Monday, 7 September 2009

Pro-business bias reflects Commission's flawed terms of reference

Paul Sweeney: This report has some excellent analyses and many useful recommendations which will be of use to a progressive government in the future.

However, the report is a child of the economic thinking which brought this once successful economy to its knees. Low direct taxes, high spending taxes, combined with de-regulation and privatisation, pro-cyclically have been abandoned by politician worldwide. Even deeply conservative Irish economists are talking endlessly of state intervention on a scale never envisaged by anyone. Their debate is not on the scale but on the technicalities of the taxpayers’ billions of euros in subsidies to the banks.

The core term of reference of keeping low taxes was out of date before the Commission commenced its work. The crash had already begun. It is regrettable that the Minster for Finance, Mr Lenihan, did not amend the terms of reference for the members and so move with the harsh new reality after the crash.

The emphasis of the report appears to be to impose substantial additional “burdens” (to use the Commission’s own pejorative and ideological description of tax) on citizens and to substantially reduce the “burden” on business. The lack of balance produced a zero-sum outcome. This is unnecessary.

This pro-business bias reflects the Commission’s flawed terms of reference and its composition. The Commission did not reflect civil society. It was hand-picked by the Department of Finance to reflect a dominant view of business.

In stark contrast to the Irish Government’s narrow and biased Commission’s terms of reference, the Norwegian government, which is left of centre, appointed a Commission on Distribution of Wealth and Income. That Commission of experts was appointed to research and explain the increase of inequality, and also how the distribution of the resources and of wealth can be made more equitable by policy changes in the future. They submitted their report in April. It can be read here, by those who speak Norwegian!
And it is shorter too, being only 399 pages as against ours of 550!

While equity was one of our Commission’s terms of reference and is very important, it erred in the balance between equity and what it perceived to be of benefit to business.

The economy crashed because the Government, regulators, and the Departments of Finance and Enterprise thought that they were doing business favours by being pro-business at almost all costs. They did this during the domestic induced boom from 2001 by de-regulation/no regulation, privatisation, massive tax breaks, subsidies, high taxes on consumption (which pushed up the overall price level and costs), and by pursuing pro-cyclical, demand-boosting economic policies. This lethal cocktail of bad economics brought this economy to its knees, where it rests.

Low taxes means low public services. In the real boom of the 1990s, it was possible to have low taxes and increased public spending. When the economy over-heated, Government should have stopped cutting taxes. It did not. It gave even more tax subsidies to the wealthy and to property and business, without assessing their impact on equity and the economy. That was the time for real tax reform.

That many, though, not all, tax expenditures are to be terminated, is welcome in the report. But the recommendation to maintain low direct taxes on incomes and on business profits in a fiscal crisis (in accordance with Minister Lenihan’s unamended terms of reference) at a time when taxes are being, and will continue to be, raised, may mean maintaining regressive tax policies.

Irish business already enjoys a) one of the lowest rates of company tax in the developed world; b) the lowest social contributions in the world; c) many tax subsidies to further reduce the low business taxes; and d) an array of state agencies (e.g. IDA, SFadco, Udaras, Forfas, BIM, Teagas, SFI, FAS etc), largely devoted to pursuing the business agenda, paid, not by the beneficiaries, but by taxpayers.

Ireland has the lowest tax wedge in the developed world. This is shown dramatically on graph 7.3 on page 184 in the report. Yet the report is concerned with keeping income taxes low. (Income taxes are generally much more progressive than consumption taxes). It devotes little analysis to consumption taxes. This year, taxes on consumption will raise €137 for every €100 raised in income taxes. Income taxes are much more progressive than taxes on spending. Consumption taxes, now so high, do not take into consideration ability to pay. The report gave but a few pages to consideration of these big taxes. This is regrettable.

The balance of this report is skewed against social equity. It should be redressed by increasing the tax contribution from business by eliminating most tax expenditure for that sector. Instead, there are many new tax breaks for business. They are not uncosted. Why? These costings should be FOI’d.

It is extraordinary that the term Transfer Pricing Fixing did not appear once in a major 550 page report on taxation. This is where MNC shift or transfer their taxes to tax havens or low tax countries, by manipulating internal pricing (see Irish Times today 7th September on Shering Plough). Ireland has been a great beneficiary of TFP, as firms shift profits here, to avail of our low company taxes. However, this is at some cost of our fellow Member states in Europe and the USA. It is artificial and cannot last. One would expect at least a discussion of the implications of the termination of TFP from a body supposedly representing civil society.

The large tax revenue impact of transfer-pricing by MNCs in boosting Irish Corporation tax revenue can be determined from the profit levels and inflated trade data of some sectors. Many independent economists have remarked on the skewed output in some sector in Irish trade and other data. The subject is taboo in Official Ireland.” That this “independent” Commission did not use the term Transfer Pricing in its report on the very subject of taxation is telling!

Still there are many interesting sections and recommendations in the report. The analyses of the Commission are interesting and contribute positively to our knowledge of this complex subject.

9 comments:

Proposition Joe said...

"Ireland has been a great beneficiary of TFP, as firms shift profits here, to avail of our low company taxes. However, this is at some cost of our fellow Member states in Europe and the USA"

Yes, out of a sense of fellowship with our down-trodden brethren in the US, we must turn our back on these ill-begotten gains.

Those military adventures in the Middle East won't pay for themselves, dontcha know.

The cheek of us, taking good tax dollars from the Americans that could instead be going to fine upstanding corporations such as Blackwater or Halliburton.

Of course the Americans would never manipulate international trade for their own benefit. Well, except for the price of bananas, but that's OK coz kids like bananas.

SlĂ­ Eile said...

@Proposition Joe
You might check out a previous blog discussion on corporate taxes, transfer pricing and poverty at
http://www.progressive-economy.ie/2009/04/low-corporate-taxes-and-poverty.html

tgmac said...

As always our government and their so-called independent experts believe if they don't talk about TFP, it won't be a problem.

We surely pissed off the UK when we unilaterally declared the blanket gaurantee on bank deposits and were percieved to be trying to attract UK deposits when the UK was struggling just as hard. Also, a few UK companies have decided to domicile here during the last couple of years just for the tax breaks.

The US govt have projected something like a $9 trillion budget deficit over the next 10 years.

It's no secret that some quite influential European parlimentarians want to curtail tax differentials between EU countries.

Yet, our fragrant leadership, from both main parties, aren't worrried. Keep stum and all will be well. Both parties will continue to privatise public services to enrich a few individuals; won't contenance tax increases on themselves and their wealthy brethern; and just won't face the possibility that the economic future may be changing.

53degrees said...

"Instead, there are many new tax breaks for business. They are not uncosted. Why? These costings should be FOI’d."

I could do that.

Is it true that for the first time we can see all of the tax breaks available that were not before?

Tomaltach said...

About the low tax wedge and the consequent lower level of services - fully agreed. Interesting too that while we are repeatedly told about the need for a low tax wedge we aren't reminded of the consequences - inability to fund the kind of services we profess to want!

Yet I think your general statement "the report is a child of the economic thinking which brought this once successful economy to its knees. Low direct taxes, high spending taxes, combined with de-regulation and privatisation, pro-cyclically have been abandoned by politician worldwide. Even deeply conservative Irish economists are talking endlessly of state intervention on a scale never envisaged by anyone." is too sweeping. I would argue that the main reason why Ireland's fiscal position and unemployment levels are worse than our peers is because of the property boom, which had of course, among its causes, the banking regulatory regime, the tax incentives, and the noxious political linkages between FF and the development community. To simply throw out 'de-regulation and privatisation' seems gratuitous. I have not heard any significant comment that it was de-regulation generally that left Ireland in crisis - more it was the poor regulation of the banking/financial sector. Other areas of the economy which were privatised and run under competitive regulation don't seem to have been a major cause. True, the global collapse has corrected the blind faith in markets (You've seen Krugman's piece in the NY Times I'm sure!), and we've seen conservative economists advocate state intervention now - but mainly to fix the banks. Few of them have reneged on privatisation generally or would suddenly favour moving to Danish-like tax wedges. In short, I don't think it is helpful analytically to lump everything together - even if it provides an ideologically pleasing veneer on the argument.

Agreed too about the difficulty in moving more towards indirect taxation. Yet it is not entirely true to say that consumption taxes 'do not take into account ability to pay'. They can have this element attached - though clearly it is rarely as elegant as with payroll tax. For instance, low earners could be exempted from water rates. This leads to the other advantage of consumption taxes - they tax consumption. So they can be used in order to curtail consumption in areas where this is desireable - carbon, water, alcohol. This is not to say that I disagree on your point about income tax being more equitable generally. But again, I think a lot is lost when we paint with a very wide brush.

paul sweeney said...

Hey Joe! you are right – the US cant use the money to bomb others (or provide medical care to the poor).
“As always our government and their so-called independent experts believe if they don't talk about TFP, it won't be a problem” - TGMAC you are correct.
Words! I think in the Orwellian fashion, the use of the words Transfer Pricing is forbidden by all public servants. I saw this when I was on a govt body and asked for a discussion of it. Every other word was used, but not that!
Other words – we got a new term yesterday from the Commission on Taxation. The term income tax is out. In comes taxes on labour. (Part 7.3) I am told it make the case for shifting taxes to consumption and property psychologically easier. It sounds as if it is a tax on union members!
The other word the good and great now use is Enterprise to describe the Corporate sector or what used to be called business. I am told that it sounds better.
I disagree with Tomaltact on de-regulation. If the Bank regulator and their appointees at the top of the Dept Finance had not swallowed the efficient market hypotheses line so deeply– that regulation was an interference in the market – credit would not have been so easy and the world would be a different place today. I would differentiate substantially between liberalisation and de-regulation. But that is an essay!
Tomaltact also says “we've seen conservative economists advocate state intervention now - but mainly to fix the banks. Few of them have reneged on privatisation generally or would suddenly favour moving to Danish-like tax wedges. In short, I don't think it is helpful analytically to lump everything together - even if it provides an ideologically pleasing veneer on the argument.” You are correct, but I don’t think they realise how far the neo-classical model has fallen.

Stringer Bell said...

Ireland has a low tax regime, and on this basis, will never be able to create a progressive developmental welfare state. All social partners (including the Trade Unions) signed up to this low tax regime during the past 15 years. Brendan Hayes has done society a great service by refusing to sign the report. But, it is 15 years too late. The low tax regime is now institutionalised. TU's increased nominal pay for their members via reduced taxation on income, not an increase in wages.

Paul Sweeney said...

The unions did not sign up to the low tax regime. Quite the opposite. Some sloppy journalists have asserted this recently, and it seems to have to got wings. In part it is because some think that Social Partnership means that the unions are actually in government, or that they are fully happy with the deals they have made, which are always compromises.

What happened is that the unions agreed to pay moderation from 1987 in return for reduced income taxes (which were very high) for some years. The boom began in 1994 and lasted to end 2000. From 1997, Mr McCreevy started cutting direct taxes. This continued for some years, supplemented by big tax breaks to property investors. During a boom cutting taxes was not good economics. But if you are a conservative of the new school, that's what you do.

The unions called for tax increases to match wage growth (usually a little higher than inflation) every year in Congress’ pre-Budget submissions. They constantly sought improvement in the Social Wage, i.e. better public services. They had some success on the latter. By 2002, David Begg was saying that the govt should take its foot off the Growth accelerator during the boom, and focus on development. No one heard him. Mr Cowan said he never got this advice, on the Late Late last Friday. What he meant is that he never chose to hear it, or he forgot it.

Tomaltach said...

Paul,

I was looking at the 2005 budget submission from Congress. Despite being in an advances stage of the boom (and after many years of taxes being lowered) there still seems to be a heavy emphasis on reducing the income tax burden. There is a demand that 80% of payers are out of the upper band, that minimum wage payers are out of the tax net, and that credit bands be adjusted upwards to match inflation.

I don't see any explicit demand that income tax rates be increased. True, there are demands for icnreases to other direct taxes in the corporate area.