Tough Budget Needed to Stave Off Grimmer Future

@Philip Are you forgetting that Ireland is an open economy for people as much as for goods and traded services? Higher taxes will mean that bright / talented people will leave to earn better money elsewhere. If you take an individual in his mid 40s with a defined contribution pension earning, say, 100k per annum. His pension has been badly hit and he needs to massively save for his retirement. You are, in essence, suggesting that he pay higher taxes to fund the defined benefit pensions of a semi-reformed (at best) public sector.

100K euro in the UK leaves you with around 12k MORE in after tax income as we stand. Ireland is, for people on middle and upper incomes, already a high tax economy for which not a lot is received in return. In fact you may argue that for what we do get it may be the highest tax economy in Europe.

The fact is that even if I agreed with you on tax increases – your assuming that people’s behaviour doesn’t change as the government demands more of their money. And that’s without even getting into incentives for risk taking in business. So leaving aside my philosophical preferences I don’t think it will work.

@ Damien

the problem is that a married couple with kids essentially pay no net tax (ie after recieving reliefs for mortgages, child benefits etc) until they hit around 60k. This very basic family unit needs to be brought into the tax net somehow if we are going to meaningfully change our tax base. And once again, these far-from-wealthy people will be paying more tax to keep our well-paid public sector employed for the next decade.

@ Pat

“A reform of public services may cost more than it saves”

“Requiring the private sector to supply means more cost to the public sector”

Im sorry Pat, but these are the same old talking points that are trotted out by the Unions every time public sector cuts are brought up. The pay cuts should allow for public sector services to remain as is for the most part, so i don’t see how that would “cost more than it saves”, or require the private sector to fill the gap. We need to acknowledge now that the public sector is grossly over paid in overall terms (ie after allowances, overtime, easy work conditions, pensions etc), and this needs to be addressed asap.

We just got downgraded by Fitch in the last few mins, to AA- from AA+, with the fiscal deficit the chief reason for this downgrade. The sooner we face up to reality the better it’ll be for everyone.

@ YM

apologies, correct, dual income household was per my example.

However, even in the single income household you use, after mortgage interest relief and child benefit they’d only be paying around 5.5% of their income in tax at the 60k income level.

Please note that im not necessarily against this, but simply to note that the tax burden will have to fall on people like this if we really want to broaden the tax base, and that this tax will be used primarily to fund the well-above-average pay of 400k public sector workers.

I find it difficult to accept an argument which states “lets tax the rich @ 63%” when (a) no one seems willing to say what constitutes ‘rich’ and (b) how much this tax is likely to earn for the exchequer and (c) we only tax a reasonably earning middle class family 5.5% as is.

My suggestion is that lots of people either consider income of 80k per year to be ‘rich’ or else don’t realise how few actually earn over 125k per year, that this tax will either tax massively the middle class or else earn nothing, and that our tax base at the moment leaves out a far more people at the bottom of the scale and not at the top.

The tax burden for the average family is far too low and the assertion that people are paying 52, 53 or 55% tax needs to be challenged. Of course, the marginal rate is high and that is reached at modest incomes(36k) but the generous tax free allowances, credits etc reduce their overall tax burden.

What we need is to move everyone into the tax net after 5,000 euro from the current 18k (15k for levy). that will bring in part time workers, students, low income earners whom should be making a contribution to the running of the state.

To minimise the shock to low income earners whom many have never experienced paying income tax(since the TFA is about 18k euro) the first rate of tax should be say 10%, moving onto the standard rate at about 24k and onto the higher marginal rate at say 50k.

I don;t think you need to increase tax rates significantly to get “more money from the rich”. What you need to do is shut down all the ridiculous loopholes and aggressively pursue and prosecute offenders. A regular tax amnesty as is usual in Ireland is the worst thing that can be done if you want to discourage legal and illegal tax cheats.

@ E76

“Is that on individuals who earn over €75K?”

I could be wrong, but i thought the CSO figures were generally talking about ‘tax units’, so this could as easily be a married couple each earning a little bit more than the average industrial wage, and you are seeking to drag into the new top rate of tax. And again, all so we can keep paying the public service their well-above-average wages.

Cut public sector pay first and then ill contribute to both infrastructure invesstment as well as deficit reduction.

“0.5% only pay 27.5% in taxes”

Sorry if i laugh at loud at your issue with such a progressive taxation system.

@ E76

shouldnt we be aiming for tax policies that see those at the top of the ladder pay 41% or so of their income in tax, and those at the bottom pay 20% or so, ie just like the way the tax bands are formed?

Everyone should pay something, at a minimum 15%, so that they are part of the system, and equally no one should have to pay more than 50%, as it was they who earned the money, not the state. Doesnt that seem like a fair way to set the system up at a very basic level?

@Eoin
Everyone pays Vat and it rivals income tax in the amount collected. The poor of necessity spend their income and so are already paying 15% of their income in taxes. I believe that the Conservatives in Britain funded their income tax cuts through hikes in Vat so the link is often even closer.
If the effective rate of income tax on any income earned by an individual above say 100,000 was raised from 27.5% to 37.5% for the duration of this emergency it wouldn’t be pleasant, but I doubt there would be a mass exodus. Certainly nothing proportionately as massive as the exodus of the unemployed and graduates.
For those over a million an effective tax rate of 27.5% seems extraordinarily lenient and in this crisis unaffordable. 63% might be too much of a shock. But how about 40%? It’s not the Gulag.
In the long-run I do see why effective marginal income tax rates of above 50%, especially at low incomes, but even at very high incomes, would be a disincentive.

But this is a crisis. We need the money. Income taxes will have to go up for the majority of earners. But there is a strong case for substantially raising them for the rich and especially the very rich for the duration of the crisis.

After the crisis the country can decide on the rates it wants.
And as I say the counter-intuitive choice for the rich may be the right one.
Let taxes go up now. Get the crisis sorted out. Lobby for their reduction as economy improves. Current opposition will probably make substantial concessions.
or
Oppose tax rises. Crisis continues. Tax rates go up and up. Opposition come into office with a desire to punish the rich. Taxes go up and up again. Taxes never come down.

Generally countries whose population rallies round in a crisis rather than expecting everyone else to take the pain do better in the long-run and get out of the crisis quicker.

A Number of observations:

1. ‘…skilled mobile professionals…’ – deserve the high rates of pay they get. Really? This is pure pyscho-babble! There are many un-employed professionals who would gladly take the jobs, even if the going rate was Min Wage. If those ‘skilled mobile professionals’ want to accept 100% of nothing – then good riddance!

2. ‘Set a sustainable growth path..’ and ‘…(until) the economy recovers’.
I am assuming that PL’s economic model is Permagrowth. Well I have very bad news Philip – Permagrowth is in the ER on life-support. It would need too much space to explain this. Sustainability means you DECLINE your economy y-o-y! ‘Sustainable Growth’ is an oxymoron.

3. If GDP is accepted as a very rough growth metric – then will someone please explain to me why we have racked up such massive debts – which I define as Negative GDP – and how in God’s name we intend to repay these debts: default or inflation?

4. I’ll make it simple. You have two models, Left-hand drive and Right-hand drive. They are enantomers, (mirror images). Same composition and properties – but functionally very different. Same inputs, different outputs. From my vantage point economic models and so-called laws are arrant nonsense. Miraculous deceptions remote from reality. The bad economic data is there to observe, its the confounding solutions that are truly maddening.

5. I’ve said this before, but just to drive the point home. We MUST adopt legislation to allow individual citizens to go simply and easily into personal bankruptcy, write off their debts (all), and get out – say in 36 months. Skip the taxes and public service bit until this is done – its really urgent – much more so than NAMA. If any one has a problem with this, then I refer you back to my question in (3) above – please explain the alternative.

B Peter

@ E76

from your link to Ronan Lyons site:

“Ireland’s top 0.5% of earners, the 11,714 people who earned more than €275,000 in a year, paid almost 18% of all income tax, over €2bn in total. Their average tax rate was 27.5%.
Almost 770,000 people earned less than €17,000. Understandably, given tax credits, these workers paid a tiny amount of tax, €20m in total. Their average tax rate was about 0.5%.
It’s in the middle, though, where things seem to go all screwy. The median earner, earning about €25,000, paid just 4% in income tax!

1. the average millionaire pays six times the income tax rate of the average worker. There’s one thing the system ain’t and that’s regressive!
2. amazingly, two thirds of the 2.2m people paying income tax in Ireland paid an average rate of less than 10%.
3. as per above, the median earner pays about 4% in income tax in Ireland, compared to 20% in the OECD.”

So those at the higher end of the scale pay a far higher effective income tax than those at the bottom. And by far higher i mean 27.5% vs either 0.5% or 4%. And yet its the high earners who are going to be asked to pick up the slack?? Watch these people leave, watch the brightest and the most mobile in our society head to the UK or to the US or to Australia. With this sort of crackpot economics i wouldnt blame them.

By the way, as a single male with no dependents, i currently pay around 36% of my income in tax. But im sure this isn’t high enough for you right? As i said, if you’re unwilling to tax middle class families substantially more, than you simply must focus your actions on the expenditure side of the finances.

The state has a obligation to deliver a service to a citizen for taxes paid. Think of it as a sort of contract. Obviously if people feel they are getting poor value for money they will start to look elsewhere. For example people are now shopping north of the border. A friend of mine who lives in N. Dublin travels to Newry every two to three weeks. They spend about 200E on food and nappies etc. By doing so they save about 100E compared to the Republic, a saving of 33%. Is that value for money? Are they being unpatriotich? Are they betraying their country? No it is the other way round, it is the country which has betrayed its own citizens with penal vat rates. Shops have to charge high prices because of these stupid upward only rent agreements. If it continued then in a few years a Mars bar would propably cost 3 euro.

If personal income taxes are pushed up and up, then those people who are in a position to leave will leave. They would most probably be those just out of 3rd level with no financial ties to Ireland, no mortgage no wife or children. The world is a much smaller place now, and contact with home is much easier and cheaper with VOIP with video etc. Don’t forget the cheap flights which can be availed of these days. So emigrating abroad is not such the big deal it once was say 20 to 30 years ago etc.

However those people who have already settled in Ireland, they have married, in the process of bringing up children, etc, they generally will tend to stay and hold on to what little they have and try and ride it out etc. Or the other option for these people is for one spouse to go abroad to seek work and send money home like before.

However with a few mouse clicks one can find out Income Tax rates for many countries. Brazil top tax rate 27.5%, Isle of Man = 10% rising to 18%. France 40% after 65K etc, the USA 33% after $80K or if you are married you can claim your spouses allowance in which case you enter the top rate of 33% at around $150K. And of course the US has a VAT rate of about 9% depending on the state.

Of course there are other considerations like cost of health insurance etc. But at least if you did emigrate you would most probably get better weather.

Also it’s not just about if you can afford to pay more tax. The less money you have then the less experiences you will have in life. The less holidays you can take, the less novelty items you can buy, the smaller the house you have to live in etc. I mean some houses and aparments are just too small and it is disgraceful the familys have to live in such small boxes. This adds to the stress of family life.

Don’t forget the vat rate which has to be added to your income tax rate. A 5 euro note will not feed you. So if you are effectively paying 36% of your income overall in taxation, you lose another 21% when you go to buy food or a coat to keep you warm in the rain. So to live in Ireland you could be paying a effective tax rate of 57%. If you are going to push a high rate of tax to 63% for high earners, then they could be looking at 84% tax to buy things. We are entering mad hatter terittory now.

In addition people are now realising if you want something to retire on then you should be looking at putting away 1/3rd of your salary every year to fund your own private pension. The more tax you pay in Ireland the less you can save for your pension, so the poorer will be your retirement experience. The idea of retiring at 55 because the stock markets did well is not looking good.

So people are under severe pressure, getting hit from all angles. I would recommend to any young person to emigrate. There is a much bigger world out there and it is much closer and better oppertunities can be had if one is careful.

Nevertheless there is still something romantic about Ireland. But maybe this feature will not be enough this time.

@ Pat

its very difficult to ‘prove’ that publicly supplied services are ‘cheaper’ than privately supplied services (its also difficult to prove the opposite), as the government generally operates in near-monopoly positions in everything it does, or it offers a highly differentiated service to the privately operated on where there is overlap (education, healthcare). The one example of where the public competes with the private sector directly that i can think of is in waste collection, and the involvement over the last few years of the private sector has massively driven down costs. However, in general there are very little comparable situations.

However, lets look at the industries that were previously of the domain of the public sector and are now offered solely by the private sector:

– airlines
– telecommunications
– airports (abroad)
– ports (abroad)
– steel production
– waste collection

Across the board, the prices of these services have dropped for the consumer after privatisation.

And lets look at sectors in this country which are still controlled for the most part by the public sector but which are offered around Europe by the private sector

– energy supply
– mass transit systems

Here we pay far higher prices for these services than the comparable ones in Europe.

We know that public sector employees are paid more than their private sector counterparts. We know they work less hours and have lower productivity. We know we pay more for publicly supplied services here than comparable private sector supplied services abroad, we know previously publicly supplied services have massively fallen in price after privatisation here. Could you please supply some facts to back up your claim that the public sector can supply services at a cheaper rate than the private sector?

@E76

“If the effective rate of income tax on any income earned by an individual above say 100,000 was raised from 27.5% to 37.5% for the duration of this emergency it wouldn’t be pleasant, but I doubt there would be a mass exodus.”

Presumably you’re basing the 27.5% on the Revenue income distribution stats for 2006?

In the meantime, taxes on the top-end have gone by 8.5% (that’s 2.5% in extra health levy and a 6% income levy on 175k+). Also note that these levies are immune to sheltering.

So the high-earners are *already* up close to the 37.5% that you propose. And yet revenue continues to collapse.

With the PRSI threshold abolished, they’d be well above the effective rate you propose.

@ Eoin,

While paying 36% in tax is excessive no matter what your income or stasis. Chasing after middle class families in a singularised (or partly singularised) tax system is not the answer. Ireland’s tax system has been set up against families and therefore against *future* tax payers i.e. children.

Because children are seen in Ireland as a ‘benefit’ and not a ‘credit’ as is the case in the U.S. (where I returned from having emigrated 10 years ago) I get the general perception that somehow every non-family taxpayer is doing families a favour. I can tell you as a single-income, married(-couple) with two young children that I am most certainly a net contributor in tax eventhough I have to manage with a net-overspend in my monthly expenditure from savings. Luckily, we “saved” an additional 50-100K by doing a little simple maths and not jumping in on the housing bandwagon – but that doesn’t mean we have tonnes of cash in the bank, or mortgage relief to claim. While reasonably well paid I have no pension, and cover all of my familys’ benefits, so it seems absurd to me as to how we could be struggling when I would be 10K better off in the US with the same income. I find it harder again to understand how single-income families earning less than I do can manage.

Tax payers without dependents (and it seems the ‘tax experts’ to our solutions) forget the tonne of additional expenditures attached to families like frequent GP visits, education fees etc. Or the need to support a second adult from one income. Add to that, such these costs are charged at increased 2009 rates – not a ‘deflated’ 2003 or whatever year price – means there isn’t a whole lot of cash sloshing around in family incomes. If the second adult is trying to re-educate for employment to help cover expenses then you can throw in creche fees too.

In the current climate, more dual-income families are turning into single income ones and the harsh realities this entails. The OECD report will not have helped ease the pain.

Solutions been proposed to cut benefits are a quick fix. What they will do in the long run is create a situation where demographics shift away from couples having children (because of the costs) towards a situation where a shrunken PAYE sector of the future won’t be able to cover our net-debits – and those debits will include both you and me. I see few families getting any thanks now for that contribution….

Declan

E76: I am not sure that raising headline tax rates is the best way to raise effective tax rate. Close all the shelters and loopholes and you will see effective rates go up a lot at the higher end without an increase in headline rates.

@ Aedin

you’re right.

But someone on 275k per year will still pay 4.07% in income levy’s alone, with this approaching 6% as their income increases.

Not sure how you could guess what the health levy is, but given that its now at between 4-5% on all taxable income, we can assume their is at least 1-2% there at a minimum.

So overall there’s 5-6%+ in additional tax on top of the old figures.

@Garo:

You have it right on the button. Just don’t expect anyone, except the Five Sigmas, to pay any heed. The herd have a business-as-usual response- which in the current predicament is completely useless. Keep at it.

B Peter

@ Garo

completely agree, have no issue at all with closing off 90% of the current tax shelter schemes. Anyone know what that would be worth now (rather than 2 yrs ago)?

@ Garo

well i would assume that at least some tax incentive schemes are productive or add value to the economy (the film schemes apparently pay for themselves), and some may be required for other policy goals (ie investing in Ballymun for instance). Tax schemes in and of themselves arent bad ideas, its just that they became so broad and vague in nature (hotel investment, investment in even remotely poorer-than-average areas) that they stopped being about policy goals and just became random-investment-for-tax-sheltering schemes. 90% of them probably now fall under this label.

@Declan
Married, 2 teenagers (1 started college), no mortgage but set up my own business two years ago and living off savings (lost a fair bit on our beloved banks)

As with Eoin my beef is with those who don’t pay tax at all effectively and there are a lot of them. They should be paying some tax. I also want to see the public sector pay bill down significantly. I’m not averse to a property tax replacing stamp duty even though that will hit me but will give steadier income to the government.

So, not selfish considerations but a desire to see the country I live in get back on its feet and provide a future for my children who are closer to emigration than yours. Where I am selfish is I want them to stay here.

By the way when I was at your stage there was no early childcare supplement, children’s allowance was a lot lower, taxes were higher, interest rates hit 17% at one stage. And if John the Optimist is reading this he’ll be able to prove our average saleries were much lower. We have to adjust our lifestyle.

@Declan, Eoin, Stuart Blythman

Eoin:
“From a very cold-hearted view as well, middle class families are the least likely to leave the country given how tied in to the country they are (ie mortgage, kids in school etc). Young single people or the very wealthy are both much more mobile and could easily leave the country for other countries with lower tax. As such, any significant tax increases on them is more than likely going to see material amounts of these people leave the state for pastures new.”

Stuart Blythman:
“By the way when I was at your stage there was no early childcare supplement, children’s allowance was a lot lower, taxes were higher, interest rates hit 17% at one stage. And if John the Optimist is reading this he’ll be able to prove our average saleries [sic] were much lower. We have to adjust our lifestyle.”

Declan has a serious point. I am also a “returnee” (though I was away for much longer than Declan) of two years standing. “Middle class”, two children, and we have seen our savings eroded over the past two years, despite two PAYE incomes for most of that time. Euro 1,000 per month creche fees (at a university creche), Euro 600 per month for 2pm-5pm after-school care, astonishing rents for, by international standards, very average housing, etc., etc. Like Declan, it was clear to us when we arrived that there was in Ireland the mother of all housing bubbles, and we did not even think about buying (Kiwi friends who bought an astonishingly overpriced shoebox two years ago who now cannot return to NZ without writing off their Euro 200k life’s savings, and having perhaps an additional Euro 100k of debt following them).

We leave at the end of the year, and are very pleased that our EU passports allow us to live in an economically more mature European country. A familiarization visit revealed the following – state-funded schooling for children of a quality similar to private schooling in Ireland (including, 20 students per class max class size, well-maintained and extraordinarily well-funded infrastructure, regular school hours); housing cheaper than Ireland today – at the bottom now? – and of better quality (care of govt. anti-speculation measures and housing development policies that clearly have not been formulated for the past fifty years, by intent or mere neglect, with a primary focus on the interests of “property developers”), efficient, widely-avaliable, pleasant-to-use (even in rush hour) public transport (in which trams dominate), and so on. Our take-home pay will also be better, since tax deductions for children and rent/mortgage are significant, and while marginal tax rates are higher and more progressive than in Ireland, we will not fall in the highest marginal bracket on incomes that are roughly the same we earn in Ireland.

My point is that there is much that is very attractive to any middle class family with children in this, and perhaps a dozen more, countries in the EU, and despite the recession, there is still a job market in much of the EU. So, thinking that middle class families who have children are locked in to pay whatever increase in tax and decrease in public service that is required to “make the bond-holders whole” and keep the banks and developers in pocket and out of goal, may be premature (and yes, I agree with the implied argument that those on the average industrial wage and less certainly can’t afford to pay all that now needs to be paid to ensure the uninterrupted and continued transfer of wealth to the land-owners, speculators, bankers, bondholders, tax refugees, and the rest of the clients).

@Eoin

(c) Cost of things and tax regimes are not unconnected; but no, most of my argument does not relate to the cost of things in the RoI. You mention earlier that you paid 37% of your income, presumably in 2008, in tax. We paid 34% – lower because of our lower salary than yours, perhaps, and also lower because we received Euro 4482 in untaxed child-related benefits. However, our 34% hardly means we pay, as you put it, “little or no income tax”, especially compared to you.

Nowhere do I suggest that I think that the relatively high cost of the things we buy in Ireland, compared to their cost in many other countries in the eurozone and elsewhere, means that you should pay more tax.

(b) I do not disagree that it is easiest for young childless persons to leave Ireland. My point was that older persons with children may find it not too difficult either, and that there are very significant economic and social-support reasons for doing so, perhaps particularly for those who have professional occupations. The implication of this point is that if you are going to use the realpolitik argument that you should not burden the extremely wealthy or the childless with high taxes, since they will simply leave to live in a lower-tax regime, then it may be wishful thinking to think that the couple-with-children (and, indeed, the single working person with children) may not find other tax/welfare/social-infrastructure environments in Europe also relatively easy to move to.

(a) Nowhere do I suggest that the entire crisis in Ireland was caused by bondholders being made whole. My point, which may not have been clear, is that this act is symptomatic of a long history of such ill-conceived acts. The huge structural deficit, of which we are all now well aware, clearly (to a relative outsider at least) has its origins in a long history of behaviour, priorities, and ways of thinking. Fintan O’Toole’s recent book “Ship of Fools” does a superb job, in my view, of describing some of that history and some of its consequences.

@Ronan

The graph I keep hoping you’ll plot would compare the Irish tax take at each income decile with the average across the EU and/or the EU-15.

@Eoin

This is tedious, but nevertheless raises an interesting point re income tax rates and their reportage and discussion in Ireland. Married persons are treated as a unit of income. This can lead to silly conclusions. From your comments above, and the tables you provide, my wife and I together do earn more than you. But, each of us earns almost the same as you (and almost the same as each other), and on our incomes, we each pay 34% tax (and, therefore, of course, 34% tax on our combined income). You pay 37% tax without children, and you would pay 3% or 4% less if you were in receipt of child benefits for two children of the ages of our children. You may think that child benefits are unreasonable (since having children is a choice, etc.), or reasonable (since the pope has a view, and since children are needed to support the economy in the future, etc.).

@Tony, Eoin
One aspect that is skewing the tax rate substantially is the PAYE tax credit. Tony has already stated he is self-employed. In addition to higher bands on PRSI, the PAYE tax credit pushes up the tax rate for a self-employed person a fair amount.

@Eoin
You should bear in mind that a household with two average incomes compared to a single income household:
From the 2006 figures:
32k income – 2,524 tax
Times two add in two children and you have an effective transfer
66k income – 11,407 tax
More than four times the tax burden of the lower earning double income household.

@Tony
Apologies, I have you crossed with someone else.

@ Tony

“The single-income family receives a tax advantage over the single-income person earning the same salary of 7.8 percentage points, reflecting the child-benefits transfer.”

The figures provided in the DoF link, as far as im aware, do not include child benefit allowances. They only include standard tax credits for single people and married people, and as such essentially represent just the differences caused by these and the accompanying tax bands. Regardless of having children or not, simply being married allows you to pay a good deal less tax than a single person on the same salary by virtue of the married persons tax credit, and this affect is obviously magnified at the lower income levels. If you include the children and the child benefits transfer, the gap between single people and married couples balloons for lower income tax units.

@ Tony

i dont have a problem with some sort of method or process to help out families with children, particularly your idea of child tax credits, and i should state that im not suggesting taxing just these groups more. My broader point is that unfortunately we are going to have to tax all those who currently pay little or no tax (in relative terms) by a substantial amount more if we wish to create a wider and more sustainable tax base. The top end simply can’t (mathematically – check out Karl W’s post)) take the majority of the burden, and so lower-to-middle middle class families are going to have to be majorly involved in the adjustment, particularly when they currently pay a very low level of actual net tax after child benefit is included.

I suppose i’m focusing on the family angle more directly because it is obviously the most politically unpalletable, and most public representatives (union or government) won’t touch the idea with a 200ft barge pole. That doesn’t make it any less true or important however.