Thursday, 17 April 2014

Ireland's National Risk Assessment

Paul Sweeeney: The Department of the Taoiseach just published its “Draft National Risk Assessment of Ireland” as promised in the Government Programme. This is extremely welcome and indicates fresh thinking on forward planning for unexpected shocks. It is very interesting reading indeed.

Its main categories of risk are i) Economic; ii) Environmental; iii) Geo-political; iv) Social; and v) Technological. But it covers food safety, infrastructural development, social cohesion, migration and integration, the banking system, pandemics, cyber security, terrorism and more.

However, it is both contradictory and disappointing in a few areas. It is thin on what the responses should be, but that should follow later, on revision, we hope.

This publication states at the very beginning that it seeks to avoid “group think.” Enda Kenny in his introduction specifically demands that “never again should dissenting voices be silenced”. It warns against “herding” and “selective reading.”

It was this “group think” which dominated property supplements and business pages of Irish newspapers and the selection of many economic commentators who urged endlessly that “you need to get on the property ladder” or be left behind.

What the Taoiseach and other commentators never say is the Group Thinkers who dominated were all from the Right. It did seem, for a while, that the unregulated free market worked, but boy, did it implode, necessitating massive public bail-outs of the private sector.

While wisely warning of the dangers of “group think”, the assessment paper immediately falls into “group think”. Workers are called “human capital” and competitiveness is defined solely as wage movements over the short term and not in its complexity. However, it is only a draft and that shows some foresight and we trust it will be amended, as it is important.

It has a crude reductionist view of competitiveness. This is surprising as Ireland has a National Competiveness Council (NCC) which examines the complex issue of competitiveness and has done so with continuing refinements for decades.

The NCC is recognised as a world leader in its area. Several countries are emulating its work. Indeed this risk assessment acknowledges the existence of the NCC and quotes one of its publications. Yet it is a clear the authors have not actually read the reports of the NCC. They are published by the Government, with forewords by the same Taoiseach. The NCC reports point out that wage movements are but one issue in a complex area.

It was not rising wages that caused Ireland's downturn, despite the needless battering of trade unions and workers by conservative economists and think tanks over the last 30 years.

Wage movements are important in an economy but less so than productivity, which is mentioned. The issue of competitiveness is much more complex than the crude depiction in this report.

In contrast, the report does not cover the dangers of “excessive profit-taking” directly. US MNCs famously make huge profits here it is stated in IDA reports. The assessment does cover this vaguely, in the sense that it is mentions Ireland’s over-dependence on a small number of foreign MNCs in a small number of sectors. This is a welcome and timely recognition. It also expresses concern about the low rate of Corporation Tax in a vague way, and while oblique, this recognition is long overdue but welcome.

The biggest issues facing Ireland’s competitiveness today are, in my own view: i) the cost to taxpayers of the infamous private bank guarantee; ii) the lack of credit for small businesses (i.e. via the banks); iii) the potential impact of a change in the US tax regime which wipes out the attractiveness of low effective corporation taxes overnight (the vague but welcome mention); and d) our reputation as a place to do business (ethics are too flexible in business and those in the elite are not brought to task, while private enterprise is becoming less transparent, with the growth of secret unlimited companies, deliberately obscure accountancy and other evasions).

The NCC has 16 members, 10 of who are representatives of business. Clearly it is a contested space, but yet it reports are sophisticated and contribute much to an understanding of what is a complex issue, provided they are read by policymakers; i.e. those who should do so.

The risk report also misses out in its lack of emphasis on inequality. This is the big economic and social issue of the 21st Century. Besides the terrible impact on poorer people, from an economic point of view it is leading to falling demand as the rich get richer without doing a hand's turn, and it is undermining meritocracy and democracy.

The other big issue neglected is media plurality. This is a defining issue for this Government for it was the lack of economic debate (which is admitted so forcefully by the Taoiseach in his Foreword) which allowed right-wing group think to rule the air and printed media. I would argue that the bias remains and may be deepening.

And while on the subject of “group think”, and the how deep the dominance of the language of the Tea Party and the Right has gone in discourse in Ireland, we should look at a recent publication by the Department of Finance. It is an interesting and detailed response to widespread publicity internationally on the extraordinarily low (and in some cases no) tax paid by highly profitable MNCs in Ireland. (Or not based 'in' Ireland yet stepping in and stepping out). For example, Jim Stewart’s revelations that the effective tax rates paid by many MNCs in Ireland are much lower than the low nominal rate of Corporation Tax.

The risk report deals with MNCs and never once referred to “transfer pricing”. This is truly remarkable!

In contrast, virtually every time it mentioned the word “tax” it appended the word “burden” to it. The term “tax burden” appears a staggering 24 times in the paper. This is a pejorative Tea Party term which no tax-funded civil servant should use, ever.

Why is my payment to the doctor a “payment” but the payment under a medical card a “burden”? The implication is that every civil servant in the same Dept of Finance is a “burden” because he or she is paid fully out of taxation, which is a burden.

What is even more laughable is that when it comes to Corporation Tax in Ireland the word “burden” is wholly inappropriate. For in Ireland the nominal rate is very low, the effective rate is even lower and the social charges paid by employers are among the lowest in the world. How can they be called “burdens”?!

I do not think that the authors even realise that they are using Tea Party language, so inculcated is it in the psyche of many. Even the Department’s PR section did not see the use of this degrading word which is attached to the word “tax” by those who want a small state and inequality.

Words are weapons.

Paul Sweeney is a member the NCC

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Thursday, 10 April 2014

Widen the band, widen the gap?

Cormac Staunton: There has been a lot of talk recently about cutting income taxes now that the Irish economy is beginning to show signs of recovery. Everyone loves a tax cut, but it’s worth looking at what is being proposed, and who is really going to benefit.

From the outset, it’s important to point out that what is being referred to as a tax ‘cut’ is in reality a widening of the tax bands so that the higher rate (41%) kicks in a bit later than it currently does (€32,800). The effect of this type of ‘cut’ won’t be the same for everyone.

The first and most important thing to note is that if a person doesn’t earn more than €32,800 per year, then this change will have no impact on their take home pay. Given that more than half of Irish workers do not earn that much, then that is a significant amount of people who won’t see any benefit from the tax cut.

It is also important to point out that 41% is a ‘marginal’ rate, which means everyone, no matter how much they earn, pays 20% on their income up to €32,800, and then 41% on anything earned above that.

To show the impact of widening the tax bands, we therefore need to see how it would change a person’s ‘effective’ tax rate, the amount of tax they actually pay.

We can show effective rates (including USC and PRSI) using tools such as the Deloitte Tax Calculator. We can then compare two different scenarios (for a single person); the current system and a hypothetical system where the tax band has been widened.  As an example, we can show what would happen if  threshold was raised from €32,800, to €36,400 (which is where the cut off was in 2010)
to see who benefits from a widening of the bands.

The results are:

In chart form, the change in effective tax rates look like this:

 Expressed as a percentage ‘tax cut’ it would look like this:

It is often presented that the greatest benefit of this type of cut is for those earning just above the current cut-off (between €32,800 and €36,400), who will now pay no taxes at the higher rate.  

However, because it is a marginal rate, this is not the case. The real benefit goes to those who pay more of their income at a higher rate. From the figures above it is clear that those who benefit most from this tax cut (in percentage terms) are those earning €40,000 per year, who would get a 1.9% cut. These are people on above average incomes.

Widening the band would also bring significant benefits (in real terms) for those on much higher incomes; 1.5% for someone on €50,000, 0.9% for someone on €80,000 (and note; this does not take into account other forms of tax breaks available to higher earners).

At the same time, those earning around average wages (c. €35,738) see a much smaller benefit (0.5%). And crucially, these figures confirm what we already knew: that this type of change would be of no benefit to around half of all workers in Ireland who earn less than €32,800. 

Given that 20% of workers in Ireland are officially on low pay, one of the highest levels in western Europe, and that manual workers’ wages have fallen since 2010, while managers and professionals have increased their wages in that time, it is likely that that widening the tax bands would widen the already high levels of income inequality in Ireland today.

Cormac Staunton is TASC's Policy Analyst. You can follow him on Twitter @Cormac_Staunton

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Wednesday, 9 April 2014

Conceptualising Economic Inequality

See here for a presentation conceptualizing economic inequality.

The presentation is designed to explore the concept of 'economic equality' by moving beyond a narrow focus on incomes (from employment and/or social transfers) and including wealth and public services, both of which provide cash-equivalent benefits and other personal benefits (such as security against risks).

The larger and more nuanced concept of 'benefit from the economic system' gives a better sence of how different social groups benefit from the way in which the economy is structured to provide a combination of market incomes, welfare incomes and public services (with both cash-equivalent value like social housing or less tangible but no less important value like security against illness or loss of a job). What emerges is a contrast between wealth confering benefits on those households who have assets versus public services confering benefits upon a wider pool of recipients, with those on low incomes (from work or welfare) gaining most from public services.

While we know that employment is the number one route towards more income equality, the Irish economic system (in 2011) was only able to provide 65.5 per cent of adults aged 25-64 with employment, and the numbers seeking employment far outweigh number of job vacancies annually. When we look at the over one million adults of working age who benefit from a weekly welfare payment, this paints a picture of a society where the large majority of people have low cash incomes, and therefore the importance of public services (and the harm of cuts) becomes more obvious. Conversely, tax changes that benefit people with higher income and wealth more clearly benefit a small minority of Irish people, not just a minority of those in employment.

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Wednesday, 2 April 2014

OECD and tax avoidance: the story so far ...

In a webcast from Paris this afternoon, the OECD updated the world on progress on the BEPS project to date. Pascal Saint-Amans stressed the process was on track to be presented to finance ministers in September 2014. Four discussion drafts have been issued over recent months, covering country-by-country reporting, the abuse of the international network of tax treaties, the rather more technical question of hybrid mismatches, and more broadly the challenges posed by the digital economy.  This article summarises where the OECD is on each of these four areas, and then makes some general observations on the process. 

The Digital Economy
The current thinking here, sensibly, is that it is neither possible nor useful to ring-fence the digital economy. Everything is digital now. So what the draft does is focus on the key features which warrant attention from a tax point of view. These are mobility of assets, customers, employers; the way new business models rely on data, sometimes very large banks of personal data; the multi-faceted nature of these new business models with value being created by customers as well as by vendors; and network effects in general.

So the working group will focus on questions such as how to restore source and residence taxation in this new context. How can value be attributed to data, given that it is created by a wide network of individuals? How can cloud-based storage be attributed to a single or even to multiple jurisdictions? What about consumption taxes?

These are complex questions. Taking just that last one as an example, VAT has traditionally been imposed in a particular jurisdiction based on the concept of place of supply;  if I sell you a car, for example, it is not difficult to decide where that transaction takes place. If, on the other hand, I download music produced by some Californian indie band from the cloud, to an ipad, while transiting through Manchester airport, where is that sale made? Do we look at where the customers are located? Where the service providers are headquartered?  Where the company making the sale says its sales force are? Each of these methods would give a very different tax outcome, with fairly profound implications for both companies and countries. 

Hybrid mismatches
This is a more technical area, fascinating to tax planners and tax nerds generally, almost certainly less so to the general public. It refers to any arrangement that exploits the different tax treatment in different jurisdictions of the same instrument, so for instance a financing instrument that obtains a tax deduction in one place, but is tax free in another. 

Achim Pross clarified some important issues of scope; the OECD are not looking at mismatches between tax and law, for instance, only at international tax mismatches. They are seeking rules wich are clear and easy to apply ,and which can be easily or automatically imported into domestic law without the need for taxing authorities to form a judgement about intent .  They want the new rules to be comprehensive – there is no  point in closing down one type of abuse only to let it open elsewhere in a slightly different guise. The mechanism they will probably apply is to neutralise the tax mismatch without disturbing the regulatory consequences, so the tax treatment in one state will be based on the tax treatment in the other, restoring the symmetry to the international situation that would have applied had the transaction been domestic. This raises the implementation question of which country’s rules to adapt? Whether to apply this only to group transactions or also to parties acting in concert and structured arrangements more generally? How to deal with accidental hybrid instruments? It is clear that widely-traded financial instruments which are hybrid in some way will probably be outside the scope, but there are lots of questions still to be addressed on this one. 

Tax Treaty Abuse
This is a big one, and has generated a great deal of public comment already on the discussion draft issued last month. The approach is interesting. First the purpose of treaties is established, and in particular the fact that they are intended to be bilateral, and not to create conduits. Next there are specific anti-abuse rules being developed such as tie-breaker rules on dual-residence companies, and minimum holding periods for dividend transfers. Finally, they are talking about a general provision, more or less like an anti-avoidance rule, which denies treaty benefits if the main purpose of the transaction is to obtain the treaty benefits, AND the obtaining of the benefits is contrary to the purpose of the treaty. 

This is potentially a game-changer, depending on how widely the new general provision might be applied. 

Transfer pricing and country by country reporting
Here is where things slow down a little. On transfer pricing, the OECD remain firmly committed to the principle of arms-length pricing, despite protests from many groups such as the tax justice network. Similarly on country by country reporting, the latest changes seem to limit the recommendations to high-level reporting on a country level rather than on a company level, and only to taxing authorities rather than to the general public. It is likely that companies will only need to report income, profit, tax paid and accrued in each country as well as details on the numbers of employees, tangible assets and retained earnings/capital. 

Overall points
The emphasis is on saving the system, not rebuilding it. In particular, the arms-length principle remains a staple of the current thinking. In answer to a question at the end, Pascal Saint-Amans said “So let’s fix the existing system. Which will allow us to save the arms-length principle, which will provide the certainty that countries and companies need.” 

Developing countries have other concerns on international tax, especially about commodity mispricing and tax incentives, which are less reflected in the current work programme of BEPS. The OECD have had a series of regional  consultations with developing countries, and have promised to take their views into consideration. 

BEPS is not all-embracing. For instance, a question from an Australian journalist revealed that aggressive tax planning based on after-tax hedging, is not currently under scrutiny. However, for particular structures, such as the infamous Double Irish, the writing is clearly on the wall. Asked specifically about that structure, Pascal Saint-Amans said that yes, they expect and encourage the ending of the Double Irish, and that for companies to anticipate such changes and adapt their actions in advance of proposed changes “”would be a smart move”

So change continues, with some measures such as country by country becoming more conservative, and others such as the treaty abuse measures holding out real possibility of reform. They promise more webcasts, so watch this space. 

Dr Sheila Killian

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Tuesday, 1 April 2014

Stiglitz on Inequality

Joseph Stiglitz's March 2014 presentation on the 'Causes and Consequences of Growing Inequality: and what can be done about it' is available here. His presentation was given at the Progressive Economy EU conference in Brussels.

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Pope Francis on Economic Inequality

Pope Francis has made a number of significant comments on economic inequality and economic policy in his EVANGELII GAUDIUM,a 224-page 'exhortation' to the Catholic Church.

Two sections stand out: Chapter 2, I. Some Challenges of Today's World and, in Chapter 4, a section on "The economy and the distribution of income".

Pope Francis writes:
"52. In our time humanity is experiencing a turning-point in its history, as we can see from the advances being made in so many fields. We can only praise the steps being taken to improve people’s welfare in areas such as health care, education and communications. At the same time we have to remember that the majority of our contemporaries are barely living from day to day, with dire consequences. A number of diseases are spreading. The hearts of many people are gripped by fear and desperation, even in the so-called rich countries. The joy of living frequently fades, lack of respect for others and violence are on the rise, and inequality is increasingly evident. It is a struggle to live and, often, to live with precious little dignity. This epochal change has been set in motion by the enormous qualitative, quantitative, rapid and cumulative advances occuring in the sciences and in technology, and by their instant application in different areas of nature and of life. We are in an age of knowledge and information, which has led to new and often anonymous kinds of power.

No to an economy of exclusion
"53. Just as the commandment “Thou shalt not kill” sets a clear limit in order to safeguard the value of human life, today we also have to say “thou shalt not” to an economy of exclusion and inequality. Such an economy kills. How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points? This is a case of exclusion. Can we continue to stand by when food is thrown away while people are starving? This is a case of inequality. Today everything comes under the laws of competition and the survival of the fittest, where the powerful feed upon the powerless. As a consequence, masses of people find themselves excluded and marginalized: without work, without possibilities, without any means of escape.

"54. In this context, some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system. Meanwhile, the excluded are still waiting. To sustain a lifestyle which excludes others, or to sustain enthusiasm for that selfish ideal, a globalization of indifference has developed. Almost without being aware of it, we end up being incapable of feeling compassion at the outcry of the poor, weeping for other people’s pain, and feeling a need to help them, as though all this were someone else’s responsibility and not our own. The culture of prosperity deadens us; we are thrilled if the market offers us something new to purchase. In the meantime all those lives stunted for lack of opportunity seem a mere spectacle; they fail to move us.

"56. While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules. Debt and the accumulation of interest also make it difficult for countries to realize the potential of their own economies and keep citizens from enjoying their real purchasing power. To all this we can add widespread corruption and self-serving tax evasion, which have taken on worldwide dimensions. The thirst for power and possessions knows no limits. In this system, which tends to devour everything which stands in the way of increased profits, whatever is fragile, like the environment, is defenseless before the interests of a deified market, which become the only rule.

No to a financial system which rules rather than serves
"57. Behind this attitude lurks a rejection of ethics and a rejection of God. [...] Ethics – a non-ideological ethics – would make it possible to bring about balance and a more humane social order. With this in mind, I encourage financial experts and political leaders to ponder the words of one of the sages of antiquity: “Not to share one’s wealth with the poor is to steal from them and to take away their livelihood. It is not our own goods which we hold, but theirs”.

"58. A financial reform open to such ethical considerations would require a vigorous change of approach on the part of political leaders. [...] I exhort you to generous solidarity and to the return of economics and finance to an ethical approach which favours human beings.

The economy and the distribution of income
"202. The need to resolve the structural causes of poverty cannot be delayed, not only for the pragmatic reason of its urgency for the good order of society, but because society needs to be cured of a sickness which is weakening and frustrating it, and which can only lead to new crises. Welfare projects, which meet certain urgent needs, should be considered merely temporary responses. As long as the problems of the poor are not radically resolved by rejecting the absolute autonomy of markets and financial speculation and by attacking the structural causes of inequality, no solution will be found for the world’s problems or, for that matter, to any problems. Inequality is the root of social ills.

"203. The dignity of each human person and the pursuit of the common good are concerns which ought to shape all economic policies. At times, however, they seem to be a mere addendum imported from without in order to fill out a political discourse lacking in perspectives or plans for true and integral development. How many words prove irksome to this system! It is irksome when the question of ethics is raised, when global solidarity is invoked, when the distribution of goods is mentioned, when reference in made to protecting labour and defending the dignity of the powerless, when allusion is made to a God who demands a commitment to justice. At other times these issues are exploited by a rhetoric which cheapens them. Casual indifference in the face of such questions empties our lives and our words of all meaning. Business is a vocation, and a noble vocation, provided that those engaged in it see themselves challenged by a greater meaning in life; this will enable them truly to serve the common good by striving to increase the goods of this world and to make them more accessible to all.

"204. We can no longer trust in the unseen forces and the invisible hand of the market. Growth in justice requires more than economic growth, while presupposing such growth: it requires decisions, programmes, mechanisms and processes specifically geared to a better distribution of income, the creation of sources of employment and an integral promotion of the poor which goes beyond a simple welfare mentality. I am far from proposing an irresponsible populism, but the economy can no longer turn to remedies that are a new poison, such as attempting to increase profits by reducing the work force and thereby adding to the ranks of the excluded.

"206. Economy, as the very word indicates, should be the art of achieving a fitting management of our common home, which is the world as a whole. Each meaningful economic decision made in one part of the world has repercussions everywhere else; consequently, no government can act without regard for shared responsibility. Indeed, it is becoming increasingly difficult to find local solutions for enormous global problems which overwhelm local politics with difficulties to resolve. If we really want to achieve a healthy world economy, what is needed at this juncture of history is a more efficient way of interacting which, with due regard for the sovereignty of each nation, ensures the economic well-being of all countries, not just of a few.

"208. If anyone feels offended by my words, I would respond that I speak them with affection and with the best of intentions, quite apart from any personal interest or political ideology. My words are not those of a foe or an opponent. I am interested only in helping those who are in thrall to an individualistic, indifferent and self-centred mentality to be freed from those unworthy chains and to attain a way of living and thinking which is more humane, noble and fruitful, and which will bring dignity to their presence on this earth."

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Monday, 31 March 2014

Capital in the 21st Century (Piketty)

Nat O'Connor: Thomas Piketty, Associate Chair in the Paris School of Economics, has produced a seminal analysis of the past, present and potential future direction of the global economy, with a stark warning that income and wealth inequality in the 21st Century may return to 19th Century levels.

Capital in the 21st Century is published by Harvard University Press and weighs in at 696 pages in the English translation. The book provides detailed empirical evidence of the rise in inequality between the top one per cent and everyone else, but goes much further by providing a novel and challenging analysis of the future direction of capitalism.

Thomas Piketty will be giving a keynote address at the TASC-FEPS annual conference in Dublin on 20th June 2014.

There is a review of the book in the Irish Times by Paul Sweeney.

There is no shortage of other reviews to be found online:
- Thomas Piketty's own article in the Financial Times
- An article on inheritance by Robin Harding in the Financial Times
- A blog post with charts from John Cassidy in The New Yorker, and a longer article from the same magazine.
- Posts in The Economist magazine (here and here)
- Various links on Irish Economy
- A long review is given by Branko Milanovic of the World Bank here.
- A "wonkish" note on the book by Paul Krugman here.

Piketty (and colleagues) have brought the issue of economic inequality centre stage as one of the most pressing issues to be addressed in any model for the future direction of the global economy. The solid empirial evidence underpinning Piketty's analysis is just as relevant for Ireland as everywhere else, and its policy implications are far-reaching.

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Friday, 14 February 2014

Inequality for All

TASC's screening and panel discussion at the Jameson Dublin International Film Festival was one of the first films to be sold out! Robert Reich's Inequality for All provides an entertaining, but stark picture of the growth in inequality in recent decades. Reich shows how wage-led recovery and a greater income share across society provides a path to a stronger, more sustainable and equitable economy.

TASC will be video-recording the panel discussion that is part of the screening and this will be available on our website. The panel will be chaired by RTÉ's Sean Whelan and features Margaret E Ward, Marie Sherlock, Colm O'Regan and Nat O'Connor.

TASC has created a mini-site to give more information about the film, and a range of facts about economic inequality in Ireland: check out
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Three Economic Lessons

Professor Robert Reich presents "Why The Three Biggest Economic Lessons Were Forgotten" on Social Europe Journal:

"First, America’s real job creators are consumers, whose rising wages generate jobs and growth. If average people don’t have decent wages there can be no real recovery and no sustained growth.

"Second, the rich do better with a smaller share of a rapidly-growing economy than they do with a large share of an economy that’s barely growing at all.

"Third, higher taxes on the wealthy to finance public investments — better roads, bridges, public transportation, basic research, world-class K-12 education, and affordable higher education – improve the future productivity of America. All of us gain from these investments, including the wealthy."

TASC is hosting a panel discussion (SOLD OUT) as part of a screening of Reich's documentary, Inequality for All, as part of the Jameson Dublin International Film Festival.
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Monday, 10 February 2014

An Assessment of the PWC/World Bank 'Paying Taxes' Report

Prof. Jim Stewart (Associate Professor of Finance TCD School of Business and member of TASC's Economists' Network) has published an assessment of the PWC/World Bank 'Paying Taxes' Report, which can be read here.

Summary: "The PwC/World Bank ‘Paying Taxes 2014’ shows cross country comparisons of various aspects of the tax system as they affect companies, for example ease of compliance. In Ireland this Report is frequently cited in media coverage to the effect that reported effective profits tax rates in Ireland (shown as 12.3% in the Report published in 2013) are higher than those in France (8.3%) and other countries. The Report is based on a hypothetical (fictional) company which is small, domestically owned, has no imports or exports and produces and sells ceramic flower pots. These and other assumptions automatically rule out many tax minimisation strategies. This note assesses the claim that this report shows effective tax rates in Ireland are close to or above those in other countries such as France. It is argued data from the US Bureau of Economic Analysis gives a more accurate estimate of effective tax rates for US subsidiaries operating in Ireland and elsewhere. This data shows that for 2011, US subsidiaries operating in Ireland have the lowest effective tax rate in the EU at 2.2%. This tax rate is not that dissimilar to effective tax rates in countries generally regarded as tax havens such as Bermuda at 0.4%."
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Wednesday, 20 November 2013

Costing a Universal Pension for Ireland

Gerry Hughes: Social Justice Ireland has published a detailed and fully costed study by Adam Larragy which proposes to replace the current contributory and non-contributory state pensions with a universal pension as of right to every Irish citizen and resident over the eligible age. In common with the TCD Pension Policy Research Group, TASC, the National Women’s Council, and other organisations and individuals, Social Justice Ireland argues that to avoid poverty in old age the target level for a universal state pension should be set at 40 per cent of average weekly earnings.

The study estimates that a universal pension would cost €0.7 billion more than current expenditure on the state’s contributory and non-contributory pension schemes and that this cost could be met by reducing the tax expenditure on top earners private pension schemes. The additional cost of introducing a universal pension in 2014 could, therefore, be met without imposing an extra burden on middle and lower income taxpayers and without having an adverse impact on the public finances.

Using official projections of the population up to 2046, growth and earnings, it is shown that, contrary to arguments in the Green Paper on Pensions, paying for a universal pension “would be no more difficult than funding existing arrangements”. However, a universal pension would have considerable advantages in ensuring gender equality by not penalising women who take time out of the labour force to care for children and relatives, reallocating resources from private pensions for higher earners to middle and lower income earners who derive little benefit from the private pension system, providing a secure framework in which people can plan for their retirement, simplifying the administration of the state pension system and providing older people with a guaranteed income to protect them from poverty

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Monday, 4 November 2013

Apparent growth of inward investment to Ireland is largely a mirage

There has been much media attention recently to the apparently very high inflows of foreign investment into Ireland.  According to a report prepared for the American Chamber of Commerce Ireland, US firms invested $129.5 billion in Ireland over the five years to 2012, fourteen times the level of US investment in China.

Meanwhile, the CSO has reported a total foreign direct investment (FDI) inflow into Ireland of almost €30 billion in 2012 alone.

Yet employment in foreign firms here (most of which is American) has been falling – by eight per cent between 2007-2011 according to Forfás data – while sales have increased only marginally (by less than five per cent).  How can this be?

The main part of the answer lies in how statistics agencies measure FDI flows.  Thus, earnings of foreign companies that are reported in an economy but are not taken out are considered to be “reinvested earnings” (even though very little of it may be directed to productive activity) and are counted as an inward investment flow.  

Last year, these earnings accounted for three quarters of the total recorded FDI “inflow” into Ireland.  Most of these earnings actually originated abroad but were declared in Ireland for tax purposes.

It is also instructive that almost 60% of this FDI inflow went into financial activities (the bulk of it in financial intermediation) which have little connection with the real world where people work in producing goods and services.

According to The Irish Times (October 4), the person who wrote the report for the American Chamber stated that the investment in question was “real stuff…It is sticks in the ground, money being used for goods and services”.

While there certainly is a significant amount of new productive investment coming into the economy every year, the great bulk of the FDI inflow does not match this description.  It is as much a mirage as the large proportion of exports by foreign firms which consists of profits generated abroad and transferred to Ireland through transfer price manipulation (rather than representing goods and services produced in Ireland) and the large proportion of service inputs of these firms which consists of arbitrarily-set royalty payments.

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Monday, 14 October 2013

Ireland, the IMF and Future Credit

Nat O'Connor: Ireland is a member of the IMF for the simple reason that by being a member we can seek loans from the IMF when we need them. The Irish Times has reported questions about Ireland exiting the bailout without a precautionary credit line from the EU and IMF.

Is Enda Kenny pulling Ireland out of the IMF? If so, he didn't mention it at the Fine Gael conference.

As long as Ireland remains in the IMF, we are entitled to seek credit from it in the normal way. The usual cap on credit is eight times a country's 'quota' (which is how much money we have deposited with the IMF to fund its global operations), although some credit facilities have no cap. Ireland has deposited $1,258 million with the IMF (in SDR, dollar value), so we are generally able to borrow just over $10 billion.

The IMF offers Stand-by Arrangements, Flexible Credit Lines and Precautionary and Liquidity Lines, among other forms of credit. Ireland is currently availing of an Extended Arrangement. A look at the current list of credit facilities active at the IMF shows the normal operation of their credit system.

What is currently different is that Ireland borrowed $19,466 million from the IMF, which goes beyond our normal entitlement to borrow. That's what brings the European Union into the issue and has required the creation of EU credit institutions. The IMF is constrained in its ability to lend to rich countries (and that still includes Ireland, and indeed any country in the Euro zone). Firstly, the IMF doesn't have enough money to lend into hard currency zones like the Euro zone, and secondly, developing countries with much greater economic problems take issue with the IMF bending its rules for countries in the rich developed world.

The conclusion I draw from this is that Ireland could probably take out a credit line of up to $10 billion from the IMF using the normal rules, which would probably be a relief to the IMF as it would normalise Ireland's relationship with the fund and end one instance of the IMF bending its own rules.

What is really at issue is whether Ireland needs a credit line of more than $10 billion (or c. €7.4 billion), which represents more than half of the deficit. In other words, is Ireland in sufficiently good economic shape - with capacity to borrow from the international markets - that we don't need a special deal from the EU institutions to underpin a larger precautionary loan?

That's the more interesting question. Ireland is already holding €25 billion in cash balances (held by the NTMA), which means that even if all tax revenue ceased overnight, the State has six months or so to reorganise itself.

Minister Noonan is also quoted as saying: Ireland cannot go back to “an economy built on the quicksand of a credit and property bubble”.

The debate is finally swinging around to where it should have been five years ago at the beginning of the crisis (and as discussed at length on this blog at that time and not least as outlined in TASC's industrial policy discussion papers). Ireland needs a credible strategy for economic growth that is not based on tax breaks or unsustainable debt-fuelled recovery. If we can present such a pathway to recovery to the world, we can convince international lenders that buying Irish government bonds is a safe investment with a reasonable rate of return.

Tomorrow's budget needs to present some convincing evidence that Ireland is on a pathway to full employment based on sustainable growth, but there is insufficient evidence (to date) that Ireland's model has shifted sufficiently away from a reliance on laissez faire approaches like tax incentives for multinationals and using poverty disincentives to squeeze people who are unemployed (into non-existant jobs!), rather than facing up to real and concrete issues like investment levels. (Currently Ireland has the lowest fixed capital formation - public and private combined - in the EU).

However, as argued in TASC's industrial policy papers and elsewhere, Ireland does have a lot of potential for a very different type of economy - we can harness our education levels and inventiveness, combined with global networks, to create growth based on innovation and new products and services. And the low levels of investment currently means that new investment is likely to have lots of options to find higher rates of return from credit-starved Irish businesses. But part of any new strategy to focus on real investment has to include a careful process of giving up our worst tactics (including facilitating global tax avoidance). These tactics are ultimately unsustainable, inequitable and have led to the systematic distortion of investment decisions in the economy away from productive sectors into financing short-term bubbles in construction and property.

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Wednesday, 9 October 2013

TASC is Recruiting

TASC is recruiting two posts to assist with our mission of promoting a flourishing society, based on equality, social justice, transparent democracy and sustainable economic activity.

Please click on the following links to see Job Descriptions and application instructions:

Policy Analyst (Economic and/or Social Policy)
Project Officer (Open Government/Freedom of Information)

All applications should be made using the linked Application Form and submitted by 5pm, Friday 25th October.

(Save and email, or print and post, the application form to TASC, Castleriver House, 14-15 Parliament Street, Dublin 2,
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Thursday, 5 September 2013

TASC Budget 2014 Analysis and Proposals

Nat O'Connor: TASC today launched our Budget 2014 analysis and proposals, 'Choosing an Equitable Route to Recovery'. The full report is available here. A two-page summary is also available (click here).

The 14-point summary goes as follows.

1. There is a strong public interest in lowering the deficit and controlling the extent of the national debt. But a narrow focus on deficit reduction through cuts would be misguided.

2. Official policy on addressing the public finances has ignored the international evidence that a more balanced approach is required to closing the deficit and recovering the economy. The multiplier effect of cuts has probably been much higher than was anticipated. Large scale fiscal consolidation has a substantial contractionary effect on growth and employment.

3. TASC proposes that the discretionary fiscal adjustment should be accompanied by a targeted programme of investment using funds from the Strategic Investment Fund (ISIF), which will also act as a stimulus to the economy.

4. The Government’s re-engineering of the promissory note repayments allows flexibility with regard to the level of adjustment for 2014 to a much greater extent than in previous years’ budgets.

5. Further cuts to public services are likely to deepen inequality in society and put Ireland’s economy onto a lower developmental trajectory for years to come. More reductions in public expenditure risk being false economies that will do long-term damage to education, health and other areas of public services. Vital programmes such as homeless services and mental health services need increases to cope with much higher demand – not cuts. TASC’s analysis is that the adjustment in the public finances in this year’s Budget should be lower than €3.1 billion.

6. Specifically, TASC proposes that, as part of the effort to restore sustainability in the public finances, while taking account of the cost to growth and employment, and the need to avoid deepening inequality and inequities, the discretionary adjustment in 2014 should not exceed €2.7 billion. Apart from the adjustment of €350 million in 2014 under the Haddington Road Agreement, the adjustment should be made entirely on the revenue side.

7. In addition to the €600 million in carry-over measures from previous budgets, TASC is proposing €1.75 billion in new measures on the revenue side. Alongside this adjustment €1.5 billion from the Strategic Investment Fund (ISIF) should be used for strategic investment in 2014 in order to boost growth and employment.

8. Ireland’s overall tax take is low compared to EU averages. In 2011, Ireland’s total revenue from tax and social security contributions was less than three-quarters of the average in the EU (28.9 per cent of GDP compared to the EU27 weighted average of 38.8 per cent).

9. TASC is proposing a range of costed reforms to capital taxation including reform of tax relief for landlords; the introduction of a small wealth tax, and a number of changes to Capital Acquisitions Tax (CAT)

10. TASC is also proposing reforms to pension tax reliefs. Research has shown that 80 per cent of the benefit from pension tax reliefs goes to the top 20 per cent of earners. TASC is proposing the standard rating of pension tax relief as well as a curtailment of the tax relief on pension lump sums.

11. Social insurance contributions in Ireland are extremely low by EU levels. Raising the social security contribution of employers to euro area averages (as a proportion of GDP) would be sufficient by itself to meet the next two budgets combined targets. TASC is proposing the introduction of a third band of employer’s PRSI contributions at 17 per cent charged on the portion of salaries above €100,000.

12. Finally, TASC is proposing a range of tax increases on socially ‘bad’ goods and services, e.g. gambling, tobacco, alcohol, and carbon emissions, the social benefits of which counter-balance their regressive distributional impact.

13. Steps must also be taken to address the ways that Government can reduce the cost of living for people, such as influencing rent levels, utility prices, transport costs and professional fees. This would also help small businesses.

14. The international evidence shows that excessive consolidation, or consolidation focused on the wrong areas, can have disastrous economic and social consequences in the short and long term. TASC’s budget proposals show that it is possible to lower the deficit in a way that lessens the impact on jobs and is consistent with equality and social justice.

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Friday, 2 August 2013

A Sensible Alternative Budgetary Approach

Dr Micheál Collins: The recent anti-austerity comments by Ashoka Mody, the IMF’s former chief of mission to Ireland, highlight the growing signs that the policy direction being pursued by Government and the Troika is not succeeding. In late June the CSO reported very weak economic data, a return to recession and a sustained weakness in domestic demand. Around the same time the Department of Finance recorded lower than expected income and consumption tax revenues while major retailers recorded declines in turnover and profits. The evidence mounts. While Ireland succeeds in reducing its borrowing and rebuilds its international financial markets reputation, households, workers and business’ in the domestic economy continue to experience the blunt-end of austerity. Unsurprisingly, the domestic economy is struggling and the only positive economic indicator, the reduction in unemployment, is principally being driven by emigration rather than job creation.

Can we do something about this? Well, yes. Admittedly, the gap between Ireland’s tax revenues and day-to-day spending needs to be addressed, but there is an alternative way to reach the Government and Troika target of a 3% budget deficit in 2015.

In our most recent Quarterly Economic Observer (Summer 2013) the NERI has outlined the details of such an alternative policy approach. Our proposals demonstrate that there are choices open to Government and it is possible to pursue a jobs-friendly, growth-friendly and equality-friendly fiscal adjustment. At the core of our suggestions for the next Budget are three points:

  1. Government should use the €1 billion of savings from the Anglo Irish Promissory Note restructuring earlier this year to reduce the scale of the planned budget adjustment from €3.1 billion to €2.1 billion. It makes sense to do this; these are ‘cuts’ to planned government spending on debt service costs and we should count them as such.
  2. The remaining adjustment should be re-orientated towards taxation measures with the only expenditure cuts being those already agreed and announced under the two public sector wage agreements. As we have shown, there remains potential for those on the highest incomes to contribute more in taxation to the adjustment. For example, an increase of just over 2% in the effective tax rate of the top 10% of households would provide an additional €600m in revenue over two years. Similarly, there is potential for a greater contribution from corporate taxes, wealth taxes, employers PRSI and capital taxes. Overall, tax increases should represent just over 80% of the adjustment.
  3. Government should recognise that no matter how it undertakes its adjustment, the domestic economy will continue to suffer. To overcome this, the Budget should include an investment stimulus targeted at key deficits and job intensive sectors of the domestic economy. Areas such as water infrastructure, broadband connectivity, green energy, early childhood education facilities are obvious targets. These represent opportunities for investments which will deliver large returns in the medium-term alongside immediate benefits to the state in additional jobs, increases in taxation revenues and reduced welfare costs.
The NERI has demonstrated that pursuing such a strategy, over Budgets 2014 and 2015, will allow Ireland to reach its 3% budget deficit goal. We end up at the same place as the Government’s current plans, but it is a better route. Why not follow that alternative?

Dr Micheál Collins is Senior Research Officer at the NERI and is also a member of the TASC Economists Network. The latest report is available at This blog first appeared as an article in Liberty.

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Friday, 19 July 2013

A new world order in corporate tax?

The long-awaited OECD Action Plan on Base Erosion and Profit-Shifting (BEPS) has been released this morning, in time for the G20 meeting in Moscow. This was promised back in February, and aims to tackled multinational corporate tax avoidance through a unified approach by the world’s most powerful economies. For background on the issue of corporate tax avoidance and why it matters, see my earlier post here, and for a summary of the OECD’s earlier missive which gives their logic for tackling it, see here

This topic was top of the agenda at the Lough Erne G20 meeting, and so this report, which sets out what the OECD plan to do and how, has been eagerly awaited. So what are the highlights? Is it, in fact, a new world order on corporate taxation? Well, before getting into the detail of the actions, here are five observations on the plan as a whole:      

     1.  Politics: As OECD’s Pascal Saint-Amans said at the launch, what we have here is not only technical, it is highly political. The plan now has the support not only of the 34 OECD countries of which Ireland is one, but also of the entire G20, including the eight countries which are outside of the OECD (South Africa, Russia, China, India, Indonesia, Argentina, Brazil, and Saudi Arabia). The combined block represents considerable power, both economic and political, all of which lends strength to the proposals

    2.  Timing: All the actions in this plan have short time-lines for implementation – one to two years, with a few of the deadlines bleeding out to December 2015. The reason for this is two-fold; the OECD want to seize the initiative to create something unified here while there is widespread political consensus on the need to tackle corporate tax avoidance, and secondly, they want to come up with an international response quickly before impatient politicians in the individual countries develop their own independent strategies, which might not be coherent. 

    3.  Absence of scapegoats: Unlike OECD actions in the 1990s, there is little emphasis on rogue regimes, tax havens or even very much on tax competition. This is a working document, aimed to provide solutions by neutralising tax avoidance schemes, rather than naming and shaming countries
    4. A top-down, multi-lateral approach: Cleverly, although the individual taskforces will come up with different recommendations under the various headings, all of these will be incorporated into a single, multilateral tax treaty by the end of the process. The (ambitious) aim is that this will then be adopted by most if not all of the countries involved, effectively replacing the current network of 3,000+ tax treaties which have been painstakingly negotiated on a bilateral basis over decades. This network is used with shocking ease by multinational firms to whisk profit in and out of various jurisdictions, exploiting minute differences to avoid billions of taxation, worldwide. If the multilateral treaty is widely adopted, and contains measures to close down some of the more egregious practices, this will mean a real change in the environment.

    5.  Limited innovation: There is a lot here that is new, but apart from the promised multi-lateral treaty, there is no radical change in the architecture of international tax. Some of what's new is essentially new to the OECD. We will have standards on information gathering, and moves to spontaneous, automatic exchange of information between taxing authorities; we will have action on residence, and on mis-match schemes including the Double Irish. There is country-by-country reporting, but not publicly. And there is no radical action on how multinational firms are taxed – no move to a single tax base, for instance; to unitary taxation; no move away from the arms-length as standard for transfer pricing. A large part of this is almost certainly political – what’s here is perhaps as much as they feel is achievable given the expanded group of countries they are now addressing with this plan. Not exactly a new world order - no central government, but a serious change nonetheless.

So what is the detail?
The plan contains fifteen separate but interlocking actions, each of which is assigned a taskforce. Two address the over-arching themes of the digital economy and the development of the multi-lateral instrument, while the central thirteen can be loosely arranged under the headings of gaps, frictions and transparency, OECD-speak for double non-taxation, double-taxation and secrecy. 

Gaps: four taskforces operate under the theme or pillar of gaps, addressing hybrid mismatches, of which more here, Controlled Foreign Company (CFC) rules, interest deductibility and harmful tax practices with a dishonourable mention here for patent box legislation. These taskforces are looking at coherence, tackling any instruments or rules which are interpreted in one way by one country, and another by a different one, leaving a little gap which can be exploited by a multinational firm. A simple example is the use of convertible shares to finance a subsidiary. In some circumstances, the profit returned to the parent company can be treated as (tax-deductible) interest when paid by the subsidiary, but as (tax-free) dividends when received by the parent – an obvious opportunity to gain a tax advantage while moving profits. However, at the launch of the report Pascal Saint-Amans specifically referred under this section to Ireland, the Netherlands, and the US check-the-box rules, so we can expect this taskforce to also address the now-infamous Double Irish (of which more here). 

Under frictions the OECD is on more familiar ground – they are aiming to restore the effectiveness of existing standards, and so taskforces here will look at countering tax treaty abuse (of which more here), and tightening up the rules on permanent establishments, possibly with an eye on making it impossible for companies to be entirely stateless. Three taskforces will look at transfer pricing, specifically examining ways to make the arms-length standard effective for intangibles, for the transfer of risk and capital and to address the greyer-than-grey area of management fees and other such payments. What’s interesting in this cluster is that these actions look to reinforce and tidy up existing ways of doing business rather than taking a radical approach, such as unitary taxation or even the type of apportionment of taxing rights envisaged by the European Commission with the Common Consolidated Corporate Tax Base (CCCTB). 

Finally, under transparency, four taskforces will look at the mechanics of gathering data which can be exchanged between taxing authorities. This is no easy task, and involves issues of data protection, IT compatibility, a common template for reporting, etc. Companies will be obliged to report more on their aggressive tax plans, but not publicly, not yet. There will be more mutual assistance among taxing authorities, and common approaches to dispute resolution, etc. 

When will we see change? 
Some of the taskforces will report in a year, and the new standard is slated for the end of 2015. As every finance student knows, however, the market anticipates change, and so as soon as this has been absorbed by the tax planners, we can expect to see a change in tax plans, and a knock-on impact on how investments are structured and how and where groups of companies are arranged. Climate change doesn’t happen overnight, but still it happens, and has real and present impact. 

How solid is the support for this?
Pascal Saint-Amans insists there is extremely solid and widespread support for these measures, even beyond the OECD and G20. He acknowledges that some large firms should end up paying more tax if his plan works, and so some in the business community may be less than thrilled. Interestingly, while they are invited to submit observations, they are not a formal part of any of the taskforces. Nevertheless, he explains that while some countries or companies will protest publicly, they accede privately, and will support the measures once they are developed. Or as he put it: “the conversation in the room and the conversation in the corridor are not the same.” It should not take long to see which conversation carries the most weight. 

Sheila Killian

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