Tuesday, 14 February 2012

A taxing fable

David Jacobson: In Monday’s Irish Times business editor John McManus speculated about why there had not been more response from disgruntled, low-earning tax payers to the government tax-cut for the rich. This is the tax relief on 30 per cent of earnings between €75,000 and €500,000 of foreign employees of multinationals transferring to Ireland for the medium term. Among other explanations, he suggested “fatigue”, “restraint” and “social cohesion”. Here is the truth:

There is a religion in Ireland the main mantra of which is “12.5 per cent corporate profit tax rate”. The elaborate accoutrements of the religion involve doing anything that the multinationals require, or claim that they require, and avoiding anything that could be interpreted to be troubling them. The high priests of the religion are the IDA. Among the staunch upholders of the religion are tax advisers, who are paid far more than the state receives in tax from multinationals.

Now it came to pass that a tax adviser and an executive from a multinational were having lunch (not free, of course). They came up with the idea of getting more net pay for multinational executives and worked out a plan as to how to justify this to the high priests. “We can tell them that it will be narrow and focused, but will encourage more job creation” said the tax adviser. “But once the measure has been passed, we’ll find loopholes and other ways to extend it.”

They then proposed it to the high priests, who saw it in terms of zeal in support of what they propagate, and in turn decided to sell the idea to the state. There is apparent separation of church and state in Ireland, of course, but there is not a member of the government who would admit publicly to being even agnostic about, never mind against, the religion’s main mantra.

The government thus, naturally, accepted the proposal. It has been accepted by the instruments of the media, both those in favour and critical of government, because of the risks involved in contradicting the fundamental dogma of the religion. And the people of the state, with no leadership into alternative paths, have also gone along with it.

And that is the true story of why the low-earning tax payers of Ireland have accepted the proposal to cut taxes for the rich.


paul sweeney said...

No you are wrong. The lowly paid do not accept the tax breaks for the rich (which by the way, there are many more in the Finance Bill), but the elected leaders of most of the Political parties do.

They actually sincerely believe that the low Corporation Tax is, as Lucinda Creighton once said "the cornerstone of Ireland's industrial policy." Well if it is, the whole edifice is in grave danger from a big machine (read tax authority) in another country.

You are correct on the CT policy being a Dogma. There is no debate of this policy. And it can be taken from us over-night. And there is to be little debate on this latest scam, as it helps the bosses of the MNC sector.

Without debate, we are lost. Religion, not evidence-based analysis seems to rule!

Paul Hunt said...

The MNC 'export enclave' has the Government over a barrel since it is its perfomance, almost completely, that is compensating for the contraction of the domestic economy and allowing the NTMA to put a gloss on things as per, e.g., p8 in the attached:

There is a fair does of hypocrisy attending the faux rage about the concessions the MNC enclave has been able to extract - and continues to extract - to ensure this crutch remains in place. If it were kicked away the excessive costs the sheltered sectors are imposing on the economy would be revealed in all their glory.

So many of those on the left either in, or doing their damnest to protect the inefficiencies in these sectors should be down on their knees praying that Barack Obama doesn't get really stuck into US MNCs 'based' in Ireland evading thier US tax liabilities.

Paul Hunt said...

I referred to the NTMA's investor presentation above. I have a simple question - to which I'm sure the economists here should be able to answer (and it relates to boosting the domestic economy to reduce the imbalanced reliance on the MNC export enclave):
What percentage increase in real disposable per capita income (p15) should we expect to see if the Irish price level were reduced to the Euro Area average (p28)?

Damian said...

@ paul hunt
Paul - I'm not sure your question adds up - even if we accept your premise that prices should be the key indicator. Nor do I buy all that down on your knees stuff - but that’s probably generational!
Prices are now 13% above Euro area average and have been on a downward trend since the peak in 2007/08. This has coincided with a shrinking of bank balance sheets - presumably the main supplier of excess liquidity since 2001 – prices were blow EU averages in mid-1990s when the banking system was far less leveraged. Since asset side shrinking is far from finished and the IMF has set a 120% target for 2015 - one would have to assume that the component of prices driven by this will continue to fall sharply. All this in the absence of any privatisation. Therefore it’s not at all clear how privatisation would affect this. One could only assume that the addition of pension fund premiums to the mix would hardly be in the interest of domestic consumers – or French state-owned utilities – the apparent major beneficiary of Thatcher’s UK version.
NTMA does not tell us how much of inflation/deflation is imported and what effect this is having on disposable incomes. Neither does it tell us the effect of social welfare cuts, nor does it provide a figure for the contribution of "elevated" energy prices. But Eurostat data show that energy prices here have been falling since 2008/09 and are in some cases lower (gas) than other EU countries. I'm sure there are many reasons to explain this (imports and energy intensity) but ownership does not appear to be central to the story.

Paul Hunt said...

Are you trying to answer the question, or trying to avoid answering the question, or saying the question doesn't make any sense?

The rate of decline from the peak gap is grinding to a halt and detailed CSO price sub-indices show that prices are sticky - or continued to increase - in the sheltered sectors.

The reluctance to consider the question on its merits probably provides some very useful information.

Damian said...

@ paul hunt
“Merits”? You proposed a relationship between two series of data - one a relative price series based on Eurostat data - the second domestic disposable incomes data. The first was rapidly falling from a peak - the second also in decline. You asked what would happen to the second if the first continued to decline????
But NTMA points out that the squeeze on disposable incomes is driven by a number of factors. One of these is elevated energy prices. Yet according to Eurostat data (which you so keenly cited earlier) relative energy prices are on a downward trend. Your question therefore implies that I should ignore the effects of social welfare payment reductions, taxation policy and lack of earnings in squeezing disposable income.
Your question was posed in terms of relative prices so I fail to see why you suddenly have a problem with the same relative price data; save that you don't like my answer (which I can live with!) or as your school yard answer suggests, you don't have very much time for data that is not consistent with your privatisation argument.

Paul Hunt said...

Given the limited upward movement in the average the relative decline in Ireland should suggest and absolute fall and I would argue that it moderated the decline in real disposable income per capita induced by "social welfare payment reductions, taxation policy and lack of earnings". I'm merely suggesting that further decines in the Irish price level, both relatively and absolutely (in the context of a single currency area), would either moderate any further downward pressure on real disposable incomes or might even increase them. Is that such a terrible thing to look for or to seek to secure?

Your 'school yard' comment about privatisation suggests your real motive: to dismiss any argument that suggests costs and prices in the sheltered sectors are excessively high lest privatisation emerge as a valid solution in cetain sectors.