Wednesday, 27 July 2011

Questions that should be put to the Minister

Michael Taft: The Cabinet has approved the interim Household Charge of €100, designed to ‘raise’ €160 million from 1.8 million households. There are some exemptions: those in receipt of mortgage interest supplement, social housing tenants, commercial property and premises owned by a charity. Otherwise, the charge will be universal.

Is it inequitable? Yes, it is. Even Fine Gael opposed such a tax in opposition:

‘. . . flat rate charge means that houses in standard neighbourhoods worth a fraction of some mansions will pay the same rate of tax. It will be difficult to pay for asset-rich but income poor households, particularly the elderly and the unemployed; and it will be deeply unfair for a young generation that paid exorbitant amounts of stamp duty and VAT on the purchases on over-valued houses, many of whom now find themselves in negative equity.’

Question 1: Why is the Minister performing a U-turn, - committing to one thing before the election, and doing the exact opposite afterwards?

The Minister has claimed he had no choice – that it’s in the EU-IMF deal. Interesting, though, that Fine Gael published the above after the deal was signed. In addition,

There is no mention of a flat-rate charge in the EU-IMF deal.

Second, a property tax is stipulated for next year and the following year. But as Minister Noonan pointed out, the Government is free to substitute one fiscal measure for another as long as it yields the same fiscal result. The Government has done this already – with the Jobs Initiative. It has also announced there will be no income tax increases, even though the EU-IMF deal explicitly calls for such increases this year and next. So merely stating that something is in the EU-IMF agreement is not a sufficient explanation.

Question 2: Why is the Minister introducing a regressive, flat-rate household charge when (a) there is no reference to it in the EU-IMF deal, and (b) the Government has declared that it is free to substitute measures in the deal?

The imposition of the household charge is, to put it bluntly, a political choice. It is also, in economic terms, a highly irrational one.

Already, the spin being put out is that it’s only €2 a week. However, if we are to believe the findings of the ‘What’s Left’ tracker published by the League of Irish Credit Unions, that €2 will impose a further substantial burden on households and the economy.

The tracker found in July that 750,000 people (or approximately 20 percent of the adult population) had only €70 each month after paying bills. A €100 charge will reduce this discretionary spend by 12 percent.

A further 250,000 had no money left after paying their bills. The €100 charge will send them into negative balance.

For a million people, the charge will reduce their discretionary budgets by 12 percent or more. Of course, a proportion of these will be either tenants – public and private – while others will be receiving mortgage supplement. Still, many, if not most, will be liable to the charge. So when you hear someone going on about ‘only €2 a week’, just remember: there are significant sections of the population who only have €16 a week or less to spend after essentials.

Even if people had twice the amount left after paying bills - €140 – the charge will still amount to a substantial cut of 6 percent.

Question 3: What is the Minister’s Department (or the Department of Finance) economic impact assessment on households’ discretionary spending budgets (that is, after bills and essentials are paid for)?

There are other losers. What about the businesses dependent on the spending power of these households? Using the ESRI’s impact of an income tax, we should expect the household charge to result in a consumer decline of approximately €100 million next year. However, this figure is likely to be higher: the ESRI was estimating a rise in a progressive tax (income tax); the household charge will disproportionately hit low-average income earners.

Question 4: What is the Minister’s Department (or the Department of Finance) economic impact assessment on consumer spending and, so, economic growth?

And while the Government hopes to ‘raise’ €160 million, the benefit to the Exchequer will be less. Once you factor in the fall in consumer demand and, so, spending taxes; and the impact on employment (firms coming under pressure may reduce hours, pay and even let people go), the actual savings will be less. Again, based on the ESRI’s simulations, the actual benefit could be of the order of only €100 million. Again, as noted above, this figure could be lower because of the regressive and, therefore, more deflationary nature of a flat-rate tax.

Question 5: When the deflationary impact of the charge is assessed, how much will the Exchequer actually ‘save’, as opposed to how much the charge will ‘raise’?

The Government wants to promote growth, employment and demand. Yet they seem determined to do the opposite. A regressive flat-rate charge on top of pay cuts for JLC workers? These questions could help determine exactly what the Government’s strategy is.

And the answers could tell us a lot about what we can expect in the budget later this year.


Anonymous said...

All fair questions, of course - and of course we know that fairness has nothing to do with this.

Viewed over a long time-frame, the ongoing FF-FG policy has been to reduce taxes on the wealthy (the top rate of income tax, capital gains tax) and replace them with increased taxes on the poor and middle earners.

A co-operative press has seen to it that the few years of low tax in the imterim is enough to obscure this fact.

The low tax-take of the 'low-tax' years was of course supplemented by large stamp duty income - financed through the borrowing of low and middle earners.

But then again, hard decisions have to be made...


paul sweeney said...

Two obs: I am surprised that the tax is so low and secondly it is interesting that the Irish Anti-Tax Vigilantes are situated on the Left! A €100 is but a start on taxing capital ie property. A property tax is long overdue and in time, it should be based on the value of the property/site. Had we retained the old residential property tax, the bubble would have been less and fall less too.

Why are so many Irish people anti tax? Do they not see that public services are paid from taxation? Property taxes are generally very progressive taxes.

Martin O'Dea said...

I think Paul, Michael's key point is that it is flat rate not that there is a porblem with taxation in principle.

I must say I am reading Michael's output here for some time - and I have got to admire his resilience; the arguements he and others here make are ignored and then made again highligthing how the ignoring accentuated the problem and how to change track - - and ignored again.

Things should be made as simple as possible

An individual has an income of €500per week.
We do not need to go through mortgages etc to realise that this individual is not saving; so all of this money leaves this individual's posession during that week
(an individual with an income of €5000 per week (€104k)is much more likely to save, holiday and import)

In any event one can assume that this money (€500 ind) will return to the government in the following ways
He/She buys something in the shop, VAT - goes to the govt.

the rest goes to running the shop business. Some of that goes to wages which suffers income tax - goes to the govt.-

some is paid as corporate profit - goes to the govt.

some is used to buy commodities and services from other businesses in ireland (Vat) and other companies, as above - goes to the govt.

as it jumps from business to business this money that the govt could just have collected via say income tax or a property tax; what happens
well it filters through the businesses of the economy allowing people to work.

When people work what they are doing is contributing to organisations which collaborate to create products and services to better the enjoyment/standard etc of life of the whole population

when there is too much confidence in a market than policy must act as a brake (particularly in sector of bubble style growth)
If however, an economy and conusmers particularly are lacking confidence then obstacles to spending need to be removed.

For Example
If there were free buses and trains for a month what impact would this have on travel and shopping and extra cash to spend and a general feeling of positivity. How much money from the free public transport would 'seep' its way to an offshore account?
How many wealthy people even use public transport.

What about lowering taxes on petrol - reducing service costs - forcing closed professions like law/accountancy/medical to become answerable to competitive authorities

what about assisting people who you know will spend.

Is this not the obvious way to get people back to work reduce the social welfare bill (and the many other associated social problems)increase production/comsumption and therefore government revenue.
Is not increasing revenue the best way to reduce a deficit

When one has a shop and starts to have difficulties you try to sell more (you may also reduce your costs a little and increase your efficiencies - but to be honest this should always be the case) if you keep cutting until you no longer buy in any stock which to sell your nearing the current govt. position

Why then would this simple logic not be applied

Well if you have a neo-liberal led crisis and your anihilate a populus political party only to elect another with more neo-liberal leanings then!!

maybe, just maybe, they are populus enough that they will change track and forget that they are suposed to espouse small govt. big business, big profits - wealthy and priviliged positions and a large working class.
I hate to say it but FF did not have neo-liberal in their political philosophy - they just bumped into the PDs on their way home from a trip to Tatcher's England and Reagan's U.S. -- they would be doing whatever they thought would win the next election if they were still there and in some ways (bar our collective blood pressure) we might even have been a little better off if they had stayed!!!

Michael Taft said...

Paul – apologies for getting back on this late; I was away. The issue is not anti-tax but whether it is socially equitable and economically efficient. On the first count, I’m sure you would agree that a tax that purports to be levied on ‘property’ but yet imposes a €100 charge on the wealthy while levying the same amount on people living in poverty is hardly socially equitable. It may nominally be a ‘property’ tax but effectively it is no such thing.

Second, it is an economically irrational tax. With the Central Bank projecting the economy to remain mired in a domestic-demand recession next year – with consumer spending falling again – it makes no sense to impose more taxes on those who spend most of their income. This will only continue to degrade economic growth – and in doing so, will mean that the Exchequer will achieve little savings from the tax.

A real property tax would have begun at the top – with those income groups who actually own substantial property and have a higher propensity to save. Over time, the tax could be extended consistent with economic and wage growth in order to sustain demand.

You are right – property taxes are generally very progressive taxes. The Minister’s household charge can hardly fit this description. Further it shows the Government has no appreciation of either social equity or economic efficiency.

paul sweeney said...

I still think it is very low at €100. I of course agree a flat tax is not equitable and the timing is not right, but one has to start somewhere and as you say, Michael property taxes are very progressive. I think it should be universal with exemptions at the bottom, but on all housing. With the Troika running Ireland, it has to be introduced, as Irish politicians, reflecting the dominant anti tax view of citizens, are so wary of progressive taxes.

Similarly it will be external changes/factors which will melt the nationalist /jingoistic opposition to reform of the low Corporation Tax. Such nationalist rhetoric will have to melt rapidly when the US or others implement changes which will demand such reform.

Anonymous said...

I think its a little optimistic to view this as the introduction of a 'progressive' property tax.

This is a flat rate charge and if it is accepted and allowed to be presented even by those on the left as being fair, it will remain a flat rate charge.