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

Tuesday, 2 September 2014

The Cost of Disability - Conference

Inclusion Ireland are holding a conference on the Cost of Disability on Thursday, 25th September 2014, at the Hilton Hotel, Kilmainham, Dublin 8.

The conference seeks to reopen the debate on how to address the costs associated with having a disability. Speakers will highlight evidence of the direct, indirect and opportunity costs of having a disability and how official measurements of poverty do not consider these costs. The benefits to the economy and society of expenditure supports to households and person(s) with a disability will be explored.

Opening address
Simon Harris, T.D., Minister of State at Department of Finance.

  • Dr John Cullinan, J.E. Cairnes School of Business & Economics, NUI Galway
  • Dr Dorothy Watson, Associate Research Professor at Economic and Social Research Institute
  • Ms Claudia Wood, Chief Executive of DEMOS
  • Mr Martin Naughton
  • Ms Ita Mangan, Chair of the Tax and Social Welfare Advisory Group
  • Mr Michael Taft, Unite the Union
  • Ms Eileen Daly
Conference fee and booking
The fee for this conference is €40. Places can be booked by going to the following link:

A small number of places have been set aside for people on low incomes.

Full programme on

For information about the venue please visit: