Limited Gains from Taxing the Rich

A prominent part of ICTU’s ten-point plan campaign has been the proposal to introduce a new third rate of tax on rich people. As far as I know, the proposals have not precisely defined who qualifies as rich. However, it is certainly understandable that the average person may find some appeal in this proposal, particularly as most people don’t consider themselves to be rich.

To calculate the revenue gains from a new third rate, you need to have detailed data on the distribution of taxable income. Unfortunately, the latest such data available from the Revenue Commissioners only covers information for 2006, which is likely to indicate more income available to tax than is there now.

Still, keeping in mind that any revenue calculations based on these figures are likely to be overestimates, it’s useful to look at these figures to get an idea of the potential tax take from a third marginal tax rate. Here’s a spreadsheet that uses the Revenue’s table for taxable income and tax paid by all households. Note that this isn’t the best way to do these calculations: To do them exactly right, the calculations would have to be done separately for single, married and widowed people and I just didn’t have the time. (If anyone wants to send in such an analysis I would happily put up a link to it.)

Two things stand out from the Revenue figures. First, contrary to what many appear to think, the tax rate structure is highly progressive. Those with income below €20,000 pay almost no income tax, the person on the average income of about €35,000 pay an average tax rate of about nine percent, while those with incomes above €100,000 pay over twenty seven percent. This point about progressivity has been well made before by Ronan Lyons.

Second, even if we added in the new levies and PRSI taxes, the income tax burden on average workers is very low by international standards. See this chart from the OECD and note that the additional levies would still keep the combined income tax burden of average workers at the very bottom end of the OECD table.

Now go over to the right-hand-side of the spreadsheet. I have done a set of calculations which detail how much money would be collected by an additional marginal tax rate of ten percentage points on the rich, where the definition of rich is varied from those earning over €60,000 to those earning over €200,000.  Based on the 2006 income figures, this higher third tax rate would have brought in an additional €1.4 billion if levied on those with incomes over €60,000, €1.1 billion if levied on those on over €75,000, €787 million if levied on those on over €100,000, €539 million if levied on those on over €150,000 and €430 million if levied on those on over €200,000.

Given that the budget deficit this year (whichever definition you want to use) will be over €20 billion, these figures show that a new third rate of tax on the rich is only likely to be of limited help in restoring stability to the government finances.

Of course, one could argue that an additional ten percentage points isn’t enough of an increase in the marginal tax rate for the rich. However, it should be kept in mind that despite our low average tax rate, Ireland has high marginal tax rates that apply even to workers on moderate incomes. Page 161 of the Commission on Taxation Report shows that once all income taxes are counted (PAYE, PRSI and levies) the marginal tax rate on taxable incomes over €36,400 is now 54%.

Increasing this top marginal tax rate to 64%, as would be implied by these calculations, seems likely to move us into self-defeating territory where the high rate is simply discouraging work and encouraging tax avoidance and evasion. I know that it is a regular (and regularly inaccurate) right-wing talking point that tax increases are self defeating and reduce tax revenue. But at these kinds of marginal tax rates, I suspect this type of argument is more likely to be correct.

The bottom line that I take from these figures is that it is not possible to raise amounts of tax revenue that would make significant inroads into the budget deficit if one insists on convincing the majority of the population that this can be done by taxing other people. 

80 thoughts on “Limited Gains from Taxing the Rich”

  1. Karl, thanks for bringing this up again. As we get in to the final countdown before Budget Day, we really need all the facts out there for people to see.

    One other chart, based on OECD data, that I would throw into the mix is the one on this post: http://www.ronanlyons.com/2009/04/27/are-irish-workers-undertaxed/

    We didn’t just get into this mess because of over-reliance on temporary revenues from the property bubble. We also actively switched out of taxing middle earners.

  2. Taxes are going to rise. You seem to be making a point that all should be taxed? That will happen. Eoin seems to think that pay issues are a zero sum game. Cut public service pay txes need not rise. Problem there is obvious: demand will fall and private sector will offload jobs and screw wages.

    All persons need to pay more income and capital taxes. The need for equity is going to be more clear now. The take will have to rise until the point of nil return is met. The schaffer curve is a lie! We lived through it in the 70s! 77% rate of income tax. On something like 8,000 pounds!

    Deflation is going to make all these loans very burdensome. Public and private finances will suffer, really suffer.

    I make no intellectual defence of this. It is what it is and it is necessary. Get used to it. The state will enforce these taxes. Think of it as a pay cut for everyone!

  3. The logic of this post honestly befuddles me. You seem to be suggesting that we shouldn’t implement a third tax level because 5% of the budget deficit isn’t enough? Should we say no to all the other options that would generate marginal gains too?

    Karl, I would have thought that you of all people would understand that there’s no quick fix; that the solution has to be an amalgation of several solutions, including increased taxation at some level.

    adam

  4. I certainly agree that now the measures have to come from the cut expenditure side rather than the rise tax side, but although that rise could be a minimal impact in the deficit reduction, I think they could be important in many ways.

    IMHO, they would also prove the point that everybody is adding their 2 cents to solve the problem.

  5. I appreciate that the main focus of any tax changes will be their impact on the public finances and therefore the key issue would appear to be whether a higher tax rate will lead to a higher tax take. I also appreciate that in considering the prospect of taxing higher earners the focus will be on a third tax rate as a means of doing this.

    However moving away from these two parameters for the discussion for a minute, we must also acknowledge that in addition to the underlying objective of restoring credibility to the public finances the management of the optics is also important. And in doing so we may wish to consider whether the focus should be on something other than the headline tax rates.

    In particular I am a little astonished that when the issue of the ‘tax shelters’ and their use to assist high earners in paying little or no tax on certain income is brought up the standard response of ‘most of the shelters are now gone’ goes unchallenged. Leaving aside the issue of whether these shelters have in fact run out as regards new projects coming to market – and for instance private hospitals, nursing homes etc are still on the scene – there is the failure to acknowledge that the fact that those that were available up until recently are still carrying allowances. For example hotel schemes were still widely on the go as recently as 2007; such schemes carry allowances for seven years, meaning that an individual who bought into one of these in 2007 would still have allowances available up until 2013. Some schemes carried allowances of €200k+ plus annum.

    Let’s take the example of an individual who purchased such a product in 2007 carrying such allowances of €200k per annum, offset against rental income. They can take rental income – and very often these schemes are used by company directors as a means of extracting income from their companies via rents payable on commercial property held in their personal names – of up to 200k per annum (or rather to be precise rental income that will result in a 200k profit after offset of interest and other allowable deductions) and avoid paying income tax of 41%, Class S PRSI of 3% and Health Levy of 4/5% (the income levy will be payable). Potentially saving 48/49% tax or in the region of €100,000 tax.

    Meaning that in the period up to 2013 – coincidentally the period during which low and middle income people will be taking pay cuts, social welfare reductions, paying increased taxes and levies and seeing a curb in public services as well as funding the NAMA project – these people will be able to extract 200k p.a. in tax-free rental profits. We hear talk of people with gross incomes of 100k being rich and facing a third tax rates – but these folks with these shelters can avoid 100k in tax alone!

    Doubtless if this point is put to those who claim ‘but most of these shelters are gone’ the response will be ‘well that was in the past, so it’s too late to make changes there’. Not strictly true however. In December 2005 the Budget contained a provision that came into force on 1 January 2007 whereby the use of ‘high level allowances’ in a given year would be restricted to €250k or 50% of relievable income. Surely in the forthcoming Budget this can be reduced to say €5. Even for a period of 3 years while the adjustment in the public finances takes place. You don’t have to cancel the allowances retrospectively.

    Even if the amount of additional revenue it would raise is small – and while I accept it won’t lead to a pot of gold, even though I am wary of taking the claims of vested interests at face value on this – it should surely be considered in the context of the need to assuage the anger of the citizens at the pain being inflicted on them.

  6. The ‘super-rich’ are regularly spoken about by all parties without any parties giving any defination of what that means to them. It’s particularly dangerous territory for the labour party as you suspect that their natural constituency, industrial and public sector, would contain the greater part of that super-rich if you were to fix it at around the 60-70k mark. I’m surprised the other parties don’t set their targets on Labout in this regard.

    Regarding the budget, I do hope that the government correct the anomoly in the set-up of Health levy that allows for a person on 25k will take home more than an person on €26,001 due to €1,040 of health levy kicking in at that levy, few examples at http://blog.redoaktaxrefunds.ie/health-levy-charge-fiasco/

  7. The notion of a top marginal rate of 64% is probably rather shocking to many readers of this blog (as is 54% on as little as €36,000).

    But this link shows the top rate of federal income tax in the US since 1913:

    http://www.truthandpolitics.org/top-rates.php

    And as Thomas Picketty points out (http://www.economist.com/debate/days/view/295#pro_statement_anchor):

    “Between 1932 and 1980, the top marginal rate of the U.S. federal income tax was on average equal to 80.2%.”

    This doesn’t prove that such rates were a good idea at the time in America, let alone that they are a good idea today Ireland. But at the very least it does show that extremely high top marginal rates are not necessarily the road to economic ruin. After all, the 1945 to 1970 period, during which the top rate was usually above 90%, was also a period of prosperity and growth not matched since.

  8. That welfare payments are tax and levy exempt is in itself distorting the landscape of taxation – this practice has to end. If you want welfare, you should have to learn how to submit a tax return – essentially a tax clearance certificate for your next year’s benefits. Employment Insurance in Canada is taxable, as is income from Canada Pension Plan, Old Age Security and Universal Child Care Benefit.

    Also, DIRT should be abolished with bank interest becoming made equivalent to any other income source. It’s hard enough to persuade people to not take money out of the banks (making said banks even more dependent on wholesale lending, unlike Canada) and hide it under the bed without whacking it with a 26pc tax which is only rarely refundable.

    Have a third rate of tax by all means – a 10 per cent rate on the lower incomes – say to 15,000 – with a from-scratch appraisal of exemption limits to incentivise work. Taxes – however little paid – are, after all, the price paid for a civilised society.

    Meanwhile, recast medical card eligibility so that people can pay a reasonable surcharge to retain it if they return to work rather than having to go from zero cost to VHI. You could call it a “public option”.

  9. John, that is a good point regarding the Health Levy. In fact the whole area of PRSI and the Health Levy is riddled with anomlies. However I wouldn’t hold out much hope of it being reformed; this is an area that most ordinary people know very little about and it is an easy target for the government in raising extra revenue. We saw that in April when the Health Levy was doubled.

    On the matter of the super-rich and it not being defined, I think to be fair to the Labour Party they have given a clear indication of what they mean when they call for a third tax rate. In their pre-Budget submission in April it was to be a rate of 48% on all incomes above €100,000 per person. At that time the income levy was at its more modest level of 1/2/3% and Health Levy was 2/2.5% so that would probably have translated to an effective marginal rate of 52.5% for a PAYE worker (48% plus 2% income levy and 2.5% health levy, no PRSI) rising to 56.5% if the PRSI ceiling was abolished, which I think they suggested, or 55.5% for self-employed (PRSI of 3% payable).

  10. @ Pat

    “Eoin seems to think that pay issues are a zero sum game. Cut public service pay txes need not rise.”

    I have said no such thing. Read over my comments again, and try and accurately reflect what i’ve actuslly said next time Pat. I have proposed the following, in this order:

    – cut public sector pay and social welfare benefits first
    – if we still feel we need a government spending stimulus, recycle these savings into private sector job creation/protection plans or long term productive infrastructure projects
    – if we feel we need additional stimulus on top of this, we cannot ignore the 750k-worker elephant in the room that pays almost no tax, or the additional 300k+ of middle-middle class families that pay a very low rate of tax (ie between 5-15%).

    As Karl and Ronan Lyons have noted, we probably have one of the most progressive tax systems in the world, even we also have a somewhat lowly taxed economy at an overall level. The only way to turn this into a sustainable and more balanced system is to increase the lower end of the income ladder by a great % of effective income tax, even if we end up taxing the higher end by a greater nominal amount (ie adding 10% onto the lower end yields 2-3k per worker, adding 3% onto the higher end yields the same amount or more).

  11. And as an addendum to my previous post, what annoys me most about the ICTU position on keeping public sector pay intact is that they completely fail to mention that it will be ultimately middle class families who are paying the most in additional taxes (in % terms) to keep relatively well paid public sector workers at the same level of pay as is. They should at least be honest about what they are suggesting – the pay of 350k workers protected by the additional taxes of 700k at the lower end of the income ladder.

  12. Calculated similar effective tax rates for France

    [code]
    [B]Band Ireland France Gap[/B]
    <10000 0.2% 0.0% [COLOR=”Red”]-0.2%[/COLOR]
    10000-12000 0.36% 0.0% [COLOR=”Red”]-0.4%[/COLOR]
    12000-15000 0.48% 0.5% [COLOR=”Navy”]0.1%[/COLOR]
    15000-17000 0.80% 1.1% [COLOR=”Navy”]0.3%[/COLOR]
    17000-20000 2.30% 2.2% [COLOR=”Red”]-0.1%[/COLOR]
    20000-25000 4.34% 4.5% 0.2%
    25000-27000 5.90% 5.2% [COLOR=”Red”]-0.7%[/COLOR]
    27000-30000 6.81% 6.1% [COLOR=”Red”]-0.7%[/COLOR]
    30000-35000 8.34% 8.2% [COLOR=”Red”]-0.1%[/COLOR]
    35000-40000 10.86% 11.0% [COLOR=”Navy”]0.1%[/COLOR]
    40000-50000 13.75% 14.8% [COLOR=”Navy”]1.0%[/COLOR]
    50000-60000 16.30% 17.3% [COLOR=”Navy”]1.0%[/COLOR]
    60000-75000 18.43% 19.9% [COLOR=”Navy”]1.5%[/COLOR]
    75000-100000 22.26% 24.9% [COLOR=”Navy”]2.7%[/COLOR]
    100000-150000 27.04% 29.9% [COLOR=”Navy”]2.9%[/COLOR]
    150000-200000 31.31% 32.5% [COLOR=”Navy”]1.2%[/COLOR]
    200000-275000 33.56% 34.5% [COLOR=”Navy”]1.0%[/COLOR]
    Over 275000 32.85% 34.5% [COLOR=”Navy”]1.7%[/COLOR]

    [/code]

  13. Karl – you are correct to highlight the fact that putting on another tax band will produce limited revenue (though numbers might be different for 2010 based on individual taxpayers as you point out). There’s another aspect, however, that should be borne in mind when considering increasing tax on higher income groups – and that is the effective tax rate. The Department of Finance released a survey (I don’t know how scientific it was) of 451 higher earners. It showed that, through the use of tax reliefs, etc., that the effective tax rate was quite low. 10% of those survey paid less than 5% of their income on income tax while a third paid less than 15%. Only 11% paid over 20% while no one paid more than 25%. Imposing a third rate of tax or incrasing the marginal rate would not be as effective on these high earners as increasing the effective tax rate. There is already a mechanism used by the Government for earners over €500,000; namely, regardless of the number of reliefs they claim for, they must pay a minimum tax rate of 20%. By increasing this legal minimum and lowering the threshold, you might obtain similar results without increasing the marginal rate (and considerably more if done in conjunction).

    The DoF paper can be read here: http://www.finance.gov.ie/documents/publications/reports/2009/analytaxrestrict09.pdf while more analysis of this marginal vs. effective tax rate can be read here: http://bit.ly/2pxpip

  14. Karl I gather looking at the OECD website
    http://www.oecd.org/document/60/0,3343,en_2649_34533_1942460_1_1_1_1,00.html
    that as a share of GDP expenditure taxes were about the average in 2006 while income/payroll taxes were lower than average OECD. If poor people spend a bigger share of income this makes our tax structure look a bit more regressive. Perhaps we should be changing the mix between income and expenditure taxes if we are going to increase income taxes at the lower end?

  15. @Karl Whelan
    There is an interesting table I found in wikipedia showing US income tax rates. The top rate does not seemed to have dropped below…63%… from 1932 to 1980.
    At the end of the tyranny of the socialist Eisenhower it was 91% on incomes of over $400,000.
    http://www.irs.gov/pub/irs-soi/02inpetr.pdf
    Although there seems to have been some sort of limit that brought it down to… 87%.

    Also, some interesting people have raised taxes during recessions.

    From wikipedia on Mr Reagan & Mrs Thatcher:
    “Pressured to counteract the increased deficit caused by the recession, Reagan agreed to a corporate tax increase in 1982. However, he refused to raise income taxes or cut defense spending. The Tax Equity and Fiscal Responsibility Act of 1982 instituted a three-year, $100 billion tax hike—the largest tax increase since World War II”.

    If you substitute national construction for national defence and substitute VAT for corporation taxes you find the similarities to Brian Lenihan very striking.

    “According to Keynesian economists, a combination of deficit spending and the lowering of interest rates slowly led to economic recovery”.

    Maybe recovery will be quicker than we think. If so, FF may get away surprisingly unscathed from the €20 Billion NAMA giveaway.

    Another notorious leftist recession tax raiser follows below:

    “Thatcher lowered direct taxes on income and increased indirect taxes instead.
    “The top rate on earnings was cut to 60 per cent in 1979 and then 40 per cent in 1988.”
    http://www.ifs.org.uk/bns/bn25.pdf
    So a 60% rate would make us as right-wing as … Thatcher’s Britain in its pomp.

    Looking back the oil shocks of the 1970s sharply affected economic growth.
    Subsequently the world economy returned to normal.
    Unfortunately a group of right-wing ideologues succeeded in convincing gullible people that the recovery was due to their cuts in the income tax rates of the very rich. We all need to get out of this mindset.
    An effective 50% income tax rate on the very rich will not turn us into Cuba. It will just leave things where they were before Reagan and Thatcher.

    Now we can see that even Thatcher was quite happy with a 60% upper tax rate for most of her time in office.

  16. The problem in the Public Finances is not one just one of income but a bloated level of Expenditure which is not sustainable. I will give a simple example from experience. I am involved in a sporting club which has connections to one of these Sporting Quangos set up by another Government Quango to deal with local issues. There are 2 people employed by the local Quango, who would not work to warm themselves in my experience of dealing with them. The Gross income of the local Quango is €300,000 pa paid from the Government Quango and the 2 employees get €150,000 in salaries and pension costs pa. This situation is replicated in every county all over the country in regard to this Quango setup but the figures are probably higher elsewhere. Colm’s excellent Report like everything else with this Government is now gathering dust in the D of F like most other such reports down the years. It is known as “nobbling”.

  17. @Michael Taft
    What’s most important to bear in mind is that you could tax the wealthiest earners in Ireland 100% of their income and it would only keep the country going for a month or two. You or I may not think 27% is the best average income tax rate for them but, if I were a Dept of Finance official, I’d be far more worried about the fact that the middle earner in the country pays about 4% in income tax, compared to 20% elsewhere in the OECD.

    One cannot ignore the fact that, compared to every other developed country (except Mexico), our taxation system has become a joke.

  18. My understanding is that the US has always had easily available reliefs on income taxes that have steeply reduced the effective tax rate experienced by high earners, so most high earners were historically able to avoid paying tax at penal marginal rates. I think the US evidence has little to say about the effects of high marginal rates of income tax that are actually collected.

    The Congressional Budget Office has data on effective tax rates going back to 1979 here: http://www.cbo.gov/doc.cfm?index=8885

  19. Ronan L – aboslutely agree. I merely pointed that, in terms of constructing a tax-based fiscal consolidation package, an effective tax rate might be a better road map (as it measures the effect of the plethora of tax expenditure programmes) than merely focusing on the marginal tax rate. But clearly, given that up to the eve of the recession Ireland was a low-tax, low-spend economy, we will have to take steps to move away from that model.

    Unfortunately, there is too little debate over the architecture of a new, enhanced taxation regime. We should be cautious about headline income tax comparisons. There is no doubting our overall low tax rate, but in terms of income tax, Eurostat shows that in 2006, our income tax took up 8.5% of GNP; the average for the EU-non Med countries was 10.5% of GDP (and these are the heavy tax hitters, the OECD average would probably be lower). To reach the average would be a jump, but not qualitatively so. Ireland – fiscally speaking – is one of the most centralised countries in the EU. We have one of the highest ‘central tax takes’ in the EU, even higher than Sweden (these mostly comprise income tax, indirect, capital and corporate tax revenue). Where we really fall down, and here we truly are in a league of our own, is in the areas of social insurance and local/regional taxation. Therefore, when debating the necessary increases in taxation, we should give attention not only to overall levels, but to the composition of our tax structure as well.

  20. @Pat Donnelly – “Taxes are going to rise”

    Who says so? That’s not the message the two Brians are kicking out at the moment – or are you talking about budget 2010 and beyond?

    As I recall, Mr Lenihan did make some passing remark back in April about taxes having to rise this year but that seemed to be quietly shelved over the summer and the PR machine is currently spitting out messages designed to drive a wedge between public and private sectors, persuade everyone that welfare claimants are grossly overpaid and that there’s no mileage in taxing the ‘better/well off’ as they are already taxed to the hilt (which I guess we all know is a lie as all the data I’ve seen suggests we are very lightly taxed in Ireland).

    The more recent PR message is that leaving the country is good for you if you are claiming benefits and/or not contributing to the tax take – it’s very subtle but it is there.

    Don’t get me wrong – I have no problem with cuts if that’s what is needed but I think it needs to be balanced with tax increases too – and finding a way to be able to afford to live in Ireland on our newly lower incomes.

    What’s that current phrase about ‘sharing the pain’? Well, the Irish retail sector will be sharing some of mine this Christmas as I hop over to Newry to do all my Christmas shopping. I wonder if that sector knows what’s going to hit them next month?

  21. @Micheal Taft
    Using GDP as a measure to compare Irish income tax against international peers is incorrect IMO.
    Surely GNP is a much better measure since we cannot impose income tax or transfer pricing gains that inflate out GDP.

    8.5% of GDP would be fairly close to the average you have quoted when you use GNP.

  22. Comparison with the UK top rate of tax can be misleading. One can point to the government’s proposal – and the apparent Conservative committment to implement this -to introduce a new top tax rate of 50% and suggest that something similar may be done here.

    However in the UK, National Insurance is payable at a rate of 1% above a certain threshold (around £44k) and other than I think a 1% Health Levy (introduced in 2003) there are no other levies. So this will still leave them with an effective top rate of 52%.

    Under the Irish sytem the marginal rate for a PAYE employee earning over €36,400 is already 51%. The ultimate highest rate (and believe it or not there are SIX different top rates of tax depending on whether one is self-empoyed and depending on income levels) is the 55% payable by Class S employees earning over €174,980.

  23. Leaving aside the taxation and fiscal analyses and turning to this from a political perspective (which is ultimately the key factor) I would have thought that curbing the high level reliefs would make more sense.

    The problem with introducing a higher tax rate is that people on middle incomes will conclude that the people at the top won’t be paying it anyway as they’ll find ways around it and that the increased burden will inevitably fall on themselves. Secondly many people will be convinced that while it may not affect them now (because of the thresholds above which a higher rate would apply are quite high) it will affect them down the line. Recall the 1992 General Election in the UK when the then Shadow Chancellor John Smith introduced a ‘shadow Budget’ pledging such changes and John Major went around on his soapbox and convinced ‘Essex Man’ that ‘It could be you!’

    Taking all of this together I would have thought thay it would make political sense to curb the types of reliefs that high earners are using to – in the eyes of the middle income earners – ‘get away with it’ even though it is questionable and very difficult to quanify what level of additional revenue this would raise.

  24. Sorry Michael I misread your post.

    I agree that taxes should be raised but I think the amount we would raise would be very limited.

    Using France as a comparison as before the revenue raised by changing the effective rate to their level would raise about €750m.

    Most from incomes in the €40k to €100k range.
    <10000 -3
    10000-12000 -3
    12000-15000 1
    15000-17000 5
    17000-20000 -4
    20000-25000 9
    25000-27000 -14
    27000-30000 -23
    30000-35000 -5
    35000-40000 5
    40000-50000 86
    50000-60000 68
    60000-75000 115
    75000-100000 202
    100000-150000 182
    150000-200000 27
    200000-275000 17
    Over 275000 96

  25. If it’s true that Ireland’s public sector is as overpaid and as ineffective as has been widely claimed – various reports over the years etc… then any decision to raise taxes rather than deal with this has to have a negative impact on the economy. It’s a transfer of wealth from the productive part of the economy to the less productive part. Therefore tax increases are not the way to go QED.

    Also taxing the ‘rich’ is also biased against the more productive citizens. What I find strange about the debate on this forum is the following logic that applies.

    a) Public spending doubled during the boom – for no very good reason.

    b) Taxes on middle and low income earners were dropped – in itself not a bad idea IF there is structural reform in the public sector – which didn’t happen

    c) The rich already pay the lion’s share of the tax

    d) All this means that ‘we all’ – whoever the hell that is – ‘have to get used to paying more tax’.

    For so long as the public sector continues to consume an unconscionable proportion of our national wealth then tax increases are not justified.

    To argue for tax increases – leaving aside the fact that they will not generate the desired revenue and are therefore just for keeping up appearance (appearance of what I have no idea) – is to argue for public sector privilege and waste.

    The solution is not to raise taxes – even from those on low incomes who pay none. The solution is reform the public sector and do all those pro competitive things the OECD says and then, maybe, reduce taxes on the rich so that the poor can pay their fair share.

    Yes you did read that last bit right.

  26. “any decision to raise taxes rather than deal with this ”

    But it’s not necessarily either/or.

    “the public sector continues to consume an unconscionable proportion of our national wealth”

    Public sector consumption (that is, government spending minus capital spend and welfare) is hardly “unconscionable” as a share of GDP. In fact I think it’s less than many/most OECD peers. Whether we get enough in return for this is another question obviously.

  27. @ James. Now listen. How many, many, many, many, many times has it been explained on this forum that GDP is, for Ireland, not a valid marker against which to measure the ‘reasonableness’ of government spending?

    And how many, many, many, many times has the reason for this been explained in words of one syllable?

    It is, at this stage, a truism.

    As a percentage of or domestic economy it is, I can assure, unconscionable. More than France. Its purpose is not to give us a ‘return’. It is to employ voters – period.

  28. @Paul McDonnell
    I hope you wrote that last bit from your villa in the Carribean, typing one handed with a gently smouldering Cuban cigar in the other!

    For myself I believe that countries should have the welfare state that the citizens want. I disagree with bossy Europeans who think the US should be Sweden. The US should be what its citizens want it to be. I believe that Irish voters want a welfare state. But if the government think otherwise that is fine – but let them be honest about it.
    No more drunken lurching between Boston and Berlin.

    @Con
    Interesting to note that the effective tax rate in 1979 was 37% on the top 1%. We were at 27% on the top .5% in 2006 with a much more extensive welfare state. I suspect that the longer the US had high tax rates the more the superrich were able to lobby politicians to intoduce new avoidance schemes.

  29. @Paul

    The issue of using GDP or GNP as a metric for assessing, for instance, the size of the public sector in Ireland is not as simple as you assert it is. For instance, contrary to DE’s assertion above, we do actually collect tax revenue on multinational income that is subsequently repatriated abroad. As such, this is income that is GDP but not GNP that generates tax revenue.

    And can I ask, yet again, that we try to keep the tone of the debate at a reasonable level? You don’t have to insult people just because you disagree with them.

  30. @Karl. I wasn’t insulting James. Leaving aside the nuance (I assume you’re referring to the 12.5% corporate tax). that you correctly point out the difference between GDP and GNP makes GDP an reliable comparator for Ireland. Now you’d need to be living in a cave not to have noticed the many (hundreds) of times it’s been pointed out here, in newspapers on TV etc..etc…

    Therefore I tend to regard arguments that rely on it as being a tad disingenuous.

    @ Eamonn20Bn – in plain English that’s a blueprint for majoritarian confiscation. There is a difference between democracy and liberty. Just because a majority of the population decides that it has a right to more than half my income doesn’t mean that this right actually exists.

  31. @ Karl – in fact this single fallacy that GDP is our real national income is probably the single biggest cause of the entire mess. It allowed all those government spending increases to appear less unreasonable.

  32. I think it’s pretty clear at this stage that the ‘pot of gold’ thesis is flawed: there aren’t enough wealthy people to tax in order to remove the necessity of taking other very substantial steps to correct the fiscal position. But likewise, it hasn’t been shown that we can make the correction solely from spending cuts. I think the only sensible approach is to explore all avenues keeping practicality, fairness, and sustainability in mind. In my opinion that will mean reducing public sector pay levels over time, and I hope adjusting work practices and pensions too in the public sector, and also removing most tax expenditures/exemptions and re-balancing the way rates fall over the income distribution. Unfortunately many of these adjustments will take time to formulate and will take a lot of political effort to put them in place. Perhaps in the meantime, in order to stabilize – we ought to just go for it with temporary measures that can be more quickly implemented.

    I think the national debate so far is very fragmentary – with sectoral and political interests managing to obscure some home truths. There has been a colossal failure of leadership. Because of its complicity in creating the fiscal crisis, the government has allowed the cause of the crisis to be obscured by non-truths. E.g. today on the Finucane show a member of the INTO was told that her fellow public sector workers couldn’t possibly argue they are worse hit than anyone else when 160 thousand or so private sector workers have lost their jobs in the last year. She shot back ‘well it was in the private sector that this whole mess started’. But no-one corrected her. So the untruth is alive an well that banks caused the crisis and they are private sector so it is all the fault of the private sector.

    As long as the public is under the this illusion then sound policy will be harder to push through. Surely there is a need to make it clear that the fiscal cul de sac into which the celtic tiger ran was wholly self made and that the social partners pushed for many of the policies (like gutting the tax base) that has left us here.

  33. @dahamsta
    “The logic of this post honestly befuddles me. You seem to be suggesting that we shouldn’t implement a third tax level because 5% of the budget deficit isn’t enough? Should we say no to all the other options that would generate marginal gains too?

    Karl, I would have thought that you of all people would understand that there’s no quick fix; that the solution has to be an amalgation of several solutions, including increased taxation at some level.”

    I have to agree.
    Every time that taxing the well off more comes up we get a large number of people argue that it wont bring in enough money.
    Some of these same people would have argued similarly that about the tax amnesties in the nineties.
    Bringing in 700ml to 1 billion from a higher rate of tax, closing off all the tax loopholes, pursuing tax exiles would all add up.
    25-30 billion is a massive deficit to make up.
    This year the budget will attempt to cut 4 billion and none of that will come from high earners in the private sector.
    That is not protecting the vulnerable.
    I think that everyone will have to make a contribution as Ronan Lyons pointed out but the government are pursuing policies that are ensuring that the people least able to stand up for themselves are on the front line.

    Other than it may not bring in as much money as some economists would like what are the reasons for not ending the tax loopholes now?
    People may argue that a 54% marginal rate is high enough, but very few people that are supposed to pay an amount at that rate end up having too.

    The acid test for when enough loopholes have been closed is when it is not worth peoples while to pay an accountant to find them.
    We are a long long way from that point.

  34. @ Eamonn20bn

    “I believe that Irish voters want a welfare state.”

    I’d agree to a point. We want some form of welfare state, but how big should this be? Given that the electorate has continually voted for low tax governments over the last 15-20 years, i think we have to assume that thats what it still wants until we hear different. No major party has ever made increased welfare a core part of their policy mandate, and certainly no government has been elected with that at the heart of their PfG. I think we therefore have two options:

    – the Irish people don’t want a particularly large welfare state (because we want low taxes)

    or

    – the Irish people are too stupid to realise that a low tax economy is more or less incapable of sustaining a large scale welfare state.

    It takes a very cynical belief in democracy to contend that the second option is the correct one and that we should raise taxes to counter people’s stupidity.

  35. “I wasn’t insulting James.”

    No you were just being arrogant and patronising (“Now listen” yourself) in assuming that because something has been said many, many etc. times (“in words of one syllable” no less!), those who don’t accept it 100% are either disingenuous or (presumably) stupid.

    By the way (to return to substance) – when calculating the tax/GNP ratio for Ireland do you advocate subtracting revenue from corporation tax from the numerator? This is not, I think, standard practice when people use GNP for these purposes.

    @ Karl, presumably remittances would be another case which would be excluded from GNP but which the state has already recieved tax from? This is another point in favour of using GDP (though I certainly accept Irish GDP statistics might need a healthy grain of salt).

  36. “No major party has ever made increased welfare a core part of their policy mandate, and certainly no government has been elected with that at the heart of their PfG.”

    Hmmm, I seem to remember quite a lot of FF posters in 2007 promising an increase in the state pension to €300. Rather amusingly it would appear that everything to do with the 2007 manifesto and election has been shunted down the memory hole on the FF website, but this site seems to confirm my memory:

    http://www.irishelection.com/2007/05/fianna-fail-manifesto-the-next-steps/

    More generally, I think the obvious answer to the question “what do the Irish people want?” is indeed that they want both low taxes and a generous welfare state. I don’t think they need to be stupid to want that: what in the fifteen odd years prior to 2008 (and certainly the 1997 – 2007 period) would have taught them otherwise? We have the least successful centre-left party in western Europe and the only outright neo-liberal party (which wasn’t exactly Thatcherite anyway) went extinct two years ago.

  37. @ James

    “they want both low taxes and a generous welfare state”

    Possibly i should be more clear. They may WANT this, like everyone wants this, in a perfect world (one filled with lots of construction related taxes), but when it comes to hard decisions, like we have now (where there are none of these super-cycle taxes), what do they actually want – the low taxes or the welfare state? I’d argue they want the former given that, aside from some minor policy issues like the pensions you noted, the core economic arguments at every general election for the last decade or so have revolved around cutting taxes.

  38. @James Humble apologies – no wish to cause offence.

    The trouble with GDP is that a good chunk of it is an accounting trick – a collusion if you will – between the state and the multinationals whereby the former route turnover via Ireland to avoid tax in the US or wherever.

    It has two pernicious effects that are almost (?) unique to the Irish situation.

    1) It allows the Irish to fake higher productivity

    Imagine Ireland as a farm and the state as an incompetent farmer. The GDP difference is like the farmer leasing out a piece of his farm to a very talented farmer down the road. The resulting productivity for whole farm will rise. The incompetent farmer is saying ‘Gosh – what a talented farmer I am’. I can spend all this extra money.

    Real productivity in the domestic economy is poor and (if you include the public sector) almost certainly falling (let the economists on the site verify this if they wish).

    Thus it has provided an excuse not to reform the public sector and has probably made the private sector more complacent (due to it doing lots of business with the public sector).

    2) It provides invalid justification for tax & spend policies.

    The really productive part of the economy – the MNCs – pay very little tax (12.5%). Their turnover is routed via Ireland. You know the stories about Microsoft’s office above the Pet Shop in Rathmines employing 2 lawyers and a hamster earning €4bn PA (an exaggeration I admit but not much of one).

    The tax and spend merchants add this redirected corporate turnover to our GNP calculate the total tax take and say ‘Hey we’re a low tax economy’. They then argue for increasing taxes on the domestic economy – usually workers who, already pay very high taxes – once they get above 40 -50k 0 – we have very high VAT – we have sky high hidden taxes – business rates..etc..etc….

    Technical points aside – that’s the big picture.

  39. @ Eamon Moran,

    I have to agree and disagree with you Eamonn,

    I agree with your argument that closing off loopholes, taxing wealthy people (what is wealthy?) and clamping down on tax exiles will bring in money in the short term.

    However the revenue will lose money in the long term as these people will slowly relocate to other countries with more favorable tax rules.

    There are negative long term consequences to what you are saying.

    Underneath all this theory and discussion there are still basic truths about people. Firstly we all desire to improve our wealth. We all desire to live in a bigger house, etc. If we didn’t then there would be no point in earning more money etc. However we also want value for money. If people feel they are being ripped off living in Ireland then some of them will look elsewhere, we are already seeing this with all the”shopping exiles” heading north.

    Even if the Revenue brought in new rules like 100% Inheritance taxation, increase the marginal rate of taxation to 80% etc, tax “trophy houses” and so on there is still no guarantee that Ireland’s public service will be reformed.

    I ask the question to all of you, after this crisis has passed (which it will) will Ireland be a more organized, efficient and better country to live in?

    After all the extra taxation, levies, stealth taxes etc will we get value for our taxes paid?

    Or will we continue stumbling along as a broken country?

  40. @James on the question of ‘outright neoliberal party’. I don’t think you could call then neoliberal. A few facts about the PDs.

    1) Genuine neoliberals – like me – did not regard them as even reliably free -market and as a result voted for them reluctantly.

    2) Leftists called them neoliberal as a term of abuse.

    3) The PDs treated it as an accusation of inhumanity and adopted an apologetic stance.

    Thus they were derided by their enemies for having values that their former friends deserted them for not having.

    I have never met a PD who was to the right of Gordon Brown.

    They were a left-wing party who chose ‘pro-market’ branding as just that – branding coz it was fashionable when they were founded.

    They were pro-market in the way that the Minister for Enterprise understands the ‘knowledge economy’.

  41. @ James I post this here from the WSJ to suggest that all this talk of taxing the rich is naive and, for the public sector people who advocate it, self-serving.

    @Karl sorry if its off topic…but the Austrian perspective needs some airing. What better than to just lay it on the unsuspecting?!?

    It’s about the real origin of the crisis and Ludwig VonMises – not a fashionable economist these days.

    The Man Who Predicted the Depression
    Ludwig von Mises explained how government-induced credit expansions led to imbalances in the economy.
    By MARK SPITZNAGEL

    Ludwig von Mises was snubbed by economists world-wide as he warned of a credit crisis in the 1920s. We ignore the great Austrian at our peril today.

    Mises’s ideas on business cycles were spelled out in his 1912 tome “Theorie des Geldes und der Umlaufsmittel” (“The Theory of Money and Credit”). Not surprisingly few people noticed, as it was published only in German and wasn’t exactly a beach read at that.

    Taking his cue from David Hume and David Ricardo, Mises explained how the banking system was endowed with the singular ability to expand credit and with it the money supply, and how this was magnified by government intervention. Left alone, interest rates would adjust such that only the amount of credit would be used as is voluntarily supplied and demanded. But when credit is force-fed beyond that (call it a credit gavage), grotesque things start to happen.

    Government-imposed expansion of bank credit distorts our “time preferences,” or our desire for saving versus consumption. Government-imposed interest rates artificially below rates demanded by savers leads to increased borrowing and capital investment beyond what savers will provide. This causes temporarily higher employment, wages and consumption.

    Ordinarily, any random spikes in credit would be quickly absorbed by the system—the pricing errors corrected, the half-baked investments liquidated, like a supple tree yielding to the wind and then returning. But when the government holds rates artificially low in order to feed ever higher capital investment in otherwise unsound, unsustainable businesses, it creates the conditions for a crash. Everyone looks smart for a while, but eventually the whole monstrosity collapses under its own weight through a credit contraction or, worse, a banking collapse.

    The system is dramatically susceptible to errors, both on the policy side and on the entrepreneurial side. Government expansion of credit takes a system otherwise capable of adjustment and resilience and transforms it into one with tremendous cyclical volatility.

    “Theorie des Geldes” did not become the playbook for policy makers. The 1920s were marked by the brave new era of the Federal Reserve system promoting inflationary credit expansion and with it permanent prosperity. The nerve of this Doubting-Thomas, perma-bear, crazy Kraut! Sadly, poor Ludwig was very nearly alone in warning of the collapse to come from this credit expansion. In mid-1929, he stubbornly turned down a lucrative job offer from the Viennese bank Kreditanstalt, much to the annoyance of his fiancée, proclaiming “A great crash is coming, and I don’t want my name in any way connected with it.”

    We all know what happened next. Pretty much right out of Mises’s script, overleveraged banks (including Kreditanstalt) collapsed, businesses collapsed, employment collapsed. The brittle tree snapped. Following Mises’s logic, was this a failure of capitalism, or a failure of hubris?

    Mises’s solution follows logically from his warnings. You can’t fix what’s broken by breaking it yet again. Stop the credit gavage. Stop inflating. Don’t encourage consumption, but rather encourage saving and the repayment of debt. Let all the lame businesses fail—no bailouts. (You see where I’m going with this.) The distortions must be removed or else the precipice from which the system will inevitably fall will simply grow higher and higher.

    Mises started getting some much-deserved respect once “Theorie des Geldes” was finally published in English in 1934. It is unfortunate that it required such a disaster for people to take heed of what was the one predictive, scholarly explanation of what was happening.

    But then, just Mises’s bad luck, along came John Maynard Keynes’s tome “The General Theory of Employment, Interest and Money” in 1936. Keynes was dapper, fresh and sophisticated. He even wrote in English! And the guy had chutzpah, fearlessly fighting the battle against unemployment by running the currency printing press and draining the government’s coffers.

    He was the anti-Mises. So what if Keynes had lost his shirt in the stock-market crash. His book was peppered with fancy math (even Greek letters) and that meant rigor, modernity. To add insult to injury, Mises wasn’t even refuted by Keynes and his ilk. He was ignored.

    Fast forward 70-some years, during which we saw Keynesianism’s repeated disappointments, the end of the gold standard, persistent inflation with intermittent inflationary recessions and banking crises, culminating in Alan Greenspan’s “Great Moderation” and a subsequent catastrophic collapse in housing and banking. Where do we find ourselves? At a point of profound insight gained through economic logic, trial and error, and objective empiricism? Or right back where we started?

    With interest rates at zero, monetary engines humming as never before, and a self-proclaimed Keynesian government, we are back again embracing the brave new era of government-sponsored prosperity and debt. And, more than ever, the system is piling uncertainties on top of uncertainties, turning an otherwise resilient economy into a brittle one.

    How curious it is that the guy who wrote the script depicting our never ending story of government-induced credit expansion, inflation and collapse has remained so persistently forgotten. Must we sit through yet another performance of this tragic tale?

    Mr. Spitznagel is the founder and chief investment officer of the hedge fund Universa Investments LP, based in Santa Monica, Calif.

  42. @ Bond – “minor policy issues like the pensions”. Pensions are typically the most important part of the welfare state in every country, so if we’re dismissing them as a minor policy issue then I don’t think it’s going to be possible for us to find any country that prefers a welfare state to low taxes!

    However, in so far as one can make judgements about what “the electorate” (as Thatcher might say, there is no such thing as the electorate, only voters) want, it is obviously true that over the last decade the more centre-right coalition (FF-PD) has done better (marginally but clearly) than the more centre-left one (FG-Lab). Nevertheless, the alternatives have not been clearly drawn – all sides have been broadly for low(er) taxes and high(er) spending.

  43. @ Paul – humble apology humbly accepted.

    To address you political and economic views respectively:

    Political – it is true, as I said, that the PDs were far from Thatcherite. But I think it’s pointless to call them a left wing party just because they’re not as far to the (liberal) right as you would like – just as I think it is pointless for the far left to call Labour righ wing for the same reason. These are relative terms and the PDs were on the right of the spectrum, narrow thought the spectrum may be. The term neo-liberal has always been one primarily used by opponents of neo-liberalism, its Irish usage has been no different.

    It’s an interesting question whether the PDs would have been more successful had they been more radically free market. In a multu-party PR-based system it shouldn’t be necessary for parties to hug the centre ground to remain viable. On the other hand, Michael “radical or redundant” McDowell’s public image was certainly more right-wing than his predecessors. And that didn’t work out!

    On Austrianism (and what Paul Krugman calls the hangover theory of the business cycle) – someone with an economics degree could probably do better on this than me but I think the core problem is this sentence:

    “Left alone, interest rates would adjust such that only the amount of credit would be used as is voluntarily supplied and demanded.”

    Two objections:

    1) At the microeconomic level, due to asymmetric information as to default risk, credit markets don’t clear, i.e. not everyone willing to pay the going price will recieve credit. This makes credit markets highly imperfect markets.

    2) At the macro level, liquidity preference short curcuits the efficient operation of credit markets. Interest rates can’t go below zero because people would rather simply hoard their cash (i.e. they have a “liquidity preference”) than lend it at a negative interest rate. This presents a grave macroeconomic problem when there is a much higher supply than demand for savings, because the price mechanism that would normally balance the two can’t work.

  44. @ James

    What you say about the PDs is pretty true. I think the trouble with the PDs wasn’t the calibration of their policies on a left-right political spectrum. It was their tone. Because they didn’t actually believe in the liberating power of free markets they were unable to sell the idea. They say themselves as pro-business and not pro-market.

    On the Austrians and the business cycle I think his point is – and it may be Utopian or, at least, un-testable – that all trouble comes from government manipulation of the cost and availability of money…..and if you take these things out then these problems disappear. But I’m not going to push that point here..and I know it doesn’t address your objections. There is something elegant about it….I’ve only read Human Action (Von Mises) and not his other work..

  45. @ RAY et al.

    “The problem in the Public Finances is not one just one of income but a bloated level of Expenditure which is not sustainable. ”

    This is a myth. Total government expenditure in Ireland in the years preceding the crisis (2002-2006) averaged 33.6% of GDP, the lowest of the Euro Area economies, compared to 47.4% for the Euro Area as a whole. France, Belgium and Austria all had public sector spending proportionately 1 1/2 times bigger, over 50% of GDP. The next lowest was Spain’s 38.6%. Ireland is an outlier as far as the public sector is concerned, on the downside.

    Two facts follow; 1. It is not correct, in any meaningful sense to speak of the public sector in Ireland as bloated, 2. It is clear that the size of the Irish public sector bears no relation to the gravity of the crisis (unless one were to argue that it is too small!)

  46. @Michael. Read my posts above on use of GDP. Simply not valid yardstick. The public sector bears more responsibility for the crisis than any other sector for the simple reason that it, and it + social welfare (given that NAMA is off balance sheet at the moment) accounts for the fiscal deficit.

    Also, as the ESRI has demonstrated it’s better paid than the private sector – something which is, so far as I know, unique certainly in any Anglo-Saxon economy….and I suspect unusual even in Europe.

  47. Paul – “the crisis” is not just a fiscal crisis. It is an economic crisis caused by a financial crisis. The primary blame for the latter has to be credited to the financial sector. The public sector’s sins in this regard were chiefly sins of omission.

    If you check out the actual ESRI research to which you refer you’ll find that it says that a public sector pay premium is in fact the norm internationally, albeit that the Irish premium is unusually large.

  48. @Dahamsta
    “The logic of this post honestly befuddles me. You seem to be suggesting that we shouldn’t implement a third tax level because 5% of the budget deficit isn’t enough? Should we say no to all the other options that would generate marginal gains too?”
    Have to agree I am surprised Karl made an argumaent of this sort. Every time I hear somebody attack the suggestion of a third rate of tax for higher earners, on the basis that it won’t solve all our I feel like shouting at the TV. It isn’t supposed to solve the entire budgetary problem. But this problem is so huge, no measures on their own, will solve it. Like eating an elephant it is possible to – do a bit at a time – the more people eating it the better chance of finiishing it before the corpse starts to stink.
    I also agree with Eamon Moran – there is no point in increasing taxes for people whose accountants still have tax loopholes to ease them through. Closing most of them will be as effective as the Maginot line was in stopping the Germans invading France. Impenetrable to get through but simple to walk around.

  49. @Michael Burke

    You are deluding yourself. This business of comparing Government Expenditure to a % of GDP is a joke when everyone knows including the CSO, Government and Revenue that our GDP figures are totally distorted by Multinationals who operate high Transfer Prices out of Ireland to avail of the 10% and 12.5% rates of taxes here. In an earlier life I worked for a Multinational and I know it to be the case.

  50. @Paul McDonnell
    The people who caused the crisis are those who made transaction taxes critical to government funding. Even if expenditure was greatly less they would probably have responded by cutting income tax further.

    @Eoin
    We have run ourselves on a corporatist basis for many years and were lead by a self-described socialist. At the very least there is a great deal of doubt about whether we are a low tax country or a boom country that kept income taxes low. If we don’t raise income taxes on the superrich in the short-term we will make it much more likely that we become a high-tax country in the long-term.

  51. I agree with Eamon Moran and Aidan McGrath about the importance of closing off exemptions if raising taxes on the highly paid is to be worthwhile. This is a point that came up in an old post here: http://www.irisheconomy.ie/index.php/2009/03/10/incentive-effects-of-taxing-high-earners/ It cites research for the US that shows that the bulk of the behavioural impact of taxing high earners is on tax avoidance encouragement rather than labour supply reductions.

    But I do think Karl’s point that taxing the rich alone won’t solve all our problems is worth spelling out. For that, the spreadsheet is very useful.

    Many more – maybe even most – people will swallow tax increases in the middle and bottom of the distribution if tax breaks are cut and rates at the top increase. This is an additional argument in favour of taxing ‘the rich’.

  52. @Karl
    “Given that the budget deficit this year (whichever definition you want to use) will be over €20 billion, these figures show that a new third rate of tax on the rich is only likely to be of limited help in restoring stability to the government finances.”

    Based on your figures a third rate applied to tax cases earning over €150k a year would yield about €2.2 over four years. Surely this is would be substantial rather then limited?

  53. @ E20bn

    “If we don’t raise income taxes on the superrich in the short-term”

    Did you even look at Karl’s spreadsheet? If we are to increase taxes (lets make that a side argument), the reality is that the million or so people who pay reasonably low levels of tax at the moment are going to have to be majorly involved in taking on much of the fiscal adjustment. This notion that there’s tons of wealth our there that can easily be taxed and make a critical difference to the fiscal deficit needs to stop. Fine, bring in increased taxation at the top end of the income ladder, but there is so so so much more work that needs to be done at the bottom if we’re to make any significant progress on closing the gap.

    I think its intellectiually dishonest as well as self-defeating to try and have one of the most progressive tax regimes in the developed world try and aggressively increase taxation on the upper end of the income ladder whilst almost ignoring any measures for the bottom end which contributes little as it currently stands.

    And what exactly constitutes ‘super rich’ in your opinion?

  54. @ Brian

    over 4 years we’re likely to run up total deficits in the region of 60-70bn. I wouldn’t call a measure which reduces this by 3.5% or so “substantial”.

  55. @ Brian

    I was probably over doing it a tad there. But lets say we’re starting off 20bn this year – 16bn next year, 14bn in 2011, 11bn in 2012 and 9bn in 2013, so 50bn in the next 4 years, and thats being reasonably optimistic. Either way, the tax measure suggested would be equal to 4.4% of that total. It still in the limited or unsubstantial column, no?

  56. Eoin

    Still substantial as it would represent about one-seventh of this year’s target. Mind you, I accept that a further “rich persons” tax could not be (easily) introduced in subsequent years. Just shows the scale of the problem.

  57. @Eoin
    Over 100k 27% effective
    Over 275K 33% effective
    In the US in 1980 (per Con) it was 37% effective on the top 1% of income earners.
    Unlike them we are in a grave crisis.
    If Thatcher’s Britain had a top rate of 60% then we should have it too and start scrapping the tax breaks.
    Taxing the poor will create poverty traps and taxing the middle will encourage the black economy. But we will still have to do it to close this deficit.
    But if we can raise an additional 750million per D_E by taxing the rich as in France then we must do so ASAP.
    We could spend it on public works and 20,000 placements for graduates.
    A crisis means crisis measures.

  58. The solution is to decrease MTRs on average wages, while increasing ATRs. One easy way to do this is to reduce or abolish tax relief on mortgage interest and on pension contributions.

    MTRs of 50%+ on 36-40k wages are not sensible by any measure.

    Either are ATRs of sub-5% on million incomes.

  59. @ Ray & Paul McDonnell

    The issue of the MNC transfer-pricing is well-known.

    But it is a red herring to insist on measuring Ireland’s deficits in terms of GNP. It does not invalidate the point about the relative size of Ireland’s public sector, for 2 reasons:

    1. The GNP measure would puts Ireland’s public sector expenditure at 39.4%, that would then be the second lowest in the Euro Area, just above Spain and still way below the average level of 47.4%.

    2. Exports are themselves taxable, so GDP is the appropriate comparative measure.

    In either calculation, it is is impossible to draw the inference that Ireland’s public sector is ‘bloated’.

    As for the statement, “The public sector bears more responsibility for the crisis than any other sector for the simple reason that it, and it + social welfare (given that NAMA is off balance sheet at the moment) accounts for the fiscal deficit. ” That’s a real head-scratcher.

    As for the on-balance sheet public deficit, the source of that is crystal clear. “Government saving fell by €11.2bn in 2008….this change is mainly explained by a change in revenue from current taxes on income and wealth of €3.4bn and an increase in social benefits of almost €3bn”. That is, falling activity and falling taxes play a bigger role in the deficit than do rising spending, the overwhelming bulk of which is too a recession effect.

    The NAMA borrowing will be real money, underwritten by taxpayers. Unusual accounting methods don’t change that.

  60. @Michael Burke

    1. GNP is a closer measurement of our income than GDP. The difference is, I believe somewhere north of 15% – around 18%. The difference is accounted for by transfer pricing of multi-nationals. GDP is pressed into service by every supporter of increased government spending and taxation.

    I don’t know what you mean by ‘exports are taxable’. Can you explain?

    2. Public spending last year was 40% of GNP. Now telling me that this is not the highest in Europe is not an argument. Public finances are in a mess in other EU countries also.

    3. Our public servants are the best paid in Europe

    4. Our effective marginal taxes are as high as the highest European countries.

    5. Some government-owned monopolies – e.g. Eirgrid – pay themselves an AVERAGE of 115000 – we pay the most / or second most for electricity in Europe.

    6. Government spending dramatically increased – for no very good reason during the Celtic Tiger on the basis that the government received wind-fall revenue from property and other transactions.

    This money is now gone.

    7. Benchmarking was a fraudulent exercise…

    You have to try and get the concept that, sometimes, governments treat other people’s property as something that can be transferred to powerful vested interests – semi-state workers in the ESB for example – or paid to its own direct staff – benchmarking for example.

  61. @ Michael Burke

    “That is, falling activity and falling taxes play a bigger role in the deficit than do rising spending”

    Agreed. The problem is that the ‘falling’ taxes are better described as disappearing taxes, in that stamp duty, vat and capital gains receipts from construction related activity are not going to return to previous levels for the next decade. They were a one off that should have been used for either infrastructure, the NPRF, or debt reduction. They should NOT have been used to go against current expenditure.

  62. Coming late to this debate – but I have to add that I am surprised and disappointed in Karls arguments. Karl you have done so much to add to the debate on NAMA that I am disappointed that you have come out with the line “its not worth introducing a new tax band as it won’t raise much revenue”. This country needs all the revenue that it can get and a billion give or take is a very substantial addition to the incoming tax receipts.

    Regarding the idea that we idea that we have a highly progressive income tax set-up thats as may be if you look at income tax in isolation but as soon as you take VAT and other non-progressive taxes into account the picture looks very different – and this is not even mentioning the tax breaks available to higher income earners.

    What I would say to the apologists for the wealthy (this is not directed at you Karl) – Is that if you are so against a higher tax band – which has some validity in economic theory over the long run – why don’t you support a property tax.

    The lack of a property tax is one of the most inequitable features of the tax landscape in Ireland and is well known to be one of the most economically advantageous ways of raising revenue – there is no where to hide on this one.

    What we should be aiming at over the medium/long term is:

    1 A significant property tax
    2 Medium level of income taxes – no higher than 50%
    3 Complete removal of all the ridiculous tax shelters, exemptions etc. – all these do is add a large drag to the economy (employing accountants etc.), mis-allocate resources, while simultaneously adding to the perceived unfairness of the system

    4. A general sense of a fair but lowish taxation level throughout the economy – that way you will get buy in from everyone.

  63. @ John

    where exactly does Karl say “its not worth introducing a new tax band as it won’t raise much revenue”?

    His closing remarks: “The bottom line that I take from these figures is that it is not possible to raise amounts of tax revenue that would make significant inroads into the budget deficit if one insists on convincing the majority of the population that this can be done by taxing other people.”

    Its not that its “not worth introducing”, its simply that its not going to do much on its own when we have a 20bn or so fiscal deficit. It’s therefore intellectually dishonest (its downright lying to be perfectly frank) for the Unions to continue to angrily rant that if only we taxed the wealthy more heavily we’d all be grand.

    – Public sector wages need to be significantly cut
    – benefits need to be materially cut
    – income taxes need to be increased on the lower/middle middle classes
    – property taxes need to be introduced (on all homes, regardless of price)
    – unproductive tax reliefs need to be drastically cut

  64. @Eoin

    using Karls own terminology and numbers – you would raise 1.1 billion by taxing incomes higher than 75,000 at the new rate. Now:

    1. That is a very significant contribution to reducing the deficit and
    2. You would clearly be taxing a minority of the population

    Hence you could easily persuade a majority that significant revenue can be raised by “Taxing other people”.

    Karl may not explicitly use the term “not worth introducing” but I think its pedantic to suggest that that is not the whole thrust of his article. If I am wrong about this perhaps Karl could clarify the issue for us?

    So to amend your list:

    – A new temporary tax band on income earners above 75,000 needs to be introduced to raise 1bn pa. This should be done immediately.
    – Public sector wages need to be significantly cut
    – benefits need to be materially cut
    – income taxes need to be increased on the lower/middle middle classes
    – property taxes need to be introduced (on all homes, regardless of price)
    – unproductive tax reliefs need to be drastically cut

    And to address any worries about whether the proposed tax band would actually be temporary – With the politics of this country it would without doubt be removed at the earliest possible opportunity.

  65. @ John A

    “very significant”? Like 5%? I’d say its a material amount, but not a “very significant amount”. Given that these are 2006 figures we are working off, something more like 3-4% are more likely to be gained. And thats before the negative effects on consumer demand and potential emmigration. By all means, suggest levying this tax increase, but please dont pretend its going to do anything significant by itself to cut the deficit. As Lenny said, there aint no ‘pot of gold’ out there waiting to be taxed.

    And does earning 75k now classify you as rich or wealthy? I’d actually appreciate some honesty here, because ICTU has been completely unwilling to put a number on what they consider ‘rich/wealthy’.

    “With the politics of this country”? Eh, isn’t that called democracy?

  66. @eoin

    The disconnect is absolutely amazing

    1.3 billion off public sector pay and pensions – not very significant (only 6%) therefore not worth doing
    1 Billion (or whatever) off social welfare – not very significant (only 5%) therefore not worth doing
    etc. etc

    75 K may not make you rich or wealthy but you are certainly comfortable. I don’t know the exact figures but it does put you in the top 10% – and (another disconnect!) – its a marginal tax rate – so someone on 75K won’t notice it.

    All cuts have negative effects on consumer demand!!!

    Lets be clear here – I am arguing against special pleading – by any sector – including high income earners. You appear to be happy to cut everyone except high income earners. I say cut everyone including high income earners. Are we not all in it together?

  67. @ John A

    where exactly do i say im unwilling to tax higher earners?

    From me:

    “Fine, bring in increased taxation at the top end of the income ladder, but there is so so so much more work that needs to be done at the bottom if we’re to make any significant progress on closing the gap.”

    “By all means, suggest levying this tax increase, but please dont pretend its going to do anything significant by itself to cut the deficit.”

    I’ve simply said that the union talking point that taxing the “rich” will somehow avoid the need for public sector cuts, is in fact a load of crap. This was the central theme to Karls point, regardless of what you believe. We already have a ridiculously progressive taxation system. Even if 75k was “rich” (which it really really isnt), we’d only get 25% of the way there towards this years cuts (never mind future years). Lets at least be honest that any major tax revenue increases, on a sustainable basis, are going to have to see more of the overall burden, and not less, go on those lower down the income chain.

    This is why i have advocated either spending cuts first, recycling of public sector spending savings into private sector job creation second, and only then should we look to increase taxes. The simple facts are that the public sector unions are advocating for middle and lower class tax increases to keep public sector wages as is. People in favour of keeping benefits as is are arguing for the same lower and middle class earners to pay for a sustained benefits system in a deflationary environment.

    At no stage have i seen anyone on the pro-tax-increase side of the argument admit this reality. Look at the opposition response to FF/GP’s suggestion about cutting child benefit or the social welfare xmas bonus! No one is willing to admit that there are going to have to be specific cuts across the board, the only thing we hear is that we need to “tax the rich” and we’ll all be grand. It’s distressing to see so little honesty.

  68. @Eoin,

    Eoin if the planned 4 billion in cuts goes ahead in this years budget (I support this by the way) would you unequivocally then support a new tax band on those earning above 75K in December 2010 designed to raise 1 billion? (out of the 4 Billion necessary in 2010).

  69. @ John A

    no. I would however back a broad range of tax measures designed to increase the income tax take by 1bn and which hit all income earners by a similar % amount. We already have a severly imbalanced tax base, where 9% of people pay around 60% of all tax (€33k each), while 40% of people pay around 6% of all tax (c. €750 each). Increasing the % taken from the higher end would only imbalance this more and make it even less sustainable than it already is.

  70. @Eoin

    Eoin we don’t have a severely imbalanced tax base – we have a severely imbalanced income tax base. There is a huge difference. Much of the other tax sources are regressive. Lower income earners pay a higher proportion of their income in VAT. For anything that is a fixed charge a lower income earner is paying a higher proportion of their income for that fixed charge.

    Also as is often said – higher income earners can avail of the services of accountants – who will often be able to reduce their tax burden. This option is not practically available to lower income earners.

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