3 per cent. The paper uses this as evidence to show both a lessening of inequality and a negative impact (through higher taxes) on those on “middle incomes”.

While the fall in incomes for those above €100,000 is dramatic, there is provisional data to suggest that those incomes have been on the rise from 2011-2013. Total income above €100,000 was 10 per cent higher in 2013 than in 2011. Also the number of tax cases in this category rose from 99,129 in 2011 to 106,650 in 2013.

So while there was an initial reduction in high-incomes from 2007 onwards as the economic crisis took hold, there is already a recovery underway for this group.

What is "middle" income? 
The paper also implies that the tax “burden” has increased for those on middle incomes. There is no definition of what constitutes “middle income” in the paper but it is appears to be anyone below €100,000.

Defining “middle income” is of course tricky. However it is unlikely that this paper is referring to “average incomes” because we know that taxes on average incomes in Ireland are amongst the lowest in the OECD.

It seems from the paper that “middle income” means those above average wages (which are around €37,000), but below €100,000.  This is not so much middle as “upper” as those above €40,000 are in the top 30% of earners, and 95% of income tax cases are below €100,000.

Assuming this is the group, (€40,000-€100,000) that is referred to as “middle incomes”, it is clear that their contribution to overall income tax take did rise from 43.4 % of all income tax to 46% from 2007 to 2011.

However, looking again at the 2013 figures we see this is falling again, down to 45.1% in 2013. (Total income in this group has also increased by 5% in that time.) This is in line with rising incomes above €100,000.

Whatever the definition of “middle income”, looking at “percentage of all income tax paid” gives an incomplete picture of the tax system. It also does not take in to account the effect of massive cuts to services, which affect those on low incomes (low wages or welfare incomes) the most.

The paper does cite another ESRI study from 2013 which gives a broader analysis of the changes in taxation since the crisis which found that “changes in taxes and benefits tended to have the biggest negative effect on the top (-15 per cent) and bottom deciles (-12.5 per cent) of the income distribution”.

Given the complexities of incomes, taxes and welfare, this is perhaps a more relevant description of the effects of the system, rather than focusing on the “middle income tax burden”.

For more information, TASC has produced a series of papers on the current tax system.


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Wednesday, 23 July 2014

Global Open Government Partnership offers a new platform for reformers

Nuala Haughey: Ireland today published its first National Action Plan as part of the global Open Government Partnership (OGP).  The two year plan contains a total of 26 commitments spanning three main areas: Open Data and Transparency; Citizen Participation; and Strengthening Governance and Accountability. (Read the Action Plan)

This plan comes at a time when trust in government in Ireland is worryingly low. Its publication also coincides with the annual MacGill Summer School, whose invited guests are discussing the need for root and branch review of our institutions to ensure more transparency and democratic accountability – like they do every year.

The Open Government Partnership is not about such radical transformative change. As a voluntary partnership with a modest qualifying threshold for membership, it is more carrot than stick, reform rather than revolution. Since its launch in 2011 it has grown from eight participating countries to 64. In many of these states, governments and civil society are working together to develop and implement open government reforms with various degrees of ambition.

And yet it would be wrong to dismiss OGP as just another genteel club affording politicians a global stage on which to boast about how open and transparent they are. One of the key strengths of this nascent partnership is that it provides an international platform for domestic reformers – both public servants and civil society – who are committed to making their governments more open, accountable and responsive to citizens. This generates a healthy peer pressure between countries to do better, go farther. It also allows non-governmental organisations to share and compare strategies and goals, to showcase good practices and to build alliances to push for reforms at national, European and global levels.

OGP also provides a new domestic platform for reformers by encouraging governments to consult with citizens and civil society in drafting and implementing National Action Plans. In Ireland, the National Action Plan was drafted by government officials with input from interested citizens and civil society members from a range of non-governmental groups, including TASC.

While some countries’ OGP action plan commitments may be weak, the partnership has helped deliver some substantive reforms in its four years. In the UK, the government committed through OGP to create a publicly accessible central registry of information on beneficial ownership of companies in a bid to crack down on aggressive tax evasion and money laundering.

In Ireland, sustained pressure from civil society groups involved in Ireland’s first OGP National Action Plan attributed to the recent announcement by Minister Brendan Howlin that up-front application fees for Freedom of Information requests are to be dropped. This will remove a bureaucratic barrier faced by members of the public and journalists, who currently have to cut a cheque for €15 each time they seek access to public information.

In the face of the critical and systemic governance shortcomings facing Ireland, today’s National Action Plan constitutes a modest step. But is it a step in the right direction and civil society needs to continue to work to see the commitments implemented and to maintain the drive for more ambitious reforms towards increased openness and accountability in public life. For readers interested in following Ireland’s OGP journey and/or getting involved in the loose civil society grouping which has formed around it, please sign up for the mailing list or visit the website www.ogpireland.ie for more information on the civil society activities around OGP.




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Monday, 21 July 2014

New MA in Sociology: Work, Labour Markets and Employment

NUI Maynooth has launched a new MA in Sociology: Work, Labour Markets and Employment, which is now accepting applications for September 2014.

Full details, including the overall postgraduate education framework, are available at https://www.nuim.ie/sociology/postgraduate

In addition, there is a question and answer session on Weds 23rd July from 5-7pm on Facebook and Twitter. Details are available at:
https://www.nuim.ie/news-events/ma-sociology-qa-live-facebook-and-twitter-23rd-july-5-7pm

The course directors are Prof. Seán Ó Riain and Dr. Mary Murphy.

Description:
This is an innovative course, taught by leading scholars of Irish and international workplaces and economies. It incorporates modules on the key themes of the degree, on research methods and on analytical thinking as well as a thesis project carried out by the student. There are opportunities for international study (in Valencia) and for research internships.

The course should be of interest to those seeking the necessary critical and analytical skills to understand the dramatic and rapid changes in work, labour markets and employment in recent decades and how different societies are responding to them.

This programme will be of interest to a wide range of constituencies including those working in or interested in a career in social or public policy making; labour market analysts; trade union and business and trade association officials; social entrepreneurs; people working in local and national government with responsibility for work and labour market initiatives; those working in training, up-skilling and work transition initiatives and those involved in Intreo, Solas, Education and Training Boards and in Local Employment Services. It is also relevant to graduates in the social sciences and cognate disciplines considering undertaking doctoral research in the fields of sociology of work, social policy, education and innovation.

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Friday, 18 July 2014

Juncker's New Start for Europe

Nat O'Connor:On 15 July, Jean-Claude Juncker was elected President of the European Commission. As part of securing votes from the S&D grouping and others as well as the EPP, Mr Juncker pledged to pursue a broader, more socially balanced agenda as President of the Commission.

His short speech is here. He also published a 12-page manifesto, A New Start for Europe: My Agenda for Jobs, Growth, Fairness and Democratic Change. Although this got some coverage in Irish media, it deserves greater scrutiny and serious engagement.

Juncker has pledged €300 billion for job creation over the next three years. It's not clear how much of this is new money, but if Ireland's 1% of the EU's population received a proportionate share, that would be €3 billion - or €1 billion/year, which is large enough to significantly boost GDP and job creation. By way of illustrating the scale of the potential impact, NAMA has pledged to build 22,000 housing units with €1 billion. The EU money could build another 66,000 - with short-term job creation and long-term reduction in the housing affordability crisis. Of course, it might get channeled into other areas, but the potential economic impact of this scale of money should be clear.

He proposes a new European Energy Union to reduce reliance on oil and gas. This is a wise move, given many EU state's reliance on Russian gas. It also is explicitly being done in the name of addressing climate change.

Juncker has called for some reversal of the deindustrialistion of Europe, with a call for a 25 per cent growth in industrial output as a proportion of GDP (from 16% to 20%) by 2020. That's ambitious, but an important marker in the need to reduce the financialisation of the economy and focus on production in the real economy.

He proposes replacing the 'troika' with a more democratic and accountable structure. He has named red-line issues of European regulation (like health, social standards, etc.) that won't be compromised in the planned free trade agreement with the USA. And he talks about the need for a gender-balanced commission, at political and administrative level as a "political must".

This is not to endorse the manifesto, but simply to point out that there are some big commitments there (and a lot more than have been named above), which provide perhaps the closest thing we are going to see to a government manifesto of priorities for the five-year European Commission under Juncker's leadership.

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Promoting growth and job creation through investment

Cormac Staunton: Taxes have both positive and negative effects on the economy and job creation. However, discussions of ‘tax cuts’ often focus on the positive impact for business and consumption, while ignoring the other side of the coin; public investment and services are also good for business and jobs.

Public spending is part of our economic output (GDP) along with private consumption, investment, imports and exports. Hence, all things being equal, tax cuts will lower GDP because it will lead to lower public spending. This is what is meant when Budget’s ‘take money out of the economy’.

Classical economic theory assumes that lower taxes lead to cheaper labour costs and more money in people’s pockets, which would increase employment and consumption. Ultimately, the theory argues, this leads to growth in the private sector and more tax revenues that should off-set the losses from cuts to public spending. This theory has been repeatedly shown to fall short in the real world, especially when taxes are already extremely low.

This is the situation in which Ireland now finds itself, with the lowest tax ‘wedge’ on average wages in the EU and a total tax take that is three quarters of the European average. As a result, more direct interventions to boost the economy through increased public spending are needed. These are likely to have a more positive impact on increasing growth and employment than tax cuts.

One of the major challenges facing the Irish economy is weak investment. Our gross capital formation (public and private investment) is only 10.7% of GDP, which is the lowest in the EU. The low level of investment in Ireland can partially be explained by the slump in construction, as well as by lack of access to credit and high corporate indebtedness. There may also be a perception of low returns on investment given the low growth in the economy.

It is also caused by the fact that successive budgets have disproportionately targeted capital spending over current spending, radically reducing Ireland’s investment in infrastructure, which is the backbone for future economic activity, including in education (‘human capital’) and research (for innovation).

Tax cuts won’t increase investment 
Cutting taxes relies on the private sector to make up the shortfall in investment and consumption. High levels of private debt, means that tax cuts are highly like to result in people paying down debt, rather than investing or increasing savings. While paying down debt will be beneficial in the long-term, there is no guarantee that these funds will be lent to Irish companies and entrepreneurs and used for investment in Ireland.

The dysfunction of Ireland’s banking system certainly means that most of these funds will not be lent to SMEs in the short-term. If tax cuts are only targeted at the small minority who currently pay the higher rate (estimated to be 17% of income earners), there will also be no corresponding boost to consumption from low and middle income households that would help struggling business.

Public Investment 
Public spending not only provides essential services, like health and education, but it can also be a key investor in the economy. The private sector relies on the quality of public infrastructure such as roads and broadband, as well as education, training, public transport and other services, all of which create an environment in which private business can thrive.

Public bodies also purchase a huge volume of goods and services from the private sector in Ireland, everything from office equipment to bricks and mortar. In fact, with increased tendering and outsourcing in recent years, the public and private sectors have never been more interwoven.

Government spending directly results in increased business and employment in the private sector too. In 2011, a TASC report estimated that the government expenditure in the enterprise sector was between €4.7 and €6.2 billon.

As a result, public investment and Government consumption impact directly on aggregate demand. A recent IMF study found that the economic multipliers from government investment and consumption are larger than the multipliers from cuts to labour income taxes, consumption taxes or corporate taxes.

In other words, measures that directly impact on demand in the economy (such as government spending increases) have a greater impact on economic growth than those that rely on private sector spending to boost demand (such as tax cuts).

Of course, it is not possible to increase Government’s contribution to GDP unsustainably. Public spending is limited by available revenue and the size of the public debt, the sustainability of which are directly related to the strength of the economy. What is required is an intelligent balance between public spending and private sector activity, including measures to optimise the efficient co-operation of the public and private sectors. 

Given that Ireland has low taxes and low public expenditure, and a low overall level of investment in the economy, there is an opportunity to maximise returns from public investment. If the Government has identified available funds, these should be used to complement the low level of private investment, and potentially ‘crowd in’ additional private finance by providing attractive investment opportunities in key infrastructural projects.

This would increase economic growth in the immediate term and put in place the necessary infrastructure to foster long-term growth, to the benefit of private sector activity and sustainable job creation.

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Tuesday, 15 July 2014

Only One in Six Pay The 41% Higher Income Tax Rate

Nat O'Connor: Minister for Finance, Michael Noonan, has confirmed TASC's analysis that few people would benefit from changes to the higher income tax rate of 41%. In responding to parliamentary question on TASC's analysis, he confirmed: "I am informed by the Revenue Commissioners that they estimate that just over 17% of income earners were liable to Income Tax at the 41% rate in 2013." (Link: KildareStreet.com)

TASC's concern is that changes to the higher income tax rate would only benefit the one in six of the highest income earners who pay tax at the higher rate. (Link: TASC Policy Briefs)

It may surprise people that only one in six income earners pay any tax at the higher rate. Unfortunately, this is a stark reminder that many people in employment earn relatively low wages - and only some couples have two good incomes. Many people do not even earn a Living Wage of €23,000/year.

In Q1 2014, average earnings per week in Ireland were €689.88/week (€35,874/year) (Link: CSO).

With average earnings €3,074 higher than the threshold to pay the higher rate of income tax, how can it be that only one in six income earners pays at the 41%?

Here are two major reasons:
1. Marriage - over 1.7 million people in Ireland are married, compared to 2.5 million who are single, which includes those who are co-habiting, but considered 'single' for tax purposes (Link: CSO). Although the threshold for paying the 41% income tax rate is lower than average individual wages (a single person begins to pay tax at 41% on that part of their income above €32,800) it is almost certainly not lower than average household income levels. Through sharing tax credits, a married couple with one income begin to pay the higher rate from €45,400 and a married couple with two incomes pays the higher rate from a variable threshold up to €65,600 (depending on the balance between the two incomes).

2. The Maths of Averages - Average earnings of nearly €36,000 does not imply an even distribution of people on either side of the average. In fact, many more than half earn less because it take a lot of low income salaries to average out one highly paid employee. For example, one person on €110,000 (in the top 10%) combined with four minimum wage workers on €17,542 gives an average of €36,034 each. In order to bring the four workers up to a living wage of €23,000, the high pay would have to be brought down to €88,000 (average €36,000 each). In other words, high pay matters in terms of the shrinking incomes of the 'bottom 90%' in society.

Revenue provides statistics on the distribution of income, based on the gross income of tax cases (single or couples). While bearing in mind that some couples might choose to make separate tax returns, the Revenue statistics can be used offer a conservative estimate of income distribution in the economy. Table IDS1 on page 6 shows a large number of tax cases (presumably including many pensioners with small declarations and part-time workers) on less than €15,000 annual income. But conversely, out of over 2 million tax cases, only around 200,000 cases declared incomes over €75,000; of whom less than 100,000 had incomes over €100,000 (most of these high income cases are married couples).

Based on 1.9 million people in employment, it should be clear that couples where both spouses are on 'above average' pay of €40,000-€50,000 each are actually doing very well compared to everyone else. This is not to deny that many of them have high mortgage debt and high childcare costs. But squeezing the 'bottom 90%' through tax cuts for the top 10% is not the way to solve these problems.

Postscript: And it doesn't matter whether the rate is cut from 41% or whether the band is shifted upwards, so one begins paying the higher rate from 34,800 instead of 32,800. Only one in six income earners (at the top end of earnings) would benefit.

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Monday, 14 July 2014

Government Priorities, Jobs and Taxation

Nat O'Connor: Jobs has (rightly) emerged as the number one priority for the Government for the remainder of its term in office (Link: Statement of Government Priorities).

But are the economic ideas underpinning the strategy sound? And will it add or subtract from Ireland's level of economic inequality? I have selected five points from the ten-page strategy document to illustrate some strengths and weaknesses of what is being proposed.

1. "Our economic strategy will ... return the economy to full employment (2.1 million people) by 2020." (page 2)

Employment in Ireland peaked in 2008, at 2,147,300 employed (Link: CSO). At the time, there were 2,792,362 people aged 20-64, which gives an 'employment' rate of 76.9 per cent.*

*With the caveat that some people younger than 20 or older than 64 were probably in employment, so this percentage figure is an over-estimate. However using the age group 20-64 is nonetheless the Eurostat standard and relates to the EU's 2020 employment targets.

The CSO has estimated (here, page 38) that the population in 2021 will be 4.9 million people, of whom 2,837,800 will be aged 20-64.

On this basis, the Government's target of 2.1 million in employment by 2020 would be 74 per cent of working age adults (20-64), which is nearly three percentage points lower than the level of employment achieved in 2008. The 2.9 percentage point difference would mean 82,296 less jobs than if the same employment rate of 76.9 per cent was achieved by 2021. Hence, talk of 'returning' to full employment or 'restoring' all the lost jobs may give some people unrealistic hopes - especially older workers with low skills or specialised construction skills that are surplus to the economy's needs. And it might dissuade people from taking up re-training opportunities.

The Government has defined 'full employment' in 2020 as 2.1 million jobs. But there are better definitions. We could define it as everyone who wants paid employment should have it. More specifically, we might specify full-time employment, as many people work part-time involuntarily.

On the positive side, this new target is higher than under the national EU 2020 targets, where the Irish Government's target was an employment rate of 69-71 per cent, probably reflecting the higher number of younger people in third level education, plus the historically higher level of people (mostly women) working in the home or in unwaged care work, voluntarily and involuntarily.

The CSO population projection report focuses mostly on labour force population rather than total population. This makes significant assumptions about the percentages of people in third-level education, working in the home, disability, care duties, etc. Yet it is precisely policies to achieve structural changes in these areas that could change these proportions and get more people into paid employment.

For example, Ireland has among the most expensive childcare in the world. A shift to a state-subsidised system would have two employment effects. In the immediate term, it would enlarge child care as a sector of employment, with career options for women in particular (based on the experience in other countries). In turn, an even larger cohort of people who are currently full- or part-time carers for their children (again, mostly women) would be released to seek employment in line with their preferences and qualifications. Both of these effects would enlarge the labour force as a percentage of the working age population.

Structural changes such as the child care example show how paid employment can be extended to more people. But of course, this would only be possible if higher taxes were levied on all households to pay for subsidised childcare (essentially a redistribution from everyone to benefit young children, who in turn will have a better life start and will benefit us all when they are employed and paying taxes in future).

Childcare has to be paid for anyway, but a national system could achieve real efficiency savings through economies of scale. But this kind of structural change to sectors of employment is not visible in the Government's job plans. So how else can employment be generated?

The total population of Ireland is expected to grow significantly between 2008 and 2020, according to the CSO's projections. We know population growth expands the economy: there are simply more people needing the same basic goods and services, and that creates more jobs to be done. However, a bigger population also means more people seeking work, so while GDP may rise, GDP per person may not.

Beyond population growth, there are two further major options for job creation: money and new ideas. But where will they come from?

Last time Ireland achieved 2.1 million employed it was at the height of the boom. A great deal of money was borrowed by private households and businesses, and spent on property. In many cases, tax breaks - from mortgage interest relief to hotel tax breaks - spurred on this process. But at the core was borrowing from the future to pay for the present. Inevitably the bubble burst and Ireland lost around 300,000 jobs - many of which were directly or indirectly linked to the property bubble - or which were collateral damage, as businesses went down because their owners had taken on debt, possibly leveraging business assets. Meanwhile, national debt went through the roof due to lost tax revenue and the costly bank bailout, while private debt had also become among the highest in the OECD.

Where is the money going to come from to bring us back to 2.1 million jobs? While there may be some pent up demand for housing, people's ability (or desire) to take on mortgage debt has hopefully been tempered by recent history. We know that companies continue to complain of a lack of lending by financial institutions to SMEs. So, hopes for debt-fueled growth are limited. Never mind the fact that debt-based growth is risky and can go badly wrong, as we know all too well.

The Government seems to be betting on 'new ideas', which are an uncertain foundation for future job growth.

2. Actions in the revised Government priorities include "Using the new network of 31 Local Enterprise Offices in every local authority to support entrepreneurship and small business activity" (page 3)

Actually, the new LEO structure could be quite dynamic. There are exciting possibilities to focus on the different strengths and natural advantages in each local area, and they are a way to spread work around the country. There needs to be free rein to allow local experiments, including at the edge of traditional paid work sectors: possibly involving co-operatives, non-profits and social enterprises.

The Government could probably do more by supporting the development of LEOs in each local authority: a few more staff could operate forums and meetings with local people and businesses, do market research, and generally maximise the potential for idea generation. Of course, nine out of ten ideas might not work - LEOs need to encourage trial and error, and to give people the opportunity to keep returning to the drawing board until they can come up with viable business models. And LEOs have the advantage of small scale in many cases. For many areas, the creation of even ten new sustainable jobs would be a big win.

However, 'entrepreneurship' is not a magic wand and the creation of jobs from new ideas alone is rare. Investment money is needed too for LEOs to become a real engine for job creation.

3. "Local authorities will retain 80% of the proceeds [of] the local property tax, with the option to vary the rate by up to 15%." (page 10)

There is an opportunity, as the Local Property Tax could represent 'new money', at least for some areas. Ireland's funding of local government is among the lowest in the OECD. While there is currently a populist political rush to lower LPT, mature reflection about job creation might lead some local authorities to conclude that increasing LPT might be the only money for investment their areas are likely to see for some time.

Other changes to local government are worth considering too. Currently, they are not permitted to take on debt, even if they have substantial assets. If LEOs are going to involve a coming-together of local communities to generate jobs, and 'crowd in' private investment through publicly-funded seed investment, more capacity to borrow money locally for jobs projects should be considered.

4. "We will establish a Low Pay Commission" (page 4)

This is a good idea. As argued on www.livingwage.ie, paying people a Living Wage satisfies the social justice argument that everyone working full-time should have a minimum, decent standard of living as a result.

But there is also a strong economic argument for living wages. Raising low pay will boost aggregate demand across the country, with most of that money spent on local goods and services. Whereas profits may be used by companies to pay down debt sooner - or invested or repatriated abroad - re-balancing companies balance-sheets in favour of wages should help local job creation.

Company profitability obviously sets a limit to wage-led economic growth, but there is almost certainly scope to make significant changes in favour of people currently living below a Living Wage.

5. "...individuals and families on the average industrial wage can be paying a 52% marginal tax rate. [...] In Budget 2015, we will announce a tax reform plan to be delivered over a number of budgets to reduce the 52% tax rate on low- and middle-income earners in a manner that maintains the highly progressive nature of the Irish tax system." (pages 4-5)

Taoiseach Enda Kenny is reported as saying “The Government wants to make work pay for Ireland’s families,” ... “Now especially we want to make their lives that bit better and easier.’’ (Link: Irish Times)

This is where the wheels fall off the Government's job plan.

Economic output (measured as GDP) can be described in terms of four components: Consumption (C) + Government Spending (G) + Investment (I) + Net Exports/Imports (X-M).

Ireland has among the lowest tax and social insurance take in the EU, at three-quarters of the EU average. If tax take is cut, then the level of public services, social transfers and/or public investment must fall.

Lower public services will just mean that people will pay more in charges or fees for services, which will eliminate the benefit of a tax cut. (In fact, young healthy single people might pocket a tax cut, but families with children or people facing illness will face worsening services and higher costs). Lower public services will also simply reduce the G component of GDP, shrinking the economy.

Evidence from the ESRI and Central Bank (presentation and report) suggests that higher earners will simply pay down mortgage debt, rather than spend more. This means that the C component of GDP is unlikely to grow to the same extent that the G component will fall due to tax cuts. In normal times, that might give the banks more money to lend - but they are not lending.

If social welfare is cut further, the C component will also fall, as people on welfare spend practically all of their incomes on essential goods and services.

Ireland already has the lowest level of investment (I) in the EU. So further cuts to public investment will shrink GDP and also lower Ireland's potential future growth trajectory, due to the lack of crucial infrastructure.

Hence, the first problem with the tax cuts strategy is that it is unlikely to boost economic output. On the contrary, it is more likely to shrink the economy and cost jobs. (The above arguments are outlined in more detail in A Defence of Taxation, pages 24-28).

The second problem is that only 17 per cent of income earners pay anything at the 52% marginal tax rate (See Minister Noonan's response to PQ). Cuts to the 52% marginal rate are not tax cuts for low and middle income earners: most of the benefit is likely to accrue to people who have higher incomes, worsening economic inequality in Ireland (See here for details).

In conclusion, Ireland had a once-off boom due to a large number of people and businesses taking on high levels of debt. The failures of the weakly-regulated banking sector led to another layer of debt being taken on across all of society. It is not plausible that much more debt can be taken on, or that debt-fueled growth is going to generate more jobs.

We have had over five years for private investors to see the opportunity of low prices and come pouring into Ireland, but this hasn't happened as our investment statistics show.

Lowering taxes won't cut people's cost of living. On the contrary, many people will pay more to replace lost public services. And people on the lowest incomes, reliant on welfare and public services, will see their quality of life further eroded.

The currently most readily available source of money for investment and jobs is the public purse. The deep contradiction at the heart of the Government's new priorities is the idea that we can maintain services and investment, while lowering taxes and giving everyone higher net incomes. But this is a recipe for having your cake and eating it: in reality, it will worsen economic inequality and it won't generate jobs.

The alternative is to re-balance the economy in favour of higher wages, and to strengthen public services, social transfers and public investment based on progressive taxation.

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Ireland's Corporation Tax Regime Under Scrutiny (Again)

Nat O'Connor: It is reported that the Government is considering an early move to close down the 'Double Irish' tax avoidance method permitted by Irish tax law. (Link: Irish Times)

Global pressure is mounting, including from Brussels' investigation into Apple, the US Congress continuing to be concerned about US companies not paying pay at home, and the OECD working on a framework for a new multinational agreement on Corporation Tax.

There appears to be a choice. The Government might "secure better international terms for phasing out such mechanisms by moving early" but IBEC's CEO argues that "a “majority” of businesses here would prefer it if the Government awaited actual action at global level before any Irish move."

Reporting, Arthur Beesley concludes that "The irony, indeed, is that there is no apparent threat to the 12.5 per cent rate itself." But there is no irony. The issue of Ireland's corporation tax regime has always been about the rules, not the rate. In TASC's report, Tax Injustice, the Double Irish tax avoidance method is explained (from page 16).

The likely medium-term outcome of an international agreement on corporation tax is that Ireland will need to change part of our industrial strategy. Currently, we take a little corporation tax from a lot of companies - some of which are based in Ireland because our tax rules allow them to lower the amount of tax they pay globally. In future, to keep up corporation tax revenues, Ireland may need to take more tax from fewer companies. In other words, the pressure to change the 12.5% rate will come from within Ireland to maintain our level of tax take from corporations.

Bearing in mind that the large majority of companies (mostly SMEs) don't pay significant levels of corporation tax, the tax bill will probably land with the bigger companies - some of which are globally mobile, but others of which are embedded in Ireland's economy. The larger companies are also likely to be the most influential in the business lobby group IBEC's push against changing the rules - as they would be in the Government's sights to pay more tax. Although a 'majority' of them might oppose changes now, they are a minority of all companies and employers in Ireland.

Another possible future is that the global rules are tightened (with or without Ireland's co-operation) but the Government decides not to seek more tax from profitable companies here. That would mean a further erosion of Ireland's tax base, which at three-quarters of the EU average is already among the lowest in Europe. Such erosion would mean weaker public services, low levels of social transfers, and even weaker public investment: a recipe for further economic stagnation and hardship.

In all likelihood, three of the largest economies in the world are likely to press for significant change (i.e. the USA, France and Germany). Although this might happen slowly rather than overnight, Ireland will inevitably be carried along by whatever new consensus emerges. So there is a good argument for moving early. What kind of 'better international terms' might Ireland get? Maybe some commitments from large multi-nationals with significant state contracts to stay based in Ireland. Maybe some concession on our legacy bank debt from the EU. But if Ireland is dragged along reluctantly along with other countries that facilitate tax avoidance (like the Netherlands and Luxemburg), this will neither help our reputation nor give us any bargaining power. However, those countries have more alternative strengths in their domestic economies compared to Ireland and can maybe better afford to wait and see.

The Government's consultation on this ends on 22 July. Whatever way this issue turns out, it is likely that international moves to limit companies ability to locate in Ireland to avoid taxation will lead to some companies leaving - although it remains to be seen what that will mean in terms of jobs. Even if this is just a risk, not a certainty, there there is a need to boost all the other reasons why Ireland is competitive, including English language fluency, membership of the Euro zone, an ICT-literate young workforce, and so on. Public services like education, as well as public investment in broadband, the energy grid, re-training schemes and even the Youth Guarantee are all ways for the Government to boost Ireland's attractiveness for business.

But this all costs money... which brings us back to the question of how we get our tax system to add up to provide an adequate level of revenue, including from corporate taxes.

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Thursday, 10 July 2014

A "Zillionaire" Calls for More Equality

Nat O'Connor: "Zillionaire" Nick Hanauer (net worth $1bn+) has written an opinion piece in Politico.com entitled "The Pitchforks Are Coming… For Us Plutocrats".

It is a call to self-interested "0.01%ers" to dump trickle-down economics in favour of "middle out" arguments. Give more money to the broad middle class (i.e. everyone in employment) and the economy will grow, leading to more (not less) profits and rewards for those on top.

The pitchforks argument is as follows "If we don’t do something to fix the glaring inequities in this economy, the pitchforks are going to come for us. No society can sustain this kind of rising inequality. In fact, there is no example in human history where wealth accumulated like this and the pitchforks didn’t eventually come out. You show me a highly unequal society, and I will show you a police state. Or an uprising. There are no counterexamples. None. It’s not if, it’s when."

Some people might be familiar with Nick Hanauer, as he appears in Robert Reich's film, Inequality for All, as screened by the Jameson film festival with TASC's panel discussion in February. In Reich's film, he reiterates the same arguments for spreading incomes more widely.

Hanauer's opinion piece (and a related TED talk) has been criticised by various commentators (e.g. Max Borders, author of Superwealth a book defending inequality) and Forbes magazine, who helped spread interest in Hanauer's piece by branding it his "Latest Near Insane Economic Plan".

One of Hanauer's central arguments is that Ford paid his workers more, who could then afford his cars. Worstall's counter-argument is a calculation that Ford's workers would spend less on cars than Ford gave them in additional wages.

The problem with Worstall's argument is that Hanauer is talking in more general terms. As Hanauer makes clear, employers cannot be expected to pay uncompetitive wages, hence employers need statutory instruments (like the new $15 Seattle minimum wage) to level the playing pitch. To continue the Ford analogy, if ALL workers gain a living wage, not just Ford's own workforce, hundreds of thousands could then afford cars. That's the real argument for economy-wide rises in wages, for wage-led economic growth.

And are there limits to this? Of course. But the argument is to rebalance the return to labour in terms of wages versus the return in terms of profit or dividends to capital. Balance is the key word here. The growing inequality of the last four decades has seen the balance move in favour of the top 10%, and particularly the top 1% (and top 0.1%, 0.01%, etc.) New tools - a Living Wage, tax reform, etc. - are needed to re-balance things in favour of the 'bottom 90%'.

Another Worstall critique is that savings are essential for investment whereas Hanauer seems in the opinion piece to discredit the role of savings. However, what Hanauer mentions in the Reich film - but does not articulate clearly in the article - is that savings now get invested globally, which does not benefit most people in America right now.

Hanauer is not entering the debate as an expert macroeconomist. However, he is a financially-literate, savvy businessman who made big money from being an early investor (of a family fortune) in Amazon. His entrance into the political debate is precisely that, political. He is challenging ideological touchstones in US political economy, such as the role of the super-rich as 'job creators', the 'trickle-down effect' and the culture of entitlement that CEOs have around extraordinary levels of remuneration. Crucially, he argues that Democrats are failing to win this argument because they talk about social justice, whereas he argues in terms of wage-led economic growth and the self-interest of the rich, who can benefit from a faster growing economy.

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The Basic Argument for a Living Wage

A group of organisations, including TASC, supported a project to calculate a Living Wage for Ireland. The evidence about the cost of living is that a single person working full time would have to earn €11.45 per hour in order to afford a dignified life.

Ireland’s Living Wage is based on detailed item-by-item costs for a basic standard of living below which no one should be expected to live. It allows someone to meet the essentials of life, but focused on needs rather than wants. It is a single measure for all of Ireland, with costs calculated for different areas and it represents a weighted average. A technical group involving a range of experts has had a series of meetings to ensure that the calculation is based on a robust method, in line with similar Living Wage calculations done in other countries. A technical paper is available on the Living Wage website giving all of the details.

The idea of a Living Wage is not just a question of social justice, it also makes economic sense as well. It should be a given in our society that full-time work allows someone to live a modest, but dignified life. The fact that the national minimum wage is so much lower (€8.65), as well as the fact that not everyone at work can get full-time hours, makes it clear that many people at work are going without certain essentials to make ends meet.

In London, and elsewhere, businesses and politicians across the political spectrum have supported a Living Wage. Companies and public bodies have pledged to be Living Wage employers. It makes sense for many businesses too, because if people have more money in their pockets that goes straight into local shops and services. When people go without essentials, that customer spending is lost forever.

And a Living Wage is something that can be afforded. On a weekly basis, it is less than €450 per week. Annually, it is less than €23,300, which is well below average wage levels. In the beginning, the national minimum wage was calculated as a proportion of average wages, but that link was dropped and more recently it has been frozen for seven years, but the cost of living has kept on climbing up.

Economists have talked about the possibility for wage-led growth across Europe and North America, based on the principle of getting more money in the pockets of low income workers and families. A Living Wage for workers – along with a living income for families (which includes public services and social transfers for children, like Child Benefit) – is an essential building block for getting the economy moving again, while making sure that no one is left behind by the recovery.

Beginning a national conversation about a Living Wage is important. Some employers will say they cannot afford it – and that has to be taken seriously. But other countries have managed to tackle the cost of living better than Ireland, for example by limiting the cost of housing or providing state subsidies for childcare. Paying workers a Living Wage is part of the solution to the cost of living crisis, but providing better public services and taking action to tackle Ireland’s high prices for food, energy and other essentials is also part of the answer.

The technical group has focused on provided a strong, evidence-based calculation of what is needed to afford the cost of living in Ireland today. It is now up to everyone to take this conversation forward, to ensure that Ireland’s economic recovery is fair and equally distributed.

Technical details of the Living Wage calculations, as well as whose involved in the technical work, can be seen on www.livingwage.ie

This opinion piece was previously published in The Carlow Nationalist on 8th July 2014 under the title 'Project reveals that Ireland's minimum wage is too low'

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Wednesday, 9 July 2014

The Cost of High Pay in the UK

The UK High Pay Centre is an independent non-party think tank established to monitor pay at the top of the income distribution and set out a road map towards better business and economic success. They have just produced a compelling three-minute video showing that a FTSE 100 CEO takes home more in three days than an average employee earns in a year.

Details of the staff, trustees and advisory board of the High Pay Centre can be seen here.

The video is based on an analysis of high pay, available as an eight-page report: 'What Would the Neighbours Say?'

They find that the bottom 20% in the UK have incomes closer to Slovenia and the Czech Republic's bottom 20% rather than North-Western European norms, even though average UK incomes are in line with North-Western Europe.

For those who think only a handful of people get paid super-high salaries and so it 'doesn't matter', think again. If the income distribution of the Netherlands or Denmark applied to the UK, 99% of households would benefit to the tune of £2,700 each on average.

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Tuesday, 8 July 2014

€11.45 Living Wage

Nat O'Connor: A technical, evidence-based analysis has led to the calculation of a Living Wage for Ireland of €11.45 per hour. This is based on a single person working full-time (defined as 39 hours/week). The calculation is based on detailed data from the Vincentian Partnership for Social Justice's budgeting.ie work, which describes each item required for a person to have a Minimum Essential Standard of Living or MESL.

The MESL standard is based on focus groups done with people living on low incomes, to agree a minimum standard of living, sufficient to meet someone's needs (not wants). It is not a poverty standard, but a minimum for a dignified life. Once the standard of living is agreed, researchers from the Vincentian Partnership for Social Justice look annually at the cheapest possible goods and services available in the market.

The categories of cost can be seen in the summary of the Living Wage (page 2). Some commentators have suggested that €11.45/hour (€446/week or just over €23,000/year) is 'too high' or includes unreasonable 'needs'. Let's look at that.

It might be argued that more frugal living is possible than described by the Living Wage. Well, core expenditure can be seen in detail here for the example of an Urban dwelling adult living alone. (Other detailed budgets can be seen here).

For a single man living alone in an urban area, a Living Wage will allow €57 per week for food along the following lines. Grocery shopping in a chain supermarket (typically a German discounter) including fresh fruit and vegetables for a healthy diet and a limited quantity of luxuries. For example, there is sufficient budget to allow three eggs per week, two litres of milk per week, one packet of biscuits per week, one jar of instant coffee every six weeks, one jar of jam every eight weeks, and so on. The budget does allow for one Deli lunch per week (€5.60), one Chinese takeaway every four weeks (€11.20) and a Sunday lunch out every six weeks (€10.00).

In terms of clothing, the Living Wage allows just over €10.00 per week. For a man (pages 9-11 of the same document), this would typically include: six pairs of socks/year, a pair of slippers every three years, a heavy jacket (€45) every year, a casual shirt every year (€15), a suit every three years (€144), a pair of shoes/year (€30), and so on. Obviously, these are the cheapest available goods. If someone wants a more expensive piece of clothing, he or she will have to make it last longer.

There is similar detail available for personal care items (e.g. shaving cream) and health care (e.g. dental visits). Energy bills are expected to be covered by €9.99/week. The household goods section is instructive. The scenario assumes that a single male lives in furnished rental accommodation and so does not own any furniture. A basic television is owned (€119.95) and is expected to last for ten years, likewise a toaster, iron, and so on. A wooden spoon (€1.99) is expected to last twenty years.

The television licence (€160/year) is an expensive cost, at over €3/week. No allowance is made for cable or satellite television. (By the way, 411 people were jailed last year for non-payment of the TV licence)

This budget allows someone to send 20 Christmas cards and four other greeting cards per year, with a total allowance of 30 stamps (55 cents each). The cost of stamps was calculated before the recent nearly 10 per cent rise in the cost of a stamp, to 60 cent - which means yet another €1.50 will have to be squeezed out of an annual budget that is already insufficient. This follows a pattern of publicly-regulated costs going up, such as Dublin Bus fares up 15-25 per cent in 2013.

Some commentators have criticised the allowance of spending for 'social inclusion'. Let's explore that. Under communications, the budget allows for a basic mobile phone (€59.99) and €5 of credit per week. It allows for a laptop (€479) meant to last for five years - i.e. costing €1.84/week. A printer is allowed for (€59.99/ten years), as well as 500 sheets of A4 paper every year (€4.99).

A person on this basic budget has €2 per week to make a donation to charity and is assumed to save €5 per week.

An annual holiday is included, which is illustrated as a week-long trip to Galway from Dublin, with seven nights accommodation (€25/night) and €299 in spending money.

Purchase of one newspaper per week is allowed for (€2.20) and a DVD rental four times a year (€4.60). A trip to the cinema is allowed for every two months (€8.50). Two swims a month are allowed for (€5 each) as well as a weekly football match (€5/week for 9 months/year).

There is a €15/week allowance for socialising/entertainment. This might allow three or four pints of beer per week, or a cup of tea/coffee every day.

The LivingWage.ie website has a new note outlining the allowances for social inclusion and participation under the Living Wage calculation, available here.

There is much more detail in the background data and reports, all available for scrutiny. While there may be quibbles about line items, what any serious examination of the data will show is that the Living Wage is based on a very modest, simple lifestyle. There is very little room for emergencies or special occasions. And the Living Wage is not meant to describe a poverty line, but it is a description of what the focus group participants believe is the minimum required for a dignified life, underneath which no one should be expected to fall. If anything, the Living Wage is too frugal - and of course the reality is that many people on such an income could still experience material deprivation. Not everyone lives beside a supermarket and disability or the needs of extended family members can put further pressure on people's budgets.

The details of the budgets merits serious attention, for many reasons.

It makes it clear that many people in Ireland go without many essential goods and services. This is bad for them, but it is also bad for local shops and immoral for Irish society because such deprivation would be unnecessary if national income was distributed more fairly.

It shows that every small increase in costs under public control or regulation matters - including energy, postage, telecoms and public transport, as well as the effect of VAT and other indirect taxes on prices in the market.

Raising people's incomes up to an evidence-based Living Wage would boost local spending power and benefit many small enterprises across Ireland. It would boost VAT income for the state and lower pressure on supplemental and special needs social welfare payments.

Like with the minimum wage, businesses that genuinely cannot afford to pay a Living Wage could be dealt with on a case-by-case basis. The Living Wage also provides an evidence base to interrogate why some goods and services are more expensive in Ireland than elsewhere, and what could be done to boost competition or regulate costs to lower the cost of living.

At the heart of the Living Wage argument is the proposition that everyone who works full-time should be entitled to a very basic, minimum standard of living sufficient to for a dignified life. But even the modest suggestion of paying at least €11.45 per hour won't happen unless people and organisations demand it.

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