Thursday, 29 January 2015

Aer Lingus Watch: The Slots are the real Target for IAG

Paul Sweeney: The real value in Aer Lingus - for IAG - is in the slots. The investor column Lex in the Financial Times, the paper of record of business people, tells it straight, that IAG are after the slots and should be careful in order to get control of them:

“For IAG, buying Aer Lingus remains sensible at the higher price, which comes to 17 times estimated 2015 earnings (IAG’s own multiple is 12). Slots at Heathrow do not come up often and pricing them accurately is tricky. But IAG would gain the flexibility to use the 23 slots for routes other than London-Dublin (such a shift would be unpopular with the Irish government, so it would have to be done carefully and gradually). IAG would also get a business rapidly expanding its north Atlantic operations, adding capacity of 25 per cent on this key route this year.”

Thus IAG will promise lots and re-allocate them as soon as they can after the takeover.

It will be ably assisted by all kinds of “professional” compradors who will work against any local opposition. There is a fortune to be made for some - whether the takeover bid is successful or not. Look at who is advising the 25.1% shareholder the government – Credit Suisse, IBI Corporate Finance and McCann Fitzgerald. Aer Lingus has its expensive advisors too, as will poor Ryanair. And IAG has professional advisors.

Those who are advocating the takeover of Aer Lingus by IAG, like David McWilliams (Irish Independent on Wednesday), argue that the Heathrow slots are not important as he and many others tend to avoid that airport. Sure, some people from here go long-haul via Amsterdam, Frankfurt and the Middle East, yet Dublin-London is one of the busiest routes in Europe, perhaps the second biggest after London-Paris.

Dublin passengers will be shunted to Gatwick or Stansted, as will passengers from Cork and Shannon, if the takeover takes place. I showed in my last blog post that both of the Irish regional cities’ airport links to Heathrow are protected in the company’s Articles of Association - at present (provided another 5% shareholding comes on board against the takeover).

Dirty Governance at Work in the Takeover
Willie Walsh must resign from the board of the NTMA immediately. He is proceeding with the takeover of Aer Lingus. He is also Chairman of NTMA and one of its main areas of operation is NewERA, which is the holding company for most state assets.

NewERA’s role is stated to include “advising on the governance of the State companies and their respective financial and commercial operation, including the expected rate of return on capital and appropriate dividend policy. In addition, NewERA may, in consultation with the relevant Minister, develop proposals for investment in the energy, water, telecommunications and forestry sectors to support economic activity and employment”.

It is incredible that Mr Walsh is Chairman of NTMA and is also head of the takeover company IAG which is trying to buy Aer Lingus when the state has this controlling 25.1% share. Only the elite in the Big Four accounting firms, in the Big Six law firms and regrettably some at top of the state believe that he can walk out of a meeting of NTMA and that “this absence” creates an impermeable Chinese wall which magically allows him play on both sides.

Are we a Banana Republic?
Furthermore, overpaid (€1,500,000) CEO, Aer Lingus chief executive Christoph Mueller may get almost €3 million worth of share options if the airline is sold ahead of his departure next year. The Aer Lingus annual report said that the company may award share options if there is a change of ownership. There is a clear incentive to sell out here.

Expand State Investment in Indigenous Firms of Size
Instead of selling its shares and losing any influence over the company, the government through NewERA should gradually buy up more shares in the company to build a stronger deterrent of over 40 per cent.

Regrettably, NewERA became the state privatisation agency, overseeing the billions of state assets sold cheaply under the Troika demands. NewERA should cease to be a privatisation board. It should be the development board of the state sector, expanding out of this little republic into other countries, like the French, Chinese, the Middle Eastern states, Norway and most other emerging countries' state companies do.

NewERA should be under a driven and entrepreneurial state capitalist development board. But the government should be kept at arm's length by law and its mandate should be as Congress of Trade Unions urged back almost a decade ago in 2005 in “A New Governance Structure for State Companies” which inspired the establishment of NewERA (by Fine Gael!) - to develop state firms of scale internationally.

The one difference in any arm's length operation from the owners (to say quoted private firms) is that the state should have Golden or Poison Pill shares to become active if major strategic issues arise. That is not dissimilar to how Ireland’s many private and unlimited companies are controlled and how the Wallenburgs control most of Swedish industry – but it would be transparent.

Those who argue only the private sector can do still do not realise what happened with our six indigenous private banks and Sean Quinn, and the developers. They all crashed, and with ignominy. So what is special about private ownership anymore in this Republic? The other reason for state ownership is precisely to retain control of strategic companies in Ireland, a small open economy.

Aer Lingus: the (State) Entrepreneurial Company
I said in the last blog post that Aer Lingus has set up many (perhaps 50 to 100) companies over the years, and has been behind the emergence of many major companies including, ironically, Ryanair.

Mr McWilliams said that Ryanair inspired many new airlines and he named Pegasus as one of these. But the Turkish low cost airline – the “most rapidly growing airline in Europe” - was established as a joint venture by none other than Aer Lingus.

Its website says “Pegasus Hava Tasimaciligi A.S, which was founded as a joint venture company on 1990 by Aer Lingus Group, Silkar Yatırım ve Insaat Organizasyonu A.S. and Net Holding A.S., entered into commercial operation with just two airplanes.”

Another point is that as a local company, Aer Lingus has established itself as a major player on the transatlantic route in the past few years. Its transatlantic route is pulling in great numbers from UK because of its service and pre-clearance of US immigration. There was a growth of 25% in the route last year and it plans profitable growth of the long haul business in 2015. It has a new Dublin to Washington service, and services on its existing transatlantic routes will be increased. “This will provide even more connectivity for our passengers and strengthen Aer Lingus’ and Dublin’s position in traffic between Europe and North America” the company said.

This would never have happened under IAG. On the contrary, it will sweep these passengers across the ocean from the rest of UK to Heathrow, probably using Dublin slots.

Read more!

Tuesday, 27 January 2015

The Takeover of Another Indigenous Company by a Foreign Multinational

Paul Sweeney: “I’m not going to click my fingers because some right-wing economists believe we should privatise [Aer Lingus]. We are an island nation, heavily dependent on trade, overseas investment and tourism. There are very important strategic issues which have to be satisfactorily resolved.” So said then Taoiseach Bertie Ahern, a decade ago on 17th November 2004.

That government went on to sell the majority of our shares in Aer Lingus in 2006 but it did hold on to 25.1%. The value of this minority - golden? - shareholding will be addressed later.

Is this blog post an obituary for Aer Lingus? Today the board recommended selling out to IAG. Indeed is it an obituary for a coherent industrial policy for Ireland? Are we accepting that we bob up and down to the vagaries of market forces and not put out a paddle to steer in the direction of some indigenous prosperity?

There are three issues on the proposed takeover of Aer Lingus by British multinational IAG for Ireland:
- First is connectivity with the rest of world for an island country;
- Second is its impact on industrial policy, i.e. future locally-grown and -owned companies;
- Third is the price of the shares for a country which needs the money.

1. Connectivity and the Slots.
The 23 slots in London Heathrow (LHW) are much more financially valuable to IAG/BA than to Aer Lingus. You can put big long-distance planes on these valuable slots and make much more than on little planes to Dublin, Cork and Shannon. But the slots are important to Ireland’s connectivity. If one believes that markets work well and will always fill any vacuum, you might believe that we can connect with the rest of the world via Amsterdam or Paris, and thus argue the slots are not so important. Indeed the Dublin-LHR route is one of the busiest in Europe, but that does not mean that IAG/BA will not assign them to long haul routes and divert Dublin passengers to Gatwick or Stansted.

Nothing can stop it, once it has control of the slots through ownership of Aer Lingus.

No airline owns the slots but they can trade them on the grey market and this is done regularly. Heathrow is the world’s second busiest airport and so the slots are valuable. But their value to Ireland is more than financial. Again, the new owners can do what they like with the slots once they own Aer Lingus.

Until such a takeover, the Aer Lingus Articles of Association give protection of the slots through the following:
“Where a resolution by shareholders is required, the voting threshold to prevent a disposal of Heathrow slots proposed by the Company is such that the percentage vote against disposal at the extraordinary general meeting must be greater than the percentage of the Company’s shares held by the Minister for Finance plus 5% (or 25% if greater).” Thus the governments stake (25.1%) plus some 5 per cent of say workers’ shares or those of other Irish shareholders, i.e. 30.1% can block the sale/reallocation of the slots.

The Articles of Association also provide for regional development and connectivity: “The Minister for Transport considers that four London Heathrow slot pairs for services to and from Cork and that four (summer season) and three (winter season) for services to and from Shannon would each be critical to ensuring connectivity to these airports because this is the minimum necessary to ensure a spread of flights throughout the day. On this basis, the Minister for Finance as a shareholder in the Company, acting on the advice of the Minister for Transport, is unlikely to support a proposed disposal of any slot pair such that there would be less than the existing London Heathrow slot pairs that relate to services between London” (2006). These rules will also die with a takeover.

The EU will also have to rule on the takeover on competition grounds. This can also delay the takeover of the very popular national emblem and former state enterprise.

2. Industrial policy, i.e. future locally-grown and -owned companies.
Aer Lingus is an exceptional entrepreneurial Irish company. Founded in 1936 it was state-owned until its privatisation in 2006. It has spun-off a great deal of successful companies, directly and indirectly. It has been through some tough times in the very cyclical airline business. It nearly collapsed in 1994 and in 2001, but with union help it progressed and is one of the more efficient airlines today.

It had diversified to even-out revenues during the cycles with subsidiaries in many sectors, including a major hotel chain, Copthorne Group, and companies in healthcare, computers, project management, recruitment and aircraft maintenance, and it was the founder investor in GPA.

It backed the leasing manager it had trained, Tony Ryan, in establishing GPA, lending its name and investing in it, with Guinness Peat bank. In turn, GPA executives set up many successful aviation leasing and finance companies which have in turn made Ireland the hub of the business worldwide today, with one-fifth of all commercial planes leased from here.

Tony Ryan also set up Ryanair, which was given three key Aer Lingus routes one of which was to be its hub, Stansted. Aer Lingus was put off the routes to allow its competitor to grow – without competition – for some years.

Once employing 10,000 worldwide, with 6,000 in Ireland (1989), Aer Lingus now employs almost 4,000. Willie Walsh may be Irish but his only allegiance is to the maximization of IAG shareholder value.

Are we serious about retaining good Irish controlled firms of size? Or is industrial policy a one-trick-pony of low taxes? I have recently argued that Irish industrial policy is confused, over-dependent on foreign direct investment, obsessed with low or no taxes on MNCs but it is also, heavily state interventionist, and costly (Irish Times).

Selling out Aer Lingus was a mistake in 2006, but keeping the state’s 25.1% share was due to lessons learned, partially from the Eircom debacle. The Articles of Association make some action possible, but there should have been a much stronger Golden Share, which is in effect a poison pill share to deter unwelcome predators. Many companies have some such shares, in many countries. Such controlling shares are of course hated by free marketeers, who prefer might or big money in determining control.

To sell the rest of Aer Lingus without a fight will just undermine any coherence in industrial policy, that is, in building indigenous enterprise over which we have some control. Head office jobs will shift to London and, despite any 'promises', over 1,200 jobs will be 'rationalised'.

Some of the best Irish firms were state-owned and still operate, like Irish Ferries, B&I, Greencore (Irish Sugar) Irish Life (collapsed like all privatised banks), TSB, ACC and ICC (ditto), Eircom (Telecom), INPC (Phillips) and BGE.

3. The Price of the Shares
This is what most (not all) financial journalists are talking about. The stockbroker commentators have a vested interest – money on both selling and buying the shares.

Could the government get more? It does not matter. €300 or €400 million is peanuts today when interest rates are on the floor and we have no problem borrowing. Indeed we have lots borrowed already in the bank (earning little) with €7.2 billion still in the Pension Reserve Fund last September and more borrowed since.

Happily the debate on the sale of the rest of Aer Lingus is getting more serious. The key issue is whether it will lead to a real debate on industrial or enterprise policy, which includes the role of Aer Lingus as an Irish-grown and -controlled firm.

A small open economy need lots of good foreign MNCs. We have many but we also need good competitive indigenous firms and that includes a brace of top class state firms too. We now know that ownership does not matter, or rather, if it does, private may not be the best as all six collapsed banks demonstrated with an incomparable vengeance.

The IAG bid is conditional on the two big shareholders, Aer Lingus and Ryanair accepting the bid. There is also the veto on the sale of the slots which the government shareholding has in the company’s rules or Articles of Association.

The Troika demanded the privatisation of up to €2 billion in non-strategic assets. This has been greatly exceeded, with €2,995 million privatised to date by my count, which may not comprehensive. And the Troika is gone.

Fianna Fáil is against the sale of the remaining shares, as are the rest of the Opposition. Labour is totally against such a sale. Even Michael Noonan from near Shannon airport may baulk at the consequences of such free-market economics in this instance. The EU Commission will take at least two months to review the sale.

The important strategic issues which Bertie referred to a decade ago have been forgotten. This has been costly. The state has had to invest a fortune in broadband subsidies since the Eircom privatisation. And four state financial institutions (ICC, ACC, Irish Life and TSB) were since privatised, collapsed and had to be rescued by the state, along with the private banks, AIB, BOI and Anglo. And more…

Willie Walsh will promise not to paint over the shamrock on the Aer Lingus tailfin with the Union Jack. He will promise jobs optimization. He will promise connectivity. He will promise slot protection. He may even promise 'the sun, moon and stars' will be painted on the Aer Lingus tailfins!

This is not just about Aer Lingus, the former dynamic state company and still Irish firm. It is about industrial or enterprise policy. It is about some modicum of control over our own economic progress. It is time to fight back. And it is winnable.

Paul Sweeney has worked on most Aer Lingus issues: crises, ESOT shares, pay freezes and pay rises, recoveries, on competition and more from 1990 to 2005.

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Monday, 26 January 2015

Why Half of Irish People are Willing to Pay More Taxes

Nat O'Connor: Most people want Ireland to be more equal, and they want this to be achieved through boosting the minimum wage, capping high pay, raising taxes and providing a wider range of quality public services. Will 2015 be the year when Irish public policy rediscovers inequality?

According to a recent survey – commissioned by TASC and carried out by research company Behaviour & Attitudes – the vast majority of people (83%) feel that income in Ireland is unfairly distributed, with close to half of them (46%) believing it is ‘very unfairly distributed’. This is when asked the question out of context. When informed that the incomes of the top 10% are seven and a half times greater than the lowest incomes, 88% felt income was unfairly distributed.

This sentiment is close to the pulse, as Ireland is the most unequal among all members of the Organisation for Economic Cooperation and Development (OECD) when it comes to incomes from work and investments. However, taxes and social transfers reduce income inequality in Ireland to lower than EU average levels, and public services like health and education reduce other aspects of economic inequality, which shows the importance of maintaining both tax levels and public services.

Economics has always been about who gets what, when and how, and there is now persuasive evidence that our well-being as a society is determined by the extent of inequality. More equal countries do better on a whole range of social issues, with lower crime rates, better health outcomes and more cohesive societies.

Now, in the aftermath of the global economic crisis, inequality has become an important focus for understanding how economies can do better. The World Bank, the IMF, the OECD, and major financial institutions are becoming increasingly concerned that the concentration of income and wealth is damaging countries’ economic potential.

Yet measures to reduce inequality – such as progressive taxation, minimum wages and strong public services – have been under attack across the developed world for many years. As a result, the share of income and wealth held by the top 10%, and particularly the top 1%, has been rising in most developed countries, including Ireland. This is not only damaging to our economy and our society but goes against the tide of public sentiment as revealed in this survey.

People in Ireland strongly believe that the Government should take active steps to address economic inequality. More than 90% are in favour of either increasing the statutory minimum wage, establishing a ‘maximum wage’ or both, with only seven per cent opting for neither of these measures. Compared to 2010, when the same question was asked, there was a rise in support for increasing the minimum wage from 65% to 84% in favour.

This may reflect the fact that the €8.65 minimum wage is no longer linked to average wages, and remains at the same level as 2006. It might also indicate a growing awareness that the minimum wage is not the same as a living wage. In Ireland a Living Wage, to allow a single person to live a minimum but decent standard of living based on full-time work, has been calculated as €11.45 an hour for a 39-hour week. The problems faced by many workers on the current minimum wage are made worse by the reality that many of them are not given full-time hours on a regular basis yet are not always eligible for State income supports.

Another key finding in our recent survey is that the majority of people (55%) support the establishment of a maximum wage to cap the amount of money earned by high earners. The idea of a maximum wage is gaining serious attention elsewhere. For example, Switzerland passed a referendum last year – with 68% of voters in favour – that imposes some of the world’s strictest rules on executive pay, such as giving shareholders a veto over salaries and forbidding ‘golden handshake’ payments to departing managers. Shareholders in Switzerland and elsewhere have been frustrated by extremely high pay, especially to those who played a lead role in the global financial crash of 2008.

In relation to tax, nearly two-thirds of Irish people (63%) are in favour of a top tax rate of 60% (combining income tax, USC and social insurance) on that part of income in excess of €100,000 per year. This finding reflects similar sentiments elsewhere.

Sceptics will point out that of course people want the government to intervene to reduce inequality, and provide better services, as long as it doesn’t affect them. The focus on tax cuts in the recent Budget and the vocal opposition to water charges are presented as evidence of this.

But, the survey finds that people are willing to contribute to making Ireland a more equal country. Half of respondents indicated that they would be in favour of ‘paying more taxes’ themselves, if guaranteed high quality public services or new or additional services such as pre-school education or social housing. This is a significant increase on the 35% who were willing to pay more taxes in 2010.

What all of this demonstrates is that there is a strong constituency in favour of a more balanced economic model for Ireland, not just one based on tax cuts and reduced solidarity, but one based on the provision of quality public services for all.

A version of this opinion piece was published in The Irish Times on Monday 15th December 2014.

The full survey data is available here.

TASC's first report on economic inequality in Ireland will be released in early February.

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Thursday, 15 January 2015

Think again about the 'squeezed middle'

Nat O'Connor: Ireland's 'squeezed middle' has been defined by the Minister for Finance, Michael Noonan, as those earning between €32,800 and €70,000 (e.g. the figures were repeated again in the Irish Times).

That basically means any single person once he or she begins to pay income tax at the higher rate of 40%.

What isn't clear from Minister Noonan's definition of 'the middle' is whether he is focusing on individual incomes or household incomes. Obviously, there is a big difference between one person earning €40,000 and two people each earning €20,000.

But unless we are talking about individual incomes, married couples on up to €140,000 would still fit in Minister Noonan's definition of the squeezed middle (and be potentially in line for further tax cuts) despite being in the Top 2% of the income spectrum.

The following chart shows Revenue data for tax cases (either singles or couples) by their gross income before tax. There are 2.05 million cases, representing 2.85 million adults; i.e. there are c. 800,000 married couples in the data, slight over half of which are dual-earner couples.

(Click to enlarge)

Three things to note when reading the chart:

  1. Revenue has no data for over 750,000 adults (15+), who have no taxable income - presumably for many of the approximately 350,000 secondary and third level students aged 15+, as well as for some people entirely reliant on social protection incomes.
  2. We don't know how many single tax payers are cohabiting with another earner, therefore benefiting from a higher household income.
  3. Where social protection incomes are a taxable part of a larger individual or household income, they should be included in the Revenue data - e.g. someone with both a State Contributory Pension and an occupational pension might have a tax liability.

If we begin counting the so-called 'squeezed middle' from those on incomes of €30,000+, they are actually the top 25% of all adults in Ireland by income share. If we exclude the adults not in Revenue's data, they are in the top 32%. In neither case are they the real middle.

It is also possible to estimate the distribution of taxable income by dividing married incomes 50:50 between couples, as shown in the next chart. This is not the best method of indicating market income distribution, which is often skewed towards one earner in a couple (the other of whom does more unpaid work), but it is one way to illustrate the average income per adult.

(Click to enlarge)

In this data, which removes the distortion of single versus dual income tax cases, those on incomes over €30,000 are in the top 15% of all adults in Ireland, or the top 20% of all adults in Revenue's data.

The middle adult taxpayer in Revenue's data is an adult in the €20,000 to €30,000 income group, below the 'squeezed middle's' LOWEST point of €32,800.

All of this is yet another way to show that the 'squeezed middle' is just a rhetorical device to make it sound OK to cut the higher rate of income tax for the minority of people who already enjoy a greater share of market incomes. Those earning from €32,800 to €70,000 are neither the 'middle' nor the most 'squeezed'.

This is not to say that some people on those incomes may not be under serious pressure due to mortgage debt or other issues. But that would call for targeted measures like mortgage relief for the over-indebted, not blanket tax cuts for an income category that includes many people without major mortgage debt or other such pressures.

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Monday, 15 December 2014

Case for a ‘Living Wage’ gets stronger

Cormac Staunton: The recent Behaviour & Attitudes survey on inequality has some striking and perhaps surprising findings.  The first is striking: more than 80% of people think that income is unfairly distributed in Ireland.

The second is perhaps surprising: more than 90% of people want the government to take active steps to reduce the gap between high and low incomes.

It’s surprising because in the media, interventions like increasing the minimum wage are seen as contentious, with business groups in particular warning of doomsday scenarios.

The reality is that there is an extremely strong case for economic growth through increased wages, for example as reported by the UN International Labour Organisation (ILO). (Full Report or Summary Report)

The theory is straightforward: if people are paid more, they can spend more, and this leads to more jobs, in a virtuous cycle. We know that people on low incomes spend more of their money than those on high incomes (and there are more of them), so it makes economic sense to boost the incomes of people on low wages. More people working and spending in turn boosts tax revenue and allows governments to invest more in infrastructure, education, and other areas that will boost productivity, which is what makes increased wages sustainable.

The survey finds support for raising the minimum wage in Ireland is up to 84%, from 65% in 2010. The minimum wage is €8.65 and has been at that level since 2007. Originally when it was introduced it was supposed to be pegged at 2/3rds of average wages. It has now fallen dramatically behind that, which may be one of the reasons why Ireland has the highest level of market income inequality (before taxes and transfers) in the OECD.

And people get this. They may not know that 1-in-4 people are living in material deprivation, but they know something is wrong and they want to do something about it.

The sentiments expressed in the survey are consistent with a growing recognition that the minimum wage is not a “Living Wage”. In Ireland the Living Wage has been calculated at €11.45 per hour. It is based on the cost of a ‘minimum essential standard’ of living.

The gap between the minimum wage and the Living Wage represents a lost opportunity for the economy, as people go without essentials. An increase in the minimum wage would see more money being spent immediately in the local economy, as people make up for lost spending.

Personal consumption is a key driver of the economy and has shown very few signs of growth despite the alleged upturn in the economy in Ireland (recent CSO figures)

Moving the minimum wage closer to a ‘Living Wage’ is the shot in the arm the economy needs and it is a policy that the vast majority (84%) of the public supports.

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

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Saturday, 1 November 2014

The Issue is Income Adequacy not the Price of Water

Nat O'Connor: If ten families on a hillside got together and built their own water supply, and had to pay to monitor and treat every litre to keep it drinkable, they would make damn sure that no one was wasting water.

The common ownership (and cost) of the water supply, shared among a small pool of people, should provide sufficient incentive for everyone to watch their water usage. But if the scheme expanded to new people who didn't share the same sense of collective effort, they would install meters so that people would see the evidence of their water usage and charge people according to use.

But such a scenario only works if everyone involved has an adequate income to be a participant. That's the problem with introducing water charges in Ireland right now: far too many people have inadequate incomes relative to the cost of meeting their basic needs.

Ireland spends €1.5 billion per year on clean water and waste water (Eurostat figures for Ireland). That's half the size of the annual primary school spending of €3 billion. It's expensive, and we are not investing enough to provide for our future water needs.

There is nothing wrong with using pay-per-litre metering to keep the overall cost down, which saves everyone money. But the introduction of this policy has gone wrong in Ireland.

Firstly, there is no sense of water services as a collective resource belonging to everyone. To say the least, the creation of Irish Water did not recreate the optimism and collective ambition of ESB's Rural Electrification Scheme. Partly, this is because successive governments chose the politically easy option of claiming that this was an unwelcome measure foisted on Ireland by the 'Troika', rather than an opportunity to save many millions of public money lost through leaks on private property.

Secondly, the high wages and cash incentives in Irish Water are out of touch with a population that has been badly bruised by years of austerity. Irish Water looks and 'quacks' like a private for-profit enterprise, even if it is a public utility and the Government denies a plan to privatize it.

Thirdly, and most importantly, many people do not have the cash to pay for water. They just don't have it. Deprivation has risen from 11.8% in 2007 to 26.9% in 2012. Many people are going without all sorts of essential goods. Another €10 or €20 per month in other times might be affordable, but it's not right now.

And there is uncertainly about the full cost. People are wary of the meter ticking. Those with older appliances or dripping taps they can't afford to change are worried about excessive bills. Many people do not have the money to repair leaking pipes and cannot afford the credit for water-efficient white goods.

What to do? The politically easy option is to say that it was all a misunderstanding and we'll put the genie back in the bottle by scrapping water charges.

But the real problem is income inadequacy - too many people have low incomes when compared to the high cost of living in Ireland. The answer is not necessarily more cash, but possibly more free-of-charge services that would reduce people's cost of living, and free up disposable income.

But, by that logic, why not free water? The reason is the strong evidence that water is more efficiently delivered as a pay-per-litre public service, whereas health services are most cost-effective when they are tax-funded national health services. If we could swop free-water and €60 GP fees for free-of-charge GP visits and pay-per-litre water, we'd get just as good services for a lot less public money.

We need to keep our eye on the prize, which is €1 billion of savings over five or ten years. That money could be invested to create jobs, or it could be spent on other public services, or it could be used to reverse some of the cruelest welfare cuts of the austerity period.

And it is not the bonus-driven incentives for Irish Water executives that will produce most of those savings. It is through the public collectively conserving water and fixing leaks that will save the public money.

If we abolish water charging, we will go back to paying for it from VAT and income tax. We will all still be paying, but there will be no metered bill to stop wastrels from taking a far greater share of our shared resource. So not only will we all pay through income tax and VAT, but we'll pay more in total than we would pay through charges.

If the water protests are successful in their own terms, water charges will be scrapped. But this will have the unintended consequence of restoring a system that allowed leakage and waste by some property owners and landlords, which will be paid for by the rest of society.

And the added pressure on tax revenue from paying for water will widen the deficit and make Budget 2016 a good deal more harsh that it would otherwise need to be.

The alternative to all of this is for policymakers to make a much great admission of misjudgement about how water charging has been handled so far, and to go back to the drawing board to design a water charging system that is transparent and strongly equitable, with targeted support to people on low incomes, so that everyone can afford to pay for water.

And about that €1 billion of savings. What is the public going to get from adopting a system that will save some of our money that was previously spent on wasted water? How about a bonus for everyone?

Read more!

Wednesday, 15 October 2014

Why Cash Matters (Budget 2015)

Nat O'Connor: As a follow-up to my pre-Budget post on proportions, we can now look at the results of the announced USC and income tax changes. There are seven changes in this mix:
  • USC now kicks in at €12,012
  • The lowest rate of USC is reduced from 2% to 1.5%
  • The next rate of USC is reduced from 4% to 3.5%
  • The 3.5% USC rate now kicks in at €17,576
  • The higher rate income tax threshold or band has moved from €32,800 so it kicks in at €33,800
  • The higher income tax rate has reduced from 41% to 40%
  • A fourth rate of USC at 8% affects all income above €70,000
Taking the example of single PAYE workers, the changes affect people as follows (in ascending order of income):
  • Those earning less than €10,036 never paid USC or income tax and are unaffected
  • Those earning between €10,036 and €12,011 are no longer paying any USC, saving up to €280 in a measure targeted at this income cohort
  • Someone on €12,0011 now pays no USC at all, €280 less than previously
  • Someone on €12,0012 now pays €100 less USC, but does pay €180 as USC suddently kicks in for all his/her wages
  • Someone earning between €16,016 and €17,576 is now only affected by the 1.5% and 3.5% USC rates (not 7%)
  • Someone on €17,576 saves €174
  • Everyone above €17,576 gets the full benefit of €174 from the USC changes
  • Someone earning up €32,799 still only gains €174 from the USC changes, as he or she never paid the higher rate of income tax. The large majority of the 1.9 million people at work were already outside the higher income tax rate
  • Someone earning €33,300 used to pay €205 at the higher rate, but is now only affected by the 20% band, saving €105
  • Someone earning €33,800 used to pay a full €410 at the higher rate, but is likewise below the threshold for the higher rate, saving €210
  • €210 is the maximum a single person saves from the wider income tax threshold/band change, and everyone earning over €33,800 gets the full benefit
  • The gain of €210 from the threshold change is in addition to the €174 from the USC changes; together that makes €384
  • Someone on €34,800 pays €400 at the new higher rate of 40%, saving €10 from the rate changes
  • Someone on €43,800 pays €4,000 at 40%, saving €100
  • Someone on €53,800 pays €8,000 at 40%, saving €200
  • Someone on €63,800 pays €12,000 at 40%, saving €300
  • Someone on €70,000 pays €15,252 at 40%, saving €362
  • Someone on €70,001 now pays 8% USC on every euro above €70,000 cancelling out any further benefit from the drop to a 40% higher income tax rate, but retains the €362 benefit from the rate reduction
  • €362 is the maximum gain from the rate change, and everyone over €70,000 gets the full benefit
  • The gain of €362 from the rate change is in addition to the €384 from the threshold change and USC changes; all together the maximum benefit from all USC and income tax changes is €746
You can check the figures - and see the effects on couples - using the helpful Deloitte online tax calculator, which shows the pre- and post-Budget income figures.

The bottom line is that people from Minimum Wage levels (€17,576) to €33,800 gain €174, whereas people on incomes over €33,800 gain €384 or more, and people on incomes above €70,000 gain the maximum benefit of €746.

Whether or not you think this is equitable or 'fair' depends on whether you think the distribution of net incomes was fair in the first place. What Budget 2015 did, in terms of net income, is widen the gap between those on higher and lower incomes. Those in the Top 10% (€70,000+) got 4.3 times more cash than the many workers who earn between €17,576 and €33,800.

Importantly, bank CEOs and others on high incomes of say €500,000 will not benefit hugely from the lower 40% income tax rate, because of the new 8% USC, which is an important and valuable safeguard for equality. They only get the same €746 benefit, and also have their use of tax reliefs shaved as the extra point of USC is immune to most tax breaks.

Another way to look at what happened is to compare Person A on €17,576 (minimum wage), Person B on €35,000 (average wage), who benefits a little bit from the income tax changes as well as the USC changes, with Person C on €70,000 (Top 10%).
  • Person A gains €174 from Budget 2015, leaving him or her with a post-tax income of €16,986 (was €16,812).
  • Person B gains €396 from Budget 2015, leaving him or her with a post-tax income of €28,065 (was €27,669).
  • Person C gains €746 from Budget 2015, leaving him or her with a post-tax income of €45,215 (was €44,469).
  • The gap between A and B went from €10,857 to €11,079; wider by €222
  • The gap between B and C went from €16,800 to €17,150; wider by €350
  • The gap between A and C went from €27,657 to €28,229; wider by €572
As the result of a single budget - where available resources were still constrained - to widen the net income gap between some single people by €572 (and even more for some couples) is significant.

Did those on higher incomes really need the €746 they received in extra net income, compared to people on lower incomes or those reliant on public services? Will it really boost consumer spending in the economy and create jobs, or will it be used to pay down debt or spent on imports? TASC's analysis has always been that giving a little money to a lot of people will be more effective at getting money spent on essentials in the local economy to boost local jobs.

More importantly, what is the direction of Government tax policy? The signal from Government is that the gap in net incomes will be widened further, as they continue to target a reduction of income tax on the upper middle income group (those on €34,000 to €70,000).

The alternative is public services rather than tax cuts, as the effect would be diluted and it would not be affordable to give the many on low incomes the same amount of cash from tax cuts given to the few on upper middle incomes. This alternative is also based on the unpopular truth that people in low incomes pay relatively little tax and social insurance in Ireland compared to what is paid by workers across the EU. Tax cuts are illusory if out-of-pocket charges for public services will mount up due to overall under-funding of services.

Rather than giving low to middle income workers small tax cuts, the focus should be on targeted spending on public services - including perhaps some new services like properly subsidised childcare - as these would benefit everyone in society much more equally.

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The Triple Benefit is Doubly Regressive

Cormac Staunton: In the immediate aftermath of the budget, there is much talk of whether the changes in income tax and USC were ‘progressive’ or not.

In order to be considered progressive, changes to the tax system should close the gap between those on higher and low incomes. As such, the cash benefit should be greater for people on lower incomes.

Changes to the tax system that give a greater percentage benefit to a person on lower incomes (even though the cash benefit is lower or the same) could be considered ‘less regressive’.

Using these definitions, changes to Income Tax and USC in Budget 2015 were not progressive, nor even "less regressive".

We modelled the changes in USC and income tax using our existing tax model, which is based on the rules for a single person paying PAYE. We looked at both cash and percentage change in net income: that is to say, how much did take-home pay change.

In cash terms it looks like this, when placed against gross income:

Those earning between €10,036 and €12,012 now pay no USC and see a benefit of approximately €240. This falls off immediately when USC kicks in, and between €12,012 and €17,500 (the minimum wage) the benefit of USC rate changes is around €110. From €17,500 upwards the gain from USC rate changes is €174.

After €32,800 the gains from income tax rate and band changes start to rise steadily, maxing out at €736 for those on €70,000, remaining at that level for all earners above €70,000.

Returning to our definition of progressivity, we should also look at what this means in percentage terms.

The curve shows that not everyone was affected proportionately. It can be explained as follows:

The first spike is caused by the removal of USC completely from people on €10,036-€12,012.

In the section from €13,000 - €32,000 the change in the USC rates and bands give a spike increase to people on the minimum wage as they are now out of the next level of USC.  As we saw above, the absolute benefit from USC changes stays the same for all people above minimum wage and below €32,800 (as there was no change in standard rate of tax). Hence the benefit, as a percentage of take home pay, declines.

After €32,800 people are hit with a triple benefit. They have a lower rate of marginal tax (40%), a later entry point to the higher rate (by €1000), and they benefit from the changes made to USC on the earlier parts of their income.

This group is doing better in percentage terms than those below them (aside from the brief spike for people between €10,036 and €12,012) and the percentage benefit increases as incomes increase.

This is doubly regressive, in that firstly those on €34,000 see a significantly higher benefit than those on lower incomes, and secondly those on €70,000 have a greater percentage benefit than those on €34,000.

After €70,000 the same cash benefit remains, but because of the introduction of USC at 8%, the benefit no longer grows. Hence, as incomes rise, the percentage benefit declines, but long after the progressivity horse has bolted.

Whichever way you look at it, it is incorrect to describe the tax cuts introduced as “progressive”, given that the greatest benefit in cash terms is for the top 10% (above €70,000), and that the benefit in percentage terms increases steadily from those on minimum wages to those on €70,000.

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

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Tuesday, 14 October 2014

Budget 2015 and Proportionality

Nat O'Connor: Without a doubt, some of the analysis of Budget 2015's income tax measures is going to focus on proportional change rather than absolute or real income changes, which repeats a misleading bias from the Celtic Tiger years that permitted the gap between high and low incomes to grow.

It would NOT be fair if someone in the Top 10% ends up paying less tax than someone on the Minimum Wage, but it is highly likely that this will be the case. But it will be disguised as someone on low wages getting a bigger percentage tax cut than someone on a relatively high income. The focus here is on the misleading concept of 'proportional' or percentage income changes.

Currently, a single person on the Minimum Wage has a gross income of €17,500 and pays €744 in income tax and USC. Assuming he or she earns the same amount every week, no PRSI is payable. A single person in the Top 10% has a gross income of €50,000* and pays €15,131 in income tax, USC and PRSI.

* Note: you can confirm that single people are in the Top 10% of earners from €50,000 upwards (add males and females in Revenue Table IDS20 here). For everyone, including couples, the threshold is €75,000 to be in the Top 10%.

For example (calculation below), someone on the Minimum Wage might see their taxes cut by 5.2 per cent, but that means €39 in real terms. Conversely, someone in the Top 10% might see their taxes cut by 2.7 per cent, but that means €411 in real terms - in reality, nearly nine and a half times more money.

We know that 'the market' does not allocate pay fairly. For example, the UK New Economics Foundation have a report about the low pay but high social value of hospital cleaners and childcare workers, versus the high pay but lower social value of City bankers. Part of the role of taxation is to compensate for market inequalities.

As TASC show here (slide 3) Ireland has the highest pre-tax, pre-transfer income inequality in the OECD (i.e. we are the most unequal among all developed economies). But Ireland's tax and transfer system currently manages to get income inequality down to below EU average levels (slide 5).

'Proportional' tax cuts - such as those described below - will disproportionately benefit the better off in real terms, and that will weaken the ability of taxes and transfers to reduce income inequality in Ireland.

Let's take three proposed policies: (1) move the USC threshold from €10,036 so that it does not kick in until €12,000; (2) move the higher rate income tax threshold from €32,800 so it kicks in at €33,800; and (3) reduce the higher income tax rate from 41% to 40%.

Our person on the Minimum Wage has a gross income of €17,500. He or she would now pay €39 less USC, which is a tax reduction of 5.2 per cent.

Our person in the Top 10% has a gross income of €50,000. He or she would get the same €39 reduction in USC, but also would pay €372 less income tax for total reduction of €411, which is a reduction of 2.7 per cent.

Of course, it is easier to give larger amounts of money to smaller numbers of people. But that is not a justification for doing so! It is probably not possible to give much more to all low earners in this budget, as there are so many of them. But there are economic and social reasons not to worsen the income inequality gap by giving more money to higher earners.

As TASC has argued in its pre-budget commentary, using any surplus for public services that benefit everyone equally would be the best use of the money. But the partisan push for tax cuts means that outcome isn't going to happen.

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Monday, 13 October 2014

Budget Rumours: An Equality Analysis

Nat O'Connor: Budget 2015 will be announced tomorrow, but there are enough rumours and unofficial announcements in this morning's headlines that some analysis can be made about the overall thrust of policy.

The main question for TASC is whether there is any coherent strategy to address the growth of inequality over the last four decades - never mind the last six years of austerity budgets. Since 1975, average incomes have doubled in real terms. In other words, there has been real economic development. However, that average is skewed by the fact that incomes for the Top 10% of people have tripled and incomes for the Top 1% are five times larger, in real terms, than they were previously.

Cause for concern? Some would say that inequality is the price of Ireland's adoption of a laissez faire economic model. But the OECD predicts inequality will grow across the developed world to such an extent that by 2060 even the most equal countries today will be as unequal as the least unequal today. That is likely to lead to breakdown of social cohesion. And countries closer to the UK and USA economic models - like Ireland - are likely to see inequality grow sooner rather than later.

The reasons for growing inequality are complex. It is not a conspiracy but rather it is the working through of the structure of our economies. There is a growth in high-skill high-pay jobs, in IT for example, but a loss of mid-pay jobs in manufacturing (replaced by robots or moved overseas). Service jobs are growing, but new sectors of employment (like personal care or hospitality) are characterised by low pay and lack of job security. Given that inequality is a likely consequence of our economic model, what is the Government doing to counter-act this?

The budget provides a wide set of tools to reverse some of the growing inequality, as well as an opportunity to make statements about the future direction of economic policy. So what do the rumours suggest?

The main suggestions I've seen across the Irish Examiner, Irish Independent and Irish Times are:
  • The higher rate of income tax to move from 41 to 40%
  • Some changes to USC
  • Changes to the tax bands, so the higher rate kicks in from €33,800
  • Tax relief of €100 towards paying for water regardless of income
  • Welfare bonus to pay towards water
  • Consideration of part-restoring the Christmas pension/welfare bonus
  • 20c to be put on cigarettes
  • 1000 new teachers to be hired
  • other spending, in health, justice, etc.
  • retention of the 9% VAT for hospitality
  • pension levy might be scrapped entirely
  • A 'patent box' scheme to attract MNC investment

Good quote from Christine Keily in the Irish Independent summarises this: "While economic prudence would demand that Ireland stay the fiscal course, reduce spending and increase taxes, political prudence will dictate that the Government do no such thing and completely ignore the economists' advice."

Naturally, there may be no real substance to some of these rumours, but on the whole the end-result looks like a very political budget, with an ad hoc approach to what economic model would best suit Ireland and no great concern with economic inequality:
  • Cutting the higher rate of income tax will benefit around 600,000 people - not the vast majority of Ireland's 1.9 million people at work (worsening inequality)
  • USC changes would probably benefit most workers, but it is likely that high earners will get the same benefit as low and middle (maintains inequality)
  • Changes to the upper tax band benefits surprisingly few workers (600,000 again) (worsening inequality)
  • The tax relief of €100 towards paying for water combined with a welfare bonus of €100 to pay towards water are purely political measures, and are technically bad policy (worsening inequality - see below)
  • Part-restoring the Christmas pension/welfare bonus (reduces inequality)
  • 20c on cigarettes (regressive, so worsens inequality, but probably justified to help stamp out smoking)
  • 1000 new teachers to be hired (reduces inequality)
  • other spending, in health, justice, etc. (mixed effects, but health spending reduces inequality)
  • 9% VAT for hospitality creates only low-paid jobs but reduces unemployment (reduces inequality slightly)
  • pension levy might be scrapped entirely (increases inequality slightly, as only those with a better class of job have pension savings)
The Government are giving either a welfare payment of €100 or a tax credit to all people in jobs worth €100 to help pay for water. In other words, they are reducing people's likely water bills by €100 through tax money, rather than simply lowering water charges. It remains to be seen if anyone gets left out of this new scheme, which is wasteful as not all workers will need a €100 tax break to pay for water. Maybe it will only apply to low paid workers (more equitable) but if it is widely available, the likely outcome is that tax revenue - paid by VAT, income tax, etc. - will be used to subsidise water for people who don't need a subsidy, but paid for by everyone. That will worsen inequality.

Meanwhile, the 'patent box' tax avoidance scheme for multi-national companies signals that Ireland is committed to prioritising foreign direct investment rather than building up an indigenous industrial base in Ireland. This is turn is likely to continue the skewed nature of Ireland's economy, with higher paying jobs in Dublin and other centres, but no direct job gain across the country. Likewise, high-paying jobs in finance or IT will contrast with low-paying domestic jobs in retail, healthcare, etc. Overall, a pretty clear continuation of the economic model that the OECD predicts will increase economic inequality steadily to 2060 and beyond.

And the lack of a coherent push towards something different suggests that the Government does not envisage any other economic model for Ireland. So, the OECD's prediction of growing inequality does not seem to have challenged official economic thinking to date.

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Friday, 10 October 2014

Deeply Misleading Irish Times Report of Budget Survey

Nat O'Connor: The Irish Times has given front-page headline coverage to the claim that "Voters want tax cuts over better public services" based on illogical and misleading interpretation of survey data.

The page giving the poll result is here. According to the video presentation by Political Editor, Stephen Collins (top right of the page), voters were asked to suggest what they wanted "unprompted" and the results were compiled. 44 per cent are reported as mentioning something along the lines of net income increase or more spending power, whereas 21 per cent said more spending on services.

It is wrong to interpret these categories as mutually exclusive. Many people would achieve "more spending power" if public services reduced their cost of living. The video explained that anyone seeking more spending power was put into the category of people seeking a net income increase. But this in turn was interpreted as support for tax cuts, as if that is the only way to achieve net income increase, which is facile.

TASC has been making the point for some time that Irish public services often require people to put their hands in their pockets and pay for GP fees, school books, hospital charges, childcare, etc. which would be subsidised or free-of-charge in most other countries.

Services have to be paid for, but economies of scale can make public services cheaper than private services for many people, and those on lower incomes can rightly expect subsidised services based on progressive taxation that requires those with greater income and wealth to pay more. This is part of the basic bargain of public services in a democratic society.

The contradiction in the report of the poll findings is shown in the responses to a list of suggestions:
  • 15% Increase spending on healthcare (nurses, doctors)
  • 15% Reduce/abolish water charges
  • 14% Reduce income taxes
  • 13% Reduce/abolish the Universal Social Charge
  • 9% None of these
  • 7% Increase social welfare payments
  • 6% Widen tax bands
  • 4% Provide a back to work incentive
  • 4% Increase state pension
  • 4% Increase spending on education (teachers, schools)
  • 3% Reduce/abolish the Local Property Tax
  • 2% Increase spending (general)
  • 1% Reduce VAT/excise/direct taxes
  • 1% Reduce abolish pensions levy
  • 1% Reduce tax on businesses
  • 1% Increase capital spending on roads, infrastructure
  • 1% Increase spending on justice (more Gardai etc.)
Looking at the above figures, income tax was mentioned by 14%, USC by 13% and tax bands by 6%. That gives 33% or one third of respondents in favour of income tax cuts.

But 15% want spending on health, plus 7% on welfare spending, 4% on pensions, 4% on education, 2% on general spending, 1% on justice and 1% on infrastructure. That adds to 34%, or one percentage point higher than those calling for income tax cuts.

Stephen Collins's article begins with the claim that "More voters would prefer income tax cuts to improved public services in next week’s budget". But he is not counting social insurance/social welfare as a public service. Is it not obvious that increased spending on welfare or pensions would have to be funded, and therefore runs counter to the call for tax cuts?

One could add the 15% against water charges and 3% against LPT to give 51% seeking some taxes or charges to be reduced, but it is not obvious that someone who personally wants a tax cut or abolition of a charge wishes that to be funded through cuts to health or welfare. For example, a person might reasonably believe the abolition of water charges could be paid for through increased taxes in other areas, or a person might believe that recent economic growth will provide sufficient tax revenue. We cannot assume people's views if they are not asked appropriate questions. The headline that "Voters want tax cuts..." suggests a much more clear cut finding than the data shows.

On the basis of the survey findings, there is a public debate about these issues, not a clear cut view. One third favour income tax cuts, one third favour spending increases and the other third is more mixed or nuanced. Those against LPT and water charges do have to explain how they would meet the funding gap, but it is not clear that they want to reduce total tax take. There are further nuances, as people might seek a tax cut assuming they will benefit, even though a cut to the higher rate of income tax will only benefit a minority.

At best, the interpretation of these responses is debatable. It certainly does not provide a clear result to justify a headline supporting tax cuts within days of the national Budget.

In the Press Council of Ireland's Code of Practice, Principle 1 is Truth and Accuracy: "1.1 In reporting news and information, newspapers and magazines shall strive at all times for truth and accuracy." The Irish Times have failed to uphold this principle in this case and it is damaging for the reputation of both the Irish Times and Ipsos/MRBI to be associated with such biased and misleading reporting of poll results.

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Thursday, 9 October 2014

Hair of the Dog?

Nat O'Connor: If you read nothing else about the global forces that shape Ireland's economic future, you should read Michael O'Sullivan's essay in the Dublin Review of Books: Hair of the Dog?

Teasers: "the global economic and investment climate are now marked by the emergence of trends, policies and behaviours that would have been seen as radical before the financial crisis but which are now accepted as normal" ... "the Irish economy is beginning to recover, but there is also a sense that like the early 2000s it is the crucible for the spillovers of many of the forces acting on the world economy" ... "For a small open economy, the trend growth rate is bounded by the health of international trade, the attractiveness of the business climate and the extent to which there is structural growth in domestic business creation. In this respect Ireland is much better off than many of its euro zone neighbours like France, but this means that it should enjoy a long-term growth rate of close to 2 per cent rather than below 1 per cent. Expectations of sustained growth in a range of 4 per cent to 8 per cent are fallacious, and in recent economic history have only been achieved in a post-crisis environment by the likes of Hong Kong and Singapore, piggybacking on Chinese growth."
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Tuesday, 7 October 2014

Public versus Private Sector Pay

Proinnsias Breathnach: On August 26 last, the Irish Times published an article with the headline “Public sector pay a third higher than private sector” in the front page of the Business section.  This was a highly irresponsible headline of the type one might expect to find in the Sunday Independent.

If the Irish Times presented a headline stating that, on average, workers in solicitors’ offices are much better paid than workers in supermarkets, readers would immediately regard this as being obvious, given the major differences in qualifications and hence pay rates between the two.

Essentially the same situation applies to comparisons between the public and private sectors.  There is a much higher proportion of professional people (e.g. teachers, doctors, nurses, administrators) and a much lower proportion of unskilled people (e.g. retail, catering, hospitality workers) in the public sector and therefore one would expect average pay rates in the sector to be higher.

To quote the 2010 Employment Survey (the most recent to be published by the Central Statistics Office), “on average, public sector employees had higher educational attainment, longer service, were older, and were more likely to be in professional jobs than their counterparts in the private sector.”

The 2010 Survey found that, while overall average weekly earnings in the public sector were 35 per cent higher than in the private sector, when allowance is made for these and other variables (including organisational size), the gap between the two for permanent full-time employees aged between 25-59 was only around 8 per cent and had fallen from around 13 per cent in 2007.  

Furthermore, the gap was greatest between workers at the lower end of the pay scale while at the higher end, private sector earnings were higher than in the public sector.

Misleading headlines such as the one used in the article referred to do nothing to promote balanced and reasoned debate on this topic and instead are conducive to the kind of emotive language (“inflated public sector pay”, “tiger wages” in the public sector) attributed to the Irish Small and Medium Enterprises Association in the same article.

I sent a letter to the Irish Times putting the above points, but it was not published.  I routinely send letters to that newspaper seeking to correct what I believe to be errors of fact or interpretation which have appeared in the paper but these are hardly ever published.  I am thinking of changing my name to Anthony Leavy!

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Friday, 3 October 2014

Another way of looking at progressivity

Cormac Staunton: TASC has previously shown how the progressivity of Ireland’s income tax system declines after certain levels of income. It is progressive (in that the percentage of tax paid increases as incomes increase) up to about €75,000 but then the relative progressivity begins to slow and then almost flat-lines.

See this diagram, which is based on tax liability as a percentage of income for a single person:

The red line is tax, the blue line is tax plus USC and PRSI. These are calculations of liability based on the rules, not actual tax paid (which we have shown to be lower).

The progressivity happens because someone on €18,000 has a liability of about 10%, and someone on €33,000 has a liability (tax, USC and PRSI) of roughly 20% of gross income. This rises to almost 40% for someone on €90,000.

However, for someone making a jump to €150,000, the rate only rises by a few percentage points to less than 45%. No one, even on extremely high income, ever pays more than half.

Another way of looking at it is to look at the tax liability in cash terms, and compare that to gross income. This can be compared to a plotted line of income tax, USC and PRSI. The diagram looks like this:

 What this shows is that at all stages, the more you earn, the more you take home. There are no “diminishing returns” and no disincentives to work.

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

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Thursday, 2 October 2014

Response to Irish Times article on the 'Tax Debate'

Cormac Staunton: Chris Johns in the Irish Times has written an article attacking all sides in the debate on income tax in the Budget, which includes TASC’s recent commentary.

The reason this debate on income tax is happening is that the Government have repeatedly claimed that they are going to reduce the higher rate of tax in order to benefit for low and middle income earners. TASC’s analysis of the tax system shows that it is impossible to help people on low and middle incomes by cutting the higher rate of tax. By putting this analysis forward, TASC seeks to show who would benefit from a higher rate cut. In the context of Budget discussions, this distinction is fundamental.

To address Mr. Johns’ criticisms directly:

1) The number of people benefiting from a higher rate cut
In the article, Chris Johns claims TASC ‘distorts’ the numbers who would benefit from a higher rate tax cut. To be clear, the assertion that “18% of tax payers will benefit from a higher rate cut” is a Revenue figure, used by the Minister of Finance in the Dail. It is not a TASC calculation. The exact quote is:

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.

The full written answer is available here, after Q.107

There are two issues raised with regard to the ‘18%’. The first is the total number who will benefit, and the second is the choice of population.

On the total who will benefit, Revenue identify 392,000 tax units as paying the higher rate of tax, out of a ‘population’ of roughly two million tax units. This gives the figure of 18% of all tax units, and was the basis for their response.

This number does not include a cohort of people who are liable for the higher rate, but whose tax credits exceed the tax at the higher rate. Revenue does not consider these people to be higher rate tax payers. This may be a fine distinction, but it is one made by Revenue, not TASC.

There is a valid argument to be made that people who are liable for the higher rate, but are not classified as paying the higher rate by Revenue, would still benefit from a higher rate cut, despite the phrasing of the response to the Parliamentary Question. The number of people in this group is hard to quantify (because of the way Revenue data is presented) but it is possible to estimate that it is somewhere in the region of 200,000 additional cases. In this case, IBEC’s figure of 607,000 who would benefit is valid.

In seeking to identify other people who would benefit, IBEC also add in a group who might benefit if they were to receive a salary increase or overtime to bring their estimated figure to 657,000 cases.

In identifying the ‘population’, IBEC narrow the definition of “taxpayer” by removing pensioners, low-paid and part-time workers and those on their first jobs (without reference to how these were identified).

In this way they shrink the population of “taxpayers” to 1.2 million cases, and can claim that more than half of “taxpayers” benefit from a cut to higher rate tax, despite the fact that Ireland has 1.9 million people in employment. Deliberately excluding the low-paid and pensioners from a discussion on income tax is poor analysis.

657,000 is 35% of the 1.9 million people at work in Ireland, but it is not “more than half”.

However, 657,000 is still only 18% of Irish adults, and in the context of the Budget, and the claims of ‘giving something back’, it is fair to point out (and factually correct) that a higher rate tax cut only benefits a minority of Irish adults.

2) The Marginal rate
While a single person on €32,900 may face a marginal rate of 52%, their effective rate is only 18%. That is a difference of 34 percentage points, or €11,186. In this context, focusing on the marginal rate of 52% is irrelevant to this discussion, rather than irrelevant entirely. In addition, because of the variances within tax systems, simple cross-border comparisons of marginal rates are not useful. In the Irish system, while it is true that the marginal rate comes in at below average earnings, this is off-set by tax credits and tax reliefs.

3) Focus on income tax
All of TASC’s analysis distinguishes where appropriate between “income tax” and “income tax, USC and PRSI”.  The focus on the actual level of income tax paid in this instance was based on the available Revenue data and in the context of a discussion on the 41% marginal rate of income tax (which is made very clear in the report).

A maximum 30% average effective rate of income tax, even on earners above €2 million, is factually correct. At no point does TASC claim that this is the only type of personal taxation. However, it is not accurate to simply bolt USC and PRSI onto the Revenue “tax paid” data, as this is a composite of couples and singles and they will have different USC and PRSI liabilities.

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

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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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