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

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?

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.

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

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.

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.

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.

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."

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!

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 

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

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!

Friday, 26 September 2014

Budget 2015 Warmups

Nat O'Connor: Interesting remarks by Minister Noonan reported in The Irish Times.

On tax breaks, he is quoted as saying “I use tax breaks to get a particular economic or social response in the short term but I will not have it bedded in as a permanent feature of the tax code.” TASC has pointed to the problems of tax breaks for years, so keeping such tax breaks on a short time horizon represents a progressive move. However, tax breaks are still problematic because they disproportionately benefit high earners and distort business decision making.

“Because of the buoyancy in taxation from the growing economy” there will be no new austerity measures in the budget, Mr Noonan is quoted as saying. However, the devil is in the detail in this one. Presumably, the Minister is still banking on the €500 million from water charges and the €300 million efficiency savings due under the Haddington Road Agreement and other carry-overs from previous budgets. That means despite a genuine easing from higher tax yields and the IMF loan repayment deal there will still be a contraction of €800 million, which will dent GDP.

But the most illuminating quote was the following: The Government’s approach to the upcoming budget was simple, he said, “if we can continue to control expenditure and grow the economy, all things are possible. If the crazy spending starts again, not only will you use up the resources on the spending side but the signal will go out that the discipline has been removed from Irish economic management.”

This reinforces the message that this Government is fixated on cutting spending rather than striking a balance between tax and spending. To be clear, spending on health, education, housing and social protection needs to be funded by adequate tax and social insurance. However, if this Government is fixated on capping taxation at its current level, which is three-quarters of the EU average, it is clear that there will not be extra funding for a serious social housing policy nor extra funds needed for pre-school education nor increased provision for Ireland's growing number of pensioners in terms of State Pensions and health care, and so on.

Adequately and sensibly funding public spending is not "crazy spending". On the contrary, it is crazy not to invest in quality public services as an investment in people working and living in Ireland. Tax cuts represent just as much loss of "discipline".

Tuesday, 23 September 2014

Another False Claim Around Cutting Higher Income Tax

Nat O'Connor: It was reported in the Irish Independent that "Under new figures released by Mr Noonan's department, a 0.5pc decrease in the top rate of income tax from 41pc would cost €82m in 2015 and €117m in a full year, and would benefit 700,000 workers. A 1pc cut would cost €164m in the first year and €234m in a full year."

The figure of 700,000 is unlikely to be correct. According to Minister Noonan's response to a Parliamentary Question, only 17 per cent of income tax payers pay anything at all at the higher rate. Table IDS1 in this Revenue report, shows there were 2 million income tax payers in 2011, representing 2.4 million adult income tax payers. 17 per cent of them represents 340,000 tax units or 408,000 adults. Plausibly more of the relevant tax payers are couples, which brings the beneficiaries up to as much as 480,000 - but not 700,000.

(The calculation: if all 340,000 were couples, then 680,000 adults would benefit but that's not possible because we know from the same Revenue data that more than 200,000 single people pay the 41% tax, as well as some one earner households, so the logical maximum number of workers who could benefit from a cut to the higher rate is 200,000 singles and 140,000 couples = 480,000 adult workers).

On the other hand, although one in six of Ireland's 2 million tax units would benefit from a cut to the 41% rate, five in six (83% or 1.67 million) will not benefit from cuts to the higher rate of income tax - representing on average nearly 2 million adults.

Out of Ireland's 3.6 million adults, even if 700,000 did benefit, they would do so to the exclusion of 2.9 million other adults, including 1.2 million other workers (out of Ireland's 1.9 million people in employment).

There is no good way of looking at these figures. Tax cuts to the higher rate, even by 1/2 a percentage point on the rate, are a tax cut for higher earners. Fine Gael may want to do this, and they may arguably even have a mandate to do so, but they should give up the pretense that this will benefit low or middle income households.

Part of Minister Noonan's response in the Dáil was a claim that "an increase in the standard rate band could ensure that those workers that are on the brink of paying the higher rate of income tax currently, could benefit from a pay increase, without becoming subject to the higher rate of income tax going forward". What this boils down to is that if the 17 per cent paying the 41% ever grows to 18 per cent or 19 per cent, then those extra higher paid workers will benefit too.

Of course, over five or ten years, if there was ever significant wage growth across the economy, one might expect a Government to widen the income tax bands. However, not in the context of recovering from a massive recession and collapse in public finances, with high long-term unemployment becoming structural, public services under severe strain and social welfare incomes frozen for nearly a decade. Tax revenue is needed to tackle inequality, not to mention the looming Fiscal Compact requirements to spend an additional €5 billion or more per annum (from 2019) to pay down the national debt. And it is all too likely that when 2019 comes around, money will be found for the debt through more cuts, not more taxes.

None of this is to say that everyone paying the 41% rate is living a life of luxury. Many may have large mortgages or other debt that are weighing them down. But there are more homeowners without major mortgages than with, and if the Government want to target money at reducing personal debt, it should take on the banks directly not use the inefficient mechanism of giving money to those who already enjoy the highest incomes.

Friday, 19 September 2014

Why reduce 52%?

Nat O'Connor: Why reduce the 52% marginal tax rate? Taoiseach Enda Kenny joined the chorus of Government spokespeople to call for its demise (Irish Times)

“The Government has agreed that the next priority [as regards taxation] is to reduce the 52 per cent income tax rate on low- and middle-income earners,” ... “The 52 per cent marginal tax rate, comprising income tax, PRSI and the universal social charge, is – I believe – anti-enterprise, anti-investment and anti-jobs. It is damaging not alone our businesses, our workers and their families, it is equally damaging to Ireland’s attractiveness as a location for foreign investors. I believe it will make it harder to get our emigrants to come back home as the recovery continues.”

The debate about taxation is being made on the basis of misleading statements, false logic and little analysis. But here are some facts...

(1) Minister for Finance, Michael Noonan: "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." (Dáil Questions)

So, if only one in six income earners pay the higher rate of tax, how can changing it benefit low or middle earners as the Government claims? While the one in six earners (less than one in ten adults) benefits from tax cuts, everyone else is likely to experience public services with less funding or weaker social transfers.

(2) The OECD compares taxation in different countries in an annual publication, Taxing Wages, which is a reference for investors and employers. In this chart the total of income tax, employee social insurance and employer social insurance is shown. The OECD average was 35.9%, but Ireland has the lowest tax wedge on labour in the EU on average single workers at just 25.9%. For a one earner couple with two children, Ireland is the second lowest in the entire OECD at 6.4%, against an average of 26.4%.

Any returning emigrant on average pay will see that he or she will pay less tax in Ireland, regardless of the 52% marginal rate. Any employer will see that, even for high salary employees, employers' social contributions in Ireland are just a fraction of what they are in other countries.

(3) Marginal tax rates are NOT the same thing as effective tax rates - that is, how much tax you actually pay. First of all, if you move into the higher tax band, you don't pay all of your income at that level - just the top wedge. And also Ireland gives far more tax credits, tax reliefs and tax breaks than most other EU countries, so we pay less effective tax than others with lower headline tax rates.

And Ireland is far from being the highest tax country. The OECD lists 'all-in' personal income tax rates by family type.

  • Single Person, No Child, Average Wage: Ireland 18.7%; Lowest tax in EU
  • Single Person, Two Children, Average Wage: Ireland 13.6%; Lowest tax in EU
  • One Earner Married Couple, No Child, Average Wage: Ireland 13.6%; Lowest tax in EU
  • One Earner Married Couple, Two Children, Average Wage: Ireland 11.1%; Lowest tax in EU
(OECD Stats here)

More OECD data on different family types is given here. And if you want you can also try the Deloitte tax calculator and work out your own tax and social insurance payments as a percentage of gross income.

So what's really going on with the 52% rate? Well, for the relatively small number of people on twice or three times average pay, Irish taxation gets close to EU norms. And at the highest levels, it can be higher than UK or USA tax rates on personal income (although still lower than other EU rates). Those who would benefit most from cutting the 52% marginal rate are the top 10 per cent of earners.

Business lobbyists in Ireland and some multinationals are using their influence to seek tax cuts for high earners, claiming this is pro-enterprise or will lead to investment. But where's the evidence for this? Maybe some investment decisions will change, but public investment decisions will also change if there is less tax revenue available. (And anyway, high-tax Nordic countries score consistently high on entrepreneurial surveys, so low tax does not equal entrepreneurial, see e.g. The Economist).

No one pays tax for the sake of it. But Ireland needs public services, social transfers and public investment for sustainable job growth spread around the country, as well as social justice and a decent quality of life for all. Tax is the price of that, and giving tax cuts to high earners will not boost the economy sufficiently to provide for everyone. (See here for more detail on an IMF finding that public investment boosts the economy more than income tax cuts).

TASC has put these and other facts in a series of Policy Briefs here.

The current one-sided chorus has created a mythology around a cutting a totemic 52% marginal rate, but it fails to engage with real evidence about effective tax rates or meaningful comparison between the tax system in Ireland and other countries. (Even those earning €150,000 pay less than 45%, not 52%; and probably much less due to pension tax breaks). Ireland's total tax take is three-quarters of the EU average, and the effect of this is seen in service charges for health and education, weak job growth in rural areas and small towns, years of weak investment in infrastructure (as Irish Water keeps telling us) and growing deprivation and inequality.

Anyone with a progressive vision for public services must defend the tax base - and that includes the marginal rate. In fact, taxes could and should be higher for the very top earners, certainly not cut at their behest before recovery is even felt around the country.

Tuesday, 16 September 2014

The score at half time: OECD 7, Tax Avoidance ??

Today the OECD announced the deliverables on seven of their fifteen planned actions to tackle global corporate tax avoidance. (for background, see here). 

So what’s in today’s release? Quite a bit, actually. Work will continue on the digital economy, which is a good thing, as they are taking a broad holistic approach to this rather than confining their focus to techie firms. As the interim report says – digital economy is the economy now, and almost all sectors including health, education, media and financial services are impacted by the issues of mobility, reliance on data, user-created content, flipped supply chains and business models, near-monopolies and a pervasive virtuality that makes the old-fashioned taxing questions of who, what and especially where very challenging. 

There are concrete proposals on hybrid mismatches and on harmful tax practices which promise to tackle patent-box regimes. There are new proposals on preventing tax treaty abuse, but more interestingly, they’ve moved on the feasibility of a global multilateral tax treaty to replace the thousands of bilateral ones now in place. That in itself would be a game-changer. There is a lot more by way of country-by-country reporting, particularly for those patent-box regimes. The devil will be in the detail here, and of course this all poses massive challenges for developing countries who may lack the ICT infrastructure to cope. 

That and other issues will be addressed next year when the OECD report on the remaining eight actions on their original list of fifteen. This includes a lot more on aligning transfer pricing, and on data methodologies. In the meantime, because of the very public and comprehensive nature of today’s disclosure, we may see a lot of quiet tweaking of individual countries’ tax rules, in anticipation of more imposed changes. 

There are issues of democracy and mandate in all of this. None of these rules can officially be imposed on the world – they have not been voted in democratically anywhere yet. The OECD can change their model rules and the member countries will abide by them. The G20 are on board in general terms and together, they control 90% of the world’s economy (as Pascal Saint-Amans pointed out happily today). So there is an economic mandate, but not a democratic one. Developing countries are consulted, and the UN can observe, but what they are observing is a small group of rich nations acting in concert. But act they have, and next year, when the remaining eight proposals are brought forward, we will see a significantly-changed corporate tax landscape. Winners, losers, yet to be determined, but certainly some companies will pay some more tax. Somewhere. 

Sheila Killian

Monday, 15 September 2014

Political Economy and Media Coverage of the European Economic Crisis

A book by UCD academic Julien Mercille on the Irish media and the economic crisis has just been released: The Political Economy and Media Coverage of the European Economic Crisis: The Case of Ireland (Routledge, 2014).

"The media have played an important role in presenting government policies enacted in response to the economic crisis since 2008. This book shows that the media have largely conveyed government views uncritically, with only a few exceptions. Throughout, Ireland is compared with contemporary and historical examples to contextualise the arguments made. The book covers the housing bubble that led to the crash, the rescue of financial institutions by the state, the role of the European institutions and the International Monetary Fund, austerity, and the possibility of leaving the eurozone for Europe’s peripheral countries. The Irish Times, Indo, Sindo, Sunday Business Post, Sunday Times and RTE are all covered."

The book is available here (use code FLR40 for 20% discount), and also via Amazon here.

"A book of record... An exceptionally rare example of an academically rigorous analysis forcing the powerful light of transparency and exposure into the murky world of Irish policy advocacy and punditry... A captivating account."
Constantin Gurdgiev, Trinity College Dublin

"One of the most important political economy books of the year... Set to become the definitive account of the media's role in Ireland's boom and bust."
Dr. Tom McDonnell, Macroeconomist at the Nevin Economic Research Institute (NERI)

"Tells the story of the economic crisis well and explains the media's role in convincing the public that it was all very complicated and that government policy can do little to improve the situation."
Dean Baker, Center for Economic and Policy Research

"Anyone who cares about democracy and economic policy should read this book and be deeply worried by it."
Mark Blyth, Professor of International Political Economy, Brown University and author of Austerity: The History of a Dangerous Idea

"A stinging critique of how Irish media narrowed the debate on crisis and austerity.”
Seán Ó Riain, Author of The Rise and Fall of Ireland's Celtic Tiger

"Outstanding research... Meticulous, balanced and clear."
Costas Lapavitsas, Professor of Economics, School of Oriental and African Studies, University of London

“Engaging, lively, critical... A must read.”
Professor Rob Kitchin, National University of Ireland Maynooth

"An invaluable concise history of Ireland's public discussion of economic issues."
Terrence McDonough, Professor of Economics, National University of Ireland Galway

Monday, 8 September 2014

Wealth distribution in Ireland

Cormac Staunton: New figures from the Central Bank show that the total net worth of individuals in Ireland is €508.5 billion or €110,312 per capita. This is a 0.9 per cent increase during the first quarter, and the seventh consecutive quarterly increase. This is still down from the peak in mid-2007 which was €719 billion.

Yet we know remarkably little about how this wealth is distributed.

The Central Bank defines “total net worth” as the difference between the stock of total assets and liabilities. Assets include land, real estate, business equity, agricultural assets, vehicles, cash, life assurance reserves, pension fund equity, and personal property.

The ECB estimates that across Europe households in the bottom 10 per cent own €1,200 in net wealth while households in the top 10 per cent have on average €506,000 in net wealth. This means they have 422 times the net wealth of the bottom 10 per cent. The household main residence makes up over half of all net wealth in the euro area.

The most reliable data on the distribution of wealth in Ireland comes from Brian Nolan, in 1991. Nolan used 1987 data from an ESRI survey, Income Distribution, Poverty and Usage of State Services, to estimate the wealth of Irish households.

Nolan estimated that

  • The top 10 per cent of households held 42.3 per cent of net household wealth
  • The top 5 per cent held 28.7 per cent of net household wealth 
  • The top 1 per cent held 10.4 per cent of net household wealth
  • The bottom 50 per cent of households held just 12.2 per cent of net household wealth
Applying these same ratios (assuming 1,658,243 households) to the latest figures would give us this:

What the figures don’t show is the distribution within the bottom 50%. Although the average is €74,823, it is likely to be very unevenly distributed, with some in the bottom 50% having much more than this, but many having close to zero or even negative net wealth.

A survey of households finance and consumption (Household Finance and Consumption Survey HFCS) is due out in Ireland in October 2014. While this is very welcome and will give an indication of the dynamics of wealth, assets and debt, it is likely only to be a snap-shot in time (the survey was done over the last year) and so won’t tell us about the changing nature of wealth inequality in Ireland over the boom and bust period. It will also be a survey, which typically underestimates wealth inequality.

Nevertheless, it will be useful to add to our knowledge of the role of personal wealth in the economy, and a broader understanding of the extent of economic inequality in Ireland.

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