Monday, 28 April 2014

Perverse Consequences of Local Property Tax Electioneering

Nat O'Connor: There is a need to shout from the rooftops that promising tax cuts and tax breaks is not the only way to stand for election or to boost economic activity. But opinions on tax vary, and the electorate will decide. However, it is perverse and anti-democratic that some local council candidates who make populist promises to reduce local property tax (LPT) may be able to pass the loss of budget to smaller neighbouring local councils!

On 24 October 2013, Minister Phil Hogan told the Dáil that "the Minister for Finance will pay into the Local Government Fund an amount equivalent to the Local Property Tax paid into the Central Fund during that year ... The Government has indicated an intention to move to 80% retention of all Local Property Tax receipts within the local authority area where the Tax is raised. ... [but] it has been necessary to defer defining a certain proportion of the proceeds of the Local Property Tax to be retained in each local authority until 2015. This approach allows maximum flexibility in allocating Local Property Tax in 2014 with the priority to support those local authorities with weaker funding bases."

We need to unpack this. In theory, LPT was to be divided up 80:20, with 80 per cent to the authority collecting the tax and 20 per cent to the local government general purpose grant, which acts as a pool of money to support councils with less advantages and weaker funding. However, subsequently (December 2013), Minister Hogan clarified that this 80:20 split may not happen. The reason for this seems to be the late realisation that an 80:20 split would give Dublin and other large councils much more money than at present, and smaller council areas much less.

Preliminary data from Revenue on the LPT shows that, for example, Dublin City collected €39.7 million of LPT. But it has been reported that Dublin City received much less of this money (on a per person basis) than rural council areas. In fact, based on the reported figure of €5.06 per person for Dublin City from the local government fund, and a population of roughly 500,000, Dublin City only received c.€2.5 million (or 6.4 per cent) out of the near €40 million it collected. Other reports are that Dublin received just €2 million.

Minister Hogan also said in October 2013 that "I expect the Local Property Tax to have multiple benefits, including a more sustainable and resilient system of funding for local authorities and therefore a sounder financial footing for the provision of essential local services; greater local scope for financial decision-making concerning service provision - in particular, the inclusion of the local variation mechanism will further increase the autonomy of local authorities; and a strengthening of democracy at local level with a more active relationship between local authorities and local electorates. A stronger democratic relationship and clearer lines of accountability can only have a beneficial impact on service provision from the perspective of the service user."

However, the reality of the LPT allocation system that has been created is that election candidates in Dublin City (and other large councils with high property tax yields) can promise to reduce LPT, accepting that their council will lose some funding, but sure in the knowledge that much deeper losses will occur in smaller, rural council areas.

Based on the above figures, a 10 per cent reduction in LPT in Dublin would reduce its tax yield from €39.7 million to €35.73. But if Dublin only got €2.5 million out of €39.7 million, it will only get €2.2 million out of the lower amount (a loss of just €300,000). But the local government fund would lose a further €3.7 million, which will have a disproportionately large effect on the budgets of smaller local authorities.

Given the maths involved, even if the 80:20 split was adhered to, this perverse consequence would be still be significant.

This makes a mockery of the suggestion that local democracy and accountability will be enhanced by the variation of local property tax. Instead, council candidates in larger council areas can promise tax cuts that will be imposed through lost services in other council areas, even if candidates there take the unpopular stance of maintaining or increasing property tax rates.

Not only is there little incentive for local council candidates in larger areas to defend property tax, but in another perverse consequence of the system, candidates in small rural council areas can (to a lesser extent) promise to cut the LPT there, as long as property tax keeps on being paid in Dublin City and other large councils and transferred to their area through the local government fund.

If LPT cuts are introduced by newly elected councils, the Minister should ensure that the cuts are fully applied to those councils' budgets. However, the loss of LPT revenue from large councils would mean that the Government would have to find other money (from general taxation) to make up the loss to the local government equalisation fund. This defeats the Minister's stated goal of building up sustainable and resilient funding for local services.

Real democratic accountability and sustainable local services will only be possible when there is a coherent, complete system for funding local government, which forces candidates to take responsible positions for the totality of local taxation raised to pay for local services in their areas.

Friday, 25 April 2014

Call for an Egalitarian Europe

Cormac Staunton: The Progressive Economy Initiative has launched an interesting paper on its alternative vision for the future of Europe, including a ‘call for change’. The signatories include a range of high-profile and eminent academics including, amongst others, Noble Prize winner Joseph Stiglitz; sociologist Gøsta Epsing Anderson; economists James K. Galbraith (University of Texas), Jean-Paul Fitoussi (LUISS University, Rome), Stephany Griffith-Jones (University of Columbia USA); and epidemiologist Kate Picket, co-author of “The Spirit Level”.

The paper notes that not only has Europe drifted out of touch with the concerns of its citizens, but warns that it is increasingly seen as a source of those concerns - the number one being mass unemployment.

It criticises the European response to the crisis and notes that the policies imposed, including sharp reductions in public investment, cuts in wages and pensions, reductions in social expenditures affecting the most vulnerable, and excessive increases in taxation of wage earners, have led to rising unemployment and the destruction of core social institutions. These policies, as well as being socially unjust, have also led to reduced growth and have prolonged rather than shortened the recession in Europe. They argue that because of the nature of today’s global market system, which produces both great wealth and vast inequality, the EU needs to embrace a new and more equal system in order to regain mass support.

Though they term their proposal a “New Egalitarian Ideal for Europe” it is not just an expression of an unrealistic vision, but it is grounded in credible empirical analysis by independent economic institutes and the European Commission’s own economic services. They also recommend a number of substantive policy approaches.

On the macroeconomic side, they recommend a growth-orientated fiscal policy which includes two pillars: a more balanced approach to public finances and sufficient public investment. They suggest that problems in sovereign debt markets should be addressed via new instruments and approaches and where banks are insolvent, they should be resolved. They also call for a truly active and inclusive employment policy across member states. And they consider stabilizing the incomes and social conditions of Europe’s most vulnerable populations to be a vital economic policy measure.

Noting that rising inequality is a key problem, and one that has become a bigger problem in Europe than even in the USA, they also propose specific and detailed policy responses to rising inequality.

They recommend progressive tax systems (e.g. taxation of inheritance, taxation of property and a reduction in VAT) and increasing competitiveness through increases in productivity, rather than reductions in wages. They argue that the EU and its member states should work toward expanding social insurance at the European level (e.g. common unemployment insurance, a European pension union) and they advocate for European policies and regulatory means to be used to reduce inequalities, including those in the fields of employment and social rights. They propose a ‘vigorous’ gender equality agenda and a child equal opportunity programme. Finally, the paper recommends that the EU should set goals for the reduction of inequality within countries and the convergence of income levels across EU member states.

The full paper can be accessed here.

Cormac Staunton is TASC's Policy Analyst. Follow him on Twitter @Cormac_Staunton

Thursday, 24 April 2014

Water Charging and Affordability

Nat O'Connor: Minister Phil Hogan has announced that the final detail on water charging will be announced soon. Meanwhile the Water Regulator (part of CER) is running a public consultation on its role in water charging.

TASC has published a four-page policy brief on an equitable solution involving Water Credits for low income households. A detailed analysis of the economics of water charging and its affordability for low income households is here.

The core issue is not whether we should pay for water. We already do, through income tax and VAT. The real issue is who will pay more - and who will pay less - when we shift the cost of water from general taxation to household charges.

Micheál Collins at NERI has published a working paper showing that the combination of direct and indirect taxes describes a U-shaped curve. In terms of how much tax people pay in real terms, as a percentage of their gross income, the top 10 per cent pay 29.24%, while the bottom 10 per cent pay 27.67%. Everyone else pays less, with those in the middle paying between 17.19% and 22.25%.

As the public water supply is currently paid from the single pool of general taxation (i.e. the Exchequer), the same distribution of the cost applies.

Domestic water charging in normal times could represent a reduction in taxation for everyone, as metering leads to more water conservation, leaks in private property being fixed and therefore less costs to produce water (which currently costs €1 billion of tax money per annum). Even if that €1 billion cost could be reduced by €50 million, that is a lot of money that could be used for more socially useful purposes.

Unfortunately, given the scale of Ireland's debt and deficit, any savings will be quickly absorbed by debt interest payments. But absent this saving, further taxes or cuts would be required for same, so the genuine benefit to citizens of reducing the cost of water treatment and distribution remains.

Domestic water charging is fairer than general taxation because people who use more water, pay more. And rather than everyone subsidising a property-owner who does not fix their pipes, the cost will be paid by the user.

The problem with water charging is that many people simply cannot afford an additional charge on top of their current expenses. We know that many people cannot meet the cost of living as it is, and even if the charge is €240 per annum (€20/month) as recently announced, many people will have to go without other necessities to meet that cost. And with the meter ticking, water 'rationing' in low income households will add further stress and strain.

TASC's solution is to charge everyone for water - so that everyone is metered and becomes conscious of their usage and any leaks in their property. However, people on low incomes would simply apply for a generous allocation of Water Credits to pay for their water. Those on higher incomes would pay the full cost, and people on the edge of the low income threshold would get a diminishing number of Water Credits (so there is no disincentive to taking up better paid employment).

In terms of the above U-shape curve, the cost of water charging would be carried by the middle to upper income groups, because they can afford it. Even so, the percentage of gross income paid in taxation by the lower income groups is likely to remain higher than the middle, which is highly regressive. Water Credits is a way to make a small correction in the distribution of income that will nonetheless have a real benefit for people on the lowest incomes.

Conversely, continuing to provide water 'free of charge' leaves the cost distributed as before - and would require new (probably less progressive) forms of taxation or cuts to cover the deficit. Any 'free' allowance of water likewise retains that part of cost of water from general taxation.

The most progressive approach is to charge the full economic cost of water to everyone who can afford to pay for it, while using the annual subsidy to Irish Water from general taxation to provide Water Credits.

Thursday, 17 April 2014

Ireland's National Risk Assessment

Paul Sweeeney: The Department of the Taoiseach just published its “Draft National Risk Assessment of Ireland” as promised in the Government Programme. This is extremely welcome and indicates fresh thinking on forward planning for unexpected shocks. It is very interesting reading indeed.

Its main categories of risk are i) Economic; ii) Environmental; iii) Geo-political; iv) Social; and v) Technological. But it covers food safety, infrastructural development, social cohesion, migration and integration, the banking system, pandemics, cyber security, terrorism and more.

However, it is both contradictory and disappointing in a few areas. It is thin on what the responses should be, but that should follow later, on revision, we hope.

This publication states at the very beginning that it seeks to avoid “group think.” Enda Kenny in his introduction specifically demands that “never again should dissenting voices be silenced”. It warns against “herding” and “selective reading.”

It was this “group think” which dominated property supplements and business pages of Irish newspapers and the selection of many economic commentators who urged endlessly that “you need to get on the property ladder” or be left behind.

What the Taoiseach and other commentators never say is the Group Thinkers who dominated were all from the Right. It did seem, for a while, that the unregulated free market worked, but boy, did it implode, necessitating massive public bail-outs of the private sector.

While wisely warning of the dangers of “group think”, the assessment paper immediately falls into “group think”. Workers are called “human capital” and competitiveness is defined solely as wage movements over the short term and not in its complexity. However, it is only a draft and that shows some foresight and we trust it will be amended, as it is important.

It has a crude reductionist view of competitiveness. This is surprising as Ireland has a National Competiveness Council (NCC) which examines the complex issue of competitiveness and has done so with continuing refinements for decades.

The NCC is recognised as a world leader in its area. Several countries are emulating its work. Indeed this risk assessment acknowledges the existence of the NCC and quotes one of its publications. Yet it is a clear the authors have not actually read the reports of the NCC. They are published by the Government, with forewords by the same Taoiseach. The NCC reports point out that wage movements are but one issue in a complex area.

It was not rising wages that caused Ireland's downturn, despite the needless battering of trade unions and workers by conservative economists and think tanks over the last 30 years.

Wage movements are important in an economy but less so than productivity, which is mentioned. The issue of competitiveness is much more complex than the crude depiction in this report.

In contrast, the report does not cover the dangers of “excessive profit-taking” directly. US MNCs famously make huge profits here it is stated in IDA reports. The assessment does cover this vaguely, in the sense that it is mentions Ireland’s over-dependence on a small number of foreign MNCs in a small number of sectors. This is a welcome and timely recognition. It also expresses concern about the low rate of Corporation Tax in a vague way, and while oblique, this recognition is long overdue but welcome.

The biggest issues facing Ireland’s competitiveness today are, in my own view: i) the cost to taxpayers of the infamous private bank guarantee; ii) the lack of credit for small businesses (i.e. via the banks); iii) the potential impact of a change in the US tax regime which wipes out the attractiveness of low effective corporation taxes overnight (the vague but welcome mention); and d) our reputation as a place to do business (ethics are too flexible in business and those in the elite are not brought to task, while private enterprise is becoming less transparent, with the growth of secret unlimited companies, deliberately obscure accountancy and other evasions).

The NCC has 16 members, 10 of who are representatives of business. Clearly it is a contested space, but yet it reports are sophisticated and contribute much to an understanding of what is a complex issue, provided they are read by policymakers; i.e. those who should do so.

The risk report also misses out in its lack of emphasis on inequality. This is the big economic and social issue of the 21st Century. Besides the terrible impact on poorer people, from an economic point of view it is leading to falling demand as the rich get richer without doing a hand's turn, and it is undermining meritocracy and democracy.

The other big issue neglected is media plurality. This is a defining issue for this Government for it was the lack of economic debate (which is admitted so forcefully by the Taoiseach in his Foreword) which allowed right-wing group think to rule the air and printed media. I would argue that the bias remains and may be deepening.

And while on the subject of “group think”, and the how deep the dominance of the language of the Tea Party and the Right has gone in discourse in Ireland, we should look at a recent publication by the Department of Finance. It is an interesting and detailed response to widespread publicity internationally on the extraordinarily low (and in some cases no) tax paid by highly profitable MNCs in Ireland. (Or not based 'in' Ireland yet stepping in and stepping out). For example, Jim Stewart’s revelations that the effective tax rates paid by many MNCs in Ireland are much lower than the low nominal rate of Corporation Tax.

The risk report deals with MNCs and never once referred to “transfer pricing”. This is truly remarkable!

In contrast, virtually every time it mentioned the word “tax” it appended the word “burden” to it. The term “tax burden” appears a staggering 24 times in the paper. This is a pejorative Tea Party term which no tax-funded civil servant should use, ever.

Why is my payment to the doctor a “payment” but the payment under a medical card a “burden”? The implication is that every civil servant in the same Dept of Finance is a “burden” because he or she is paid fully out of taxation, which is a burden.

What is even more laughable is that when it comes to Corporation Tax in Ireland the word “burden” is wholly inappropriate. For in Ireland the nominal rate is very low, the effective rate is even lower and the social charges paid by employers are among the lowest in the world. How can they be called “burdens”?!

I do not think that the authors even realise that they are using Tea Party language, so inculcated is it in the psyche of many. Even the Department’s PR section did not see the use of this degrading word which is attached to the word “tax” by those who want a small state and inequality.

Words are weapons.

Paul Sweeney is a member the NCC

Thursday, 10 April 2014

Widen the band, widen the gap?

Cormac Staunton: There has been a lot of talk recently about cutting income taxes now that the Irish economy is beginning to show signs of recovery. Everyone loves a tax cut, but it’s worth looking at what is being proposed, and who is really going to benefit.

From the outset, it’s important to point out that what is being referred to as a tax ‘cut’ is in reality a widening of the tax bands so that the higher rate (41%) kicks in a bit later than it currently does (€32,800). The effect of this type of ‘cut’ won’t be the same for everyone.

The first and most important thing to note is that if a person doesn’t earn more than €32,800 per year, then this change will have no impact on their take home pay. Given that more than half of Irish workers do not earn that much, then that is a significant amount of people who won’t see any benefit from the tax cut.

It is also important to point out that 41% is a ‘marginal’ rate, which means everyone, no matter how much they earn, pays 20% on their income up to €32,800, and then 41% on anything earned above that.

To show the impact of widening the tax bands, we therefore need to see how it would change a person’s ‘effective’ tax rate, the amount of tax they actually pay.

We can show effective rates (including USC and PRSI) using tools such as the Deloitte Tax Calculator. We can then compare two different scenarios (for a single person); the current system and a hypothetical system where the tax band has been widened.  As an example, we can show what would happen if  threshold was raised from €32,800, to €36,400 (which is where the cut off was in 2010)
to see who benefits from a widening of the bands.

The results are:

In chart form, the change in effective tax rates look like this:

 Expressed as a percentage ‘tax cut’ it would look like this:

It is often presented that the greatest benefit of this type of cut is for those earning just above the current cut-off (between €32,800 and €36,400), who will now pay no taxes at the higher rate.  

However, because it is a marginal rate, this is not the case. The real benefit goes to those who pay more of their income at a higher rate. From the figures above it is clear that those who benefit most from this tax cut (in percentage terms) are those earning €40,000 per year, who would get a 1.9% cut. These are people on above average incomes.

Widening the band would also bring significant benefits (in real terms) for those on much higher incomes; 1.5% for someone on €50,000, 0.9% for someone on €80,000 (and note; this does not take into account other forms of tax breaks available to higher earners).

At the same time, those earning around average wages (c. €35,738) see a much smaller benefit (0.5%). And crucially, these figures confirm what we already knew: that this type of change would be of no benefit to around half of all workers in Ireland who earn less than €32,800. 

Given that 20% of workers in Ireland are officially on low pay, one of the highest levels in western Europe, and that manual workers’ wages have fallen since 2010, while managers and professionals have increased their wages in that time, it is likely that that widening the tax bands would widen the already high levels of income inequality in Ireland today.

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

Wednesday, 9 April 2014

Conceptualising Economic Inequality

See here for a presentation conceptualizing economic inequality.

The presentation is designed to explore the concept of 'economic equality' by moving beyond a narrow focus on incomes (from employment and/or social transfers) and including wealth and public services, both of which provide cash-equivalent benefits and other personal benefits (such as security against risks).

The larger and more nuanced concept of 'benefit from the economic system' gives a better sence of how different social groups benefit from the way in which the economy is structured to provide a combination of market incomes, welfare incomes and public services (with both cash-equivalent value like social housing or less tangible but no less important value like security against illness or loss of a job). What emerges is a contrast between wealth confering benefits on those households who have assets versus public services confering benefits upon a wider pool of recipients, with those on low incomes (from work or welfare) gaining most from public services.

While we know that employment is the number one route towards more income equality, the Irish economic system (in 2011) was only able to provide 65.5 per cent of adults aged 25-64 with employment, and the numbers seeking employment far outweigh number of job vacancies annually. When we look at the over one million adults of working age who benefit from a weekly welfare payment, this paints a picture of a society where the large majority of people have low cash incomes, and therefore the importance of public services (and the harm of cuts) becomes more obvious. Conversely, tax changes that benefit people with higher income and wealth more clearly benefit a small minority of Irish people, not just a minority of those in employment.

Wednesday, 2 April 2014

OECD and tax avoidance: the story so far ...

In a webcast from Paris this afternoon, the OECD updated the world on progress on the BEPS project to date. Pascal Saint-Amans stressed the process was on track to be presented to finance ministers in September 2014. Four discussion drafts have been issued over recent months, covering country-by-country reporting, the abuse of the international network of tax treaties, the rather more technical question of hybrid mismatches, and more broadly the challenges posed by the digital economy.  This article summarises where the OECD is on each of these four areas, and then makes some general observations on the process. 

The Digital Economy
The current thinking here, sensibly, is that it is neither possible nor useful to ring-fence the digital economy. Everything is digital now. So what the draft does is focus on the key features which warrant attention from a tax point of view. These are mobility of assets, customers, employers; the way new business models rely on data, sometimes very large banks of personal data; the multi-faceted nature of these new business models with value being created by customers as well as by vendors; and network effects in general.

So the working group will focus on questions such as how to restore source and residence taxation in this new context. How can value be attributed to data, given that it is created by a wide network of individuals? How can cloud-based storage be attributed to a single or even to multiple jurisdictions? What about consumption taxes?

These are complex questions. Taking just that last one as an example, VAT has traditionally been imposed in a particular jurisdiction based on the concept of place of supply;  if I sell you a car, for example, it is not difficult to decide where that transaction takes place. If, on the other hand, I download music produced by some Californian indie band from the cloud, to an ipad, while transiting through Manchester airport, where is that sale made? Do we look at where the customers are located? Where the service providers are headquartered?  Where the company making the sale says its sales force are? Each of these methods would give a very different tax outcome, with fairly profound implications for both companies and countries. 

Hybrid mismatches
This is a more technical area, fascinating to tax planners and tax nerds generally, almost certainly less so to the general public. It refers to any arrangement that exploits the different tax treatment in different jurisdictions of the same instrument, so for instance a financing instrument that obtains a tax deduction in one place, but is tax free in another. 

Achim Pross clarified some important issues of scope; the OECD are not looking at mismatches between tax and law, for instance, only at international tax mismatches. They are seeking rules wich are clear and easy to apply ,and which can be easily or automatically imported into domestic law without the need for taxing authorities to form a judgement about intent .  They want the new rules to be comprehensive – there is no  point in closing down one type of abuse only to let it open elsewhere in a slightly different guise. The mechanism they will probably apply is to neutralise the tax mismatch without disturbing the regulatory consequences, so the tax treatment in one state will be based on the tax treatment in the other, restoring the symmetry to the international situation that would have applied had the transaction been domestic. This raises the implementation question of which country’s rules to adapt? Whether to apply this only to group transactions or also to parties acting in concert and structured arrangements more generally? How to deal with accidental hybrid instruments? It is clear that widely-traded financial instruments which are hybrid in some way will probably be outside the scope, but there are lots of questions still to be addressed on this one. 

Tax Treaty Abuse
This is a big one, and has generated a great deal of public comment already on the discussion draft issued last month. The approach is interesting. First the purpose of treaties is established, and in particular the fact that they are intended to be bilateral, and not to create conduits. Next there are specific anti-abuse rules being developed such as tie-breaker rules on dual-residence companies, and minimum holding periods for dividend transfers. Finally, they are talking about a general provision, more or less like an anti-avoidance rule, which denies treaty benefits if the main purpose of the transaction is to obtain the treaty benefits, AND the obtaining of the benefits is contrary to the purpose of the treaty. 

This is potentially a game-changer, depending on how widely the new general provision might be applied. 

Transfer pricing and country by country reporting
Here is where things slow down a little. On transfer pricing, the OECD remain firmly committed to the principle of arms-length pricing, despite protests from many groups such as the tax justice network. Similarly on country by country reporting, the latest changes seem to limit the recommendations to high-level reporting on a country level rather than on a company level, and only to taxing authorities rather than to the general public. It is likely that companies will only need to report income, profit, tax paid and accrued in each country as well as details on the numbers of employees, tangible assets and retained earnings/capital. 

Overall points
The emphasis is on saving the system, not rebuilding it. In particular, the arms-length principle remains a staple of the current thinking. In answer to a question at the end, Pascal Saint-Amans said “So let’s fix the existing system. Which will allow us to save the arms-length principle, which will provide the certainty that countries and companies need.” 

Developing countries have other concerns on international tax, especially about commodity mispricing and tax incentives, which are less reflected in the current work programme of BEPS. The OECD have had a series of regional  consultations with developing countries, and have promised to take their views into consideration. 

BEPS is not all-embracing. For instance, a question from an Australian journalist revealed that aggressive tax planning based on after-tax hedging, is not currently under scrutiny. However, for particular structures, such as the infamous Double Irish, the writing is clearly on the wall. Asked specifically about that structure, Pascal Saint-Amans said that yes, they expect and encourage the ending of the Double Irish, and that for companies to anticipate such changes and adapt their actions in advance of proposed changes “”would be a smart move”

So change continues, with some measures such as country by country becoming more conservative, and others such as the treaty abuse measures holding out real possibility of reform. They promise more webcasts, so watch this space. 

Dr Sheila Killian

Tuesday, 1 April 2014

Stiglitz on Inequality

Joseph Stiglitz's March 2014 presentation on the 'Causes and Consequences of Growing Inequality: and what can be done about it' is available here. His presentation was given at the Progressive Economy EU conference in Brussels.

Pope Francis on Economic Inequality

Pope Francis has made a number of significant comments on economic inequality and economic policy in his EVANGELII GAUDIUM,a 224-page 'exhortation' to the Catholic Church.

Two sections stand out: Chapter 2, I. Some Challenges of Today's World and, in Chapter 4, a section on "The economy and the distribution of income".

Pope Francis writes:
"52. In our time humanity is experiencing a turning-point in its history, as we can see from the advances being made in so many fields. We can only praise the steps being taken to improve people’s welfare in areas such as health care, education and communications. At the same time we have to remember that the majority of our contemporaries are barely living from day to day, with dire consequences. A number of diseases are spreading. The hearts of many people are gripped by fear and desperation, even in the so-called rich countries. The joy of living frequently fades, lack of respect for others and violence are on the rise, and inequality is increasingly evident. It is a struggle to live and, often, to live with precious little dignity. This epochal change has been set in motion by the enormous qualitative, quantitative, rapid and cumulative advances occuring in the sciences and in technology, and by their instant application in different areas of nature and of life. We are in an age of knowledge and information, which has led to new and often anonymous kinds of power.

No to an economy of exclusion
"53. Just as the commandment “Thou shalt not kill” sets a clear limit in order to safeguard the value of human life, today we also have to say “thou shalt not” to an economy of exclusion and inequality. Such an economy kills. How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points? This is a case of exclusion. Can we continue to stand by when food is thrown away while people are starving? This is a case of inequality. Today everything comes under the laws of competition and the survival of the fittest, where the powerful feed upon the powerless. As a consequence, masses of people find themselves excluded and marginalized: without work, without possibilities, without any means of escape.

"54. In this context, some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system. Meanwhile, the excluded are still waiting. To sustain a lifestyle which excludes others, or to sustain enthusiasm for that selfish ideal, a globalization of indifference has developed. Almost without being aware of it, we end up being incapable of feeling compassion at the outcry of the poor, weeping for other people’s pain, and feeling a need to help them, as though all this were someone else’s responsibility and not our own. The culture of prosperity deadens us; we are thrilled if the market offers us something new to purchase. In the meantime all those lives stunted for lack of opportunity seem a mere spectacle; they fail to move us.

"56. While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules. Debt and the accumulation of interest also make it difficult for countries to realize the potential of their own economies and keep citizens from enjoying their real purchasing power. To all this we can add widespread corruption and self-serving tax evasion, which have taken on worldwide dimensions. The thirst for power and possessions knows no limits. In this system, which tends to devour everything which stands in the way of increased profits, whatever is fragile, like the environment, is defenseless before the interests of a deified market, which become the only rule.

No to a financial system which rules rather than serves
"57. Behind this attitude lurks a rejection of ethics and a rejection of God. [...] Ethics – a non-ideological ethics – would make it possible to bring about balance and a more humane social order. With this in mind, I encourage financial experts and political leaders to ponder the words of one of the sages of antiquity: “Not to share one’s wealth with the poor is to steal from them and to take away their livelihood. It is not our own goods which we hold, but theirs”.

"58. A financial reform open to such ethical considerations would require a vigorous change of approach on the part of political leaders. [...] I exhort you to generous solidarity and to the return of economics and finance to an ethical approach which favours human beings.

The economy and the distribution of income
"202. The need to resolve the structural causes of poverty cannot be delayed, not only for the pragmatic reason of its urgency for the good order of society, but because society needs to be cured of a sickness which is weakening and frustrating it, and which can only lead to new crises. Welfare projects, which meet certain urgent needs, should be considered merely temporary responses. As long as the problems of the poor are not radically resolved by rejecting the absolute autonomy of markets and financial speculation and by attacking the structural causes of inequality, no solution will be found for the world’s problems or, for that matter, to any problems. Inequality is the root of social ills.

"203. The dignity of each human person and the pursuit of the common good are concerns which ought to shape all economic policies. At times, however, they seem to be a mere addendum imported from without in order to fill out a political discourse lacking in perspectives or plans for true and integral development. How many words prove irksome to this system! It is irksome when the question of ethics is raised, when global solidarity is invoked, when the distribution of goods is mentioned, when reference in made to protecting labour and defending the dignity of the powerless, when allusion is made to a God who demands a commitment to justice. At other times these issues are exploited by a rhetoric which cheapens them. Casual indifference in the face of such questions empties our lives and our words of all meaning. Business is a vocation, and a noble vocation, provided that those engaged in it see themselves challenged by a greater meaning in life; this will enable them truly to serve the common good by striving to increase the goods of this world and to make them more accessible to all.

"204. We can no longer trust in the unseen forces and the invisible hand of the market. Growth in justice requires more than economic growth, while presupposing such growth: it requires decisions, programmes, mechanisms and processes specifically geared to a better distribution of income, the creation of sources of employment and an integral promotion of the poor which goes beyond a simple welfare mentality. I am far from proposing an irresponsible populism, but the economy can no longer turn to remedies that are a new poison, such as attempting to increase profits by reducing the work force and thereby adding to the ranks of the excluded.

"206. Economy, as the very word indicates, should be the art of achieving a fitting management of our common home, which is the world as a whole. Each meaningful economic decision made in one part of the world has repercussions everywhere else; consequently, no government can act without regard for shared responsibility. Indeed, it is becoming increasingly difficult to find local solutions for enormous global problems which overwhelm local politics with difficulties to resolve. If we really want to achieve a healthy world economy, what is needed at this juncture of history is a more efficient way of interacting which, with due regard for the sovereignty of each nation, ensures the economic well-being of all countries, not just of a few.

"208. If anyone feels offended by my words, I would respond that I speak them with affection and with the best of intentions, quite apart from any personal interest or political ideology. My words are not those of a foe or an opponent. I am interested only in helping those who are in thrall to an individualistic, indifferent and self-centred mentality to be freed from those unworthy chains and to attain a way of living and thinking which is more humane, noble and fruitful, and which will bring dignity to their presence on this earth."