Business and Finance Article on Tax

Following on from last weekend’s discussion of tax issues prompted by Garret Fitzgerald’s column here‘s an article I wrote on reforming our tax system for the current edition of Business and Finance (Admittedly, I wrote the piece prior to finding out about the omertà code of silence on writing about low taxation. Hopefully, I won’t get mugged on the way home.)

One point that I raise is whether the proposed Universal Social Contribution (USC) is a good idea. In addition to the question of the fairness of raising tax rates on our poorest workers, this proposal may affect work incentives and contribute to rising structural unemployment. An alternative would be raise the standard rate (yes, I’d prefer a flat tax) or to provide a credit against the USC that can get clawed back as incomes rise.

35 replies on “Business and Finance Article on Tax”

Hi All,

It annoys me when people use GDP to rank the tax take in Ireland relative to other countries. Both articles refer to it. Surely GNP is the proper measure. If we are to measure it by GDP we will be relatively highly taxed which as a periphery country is a death wish.

Thanks,
JC

The first and last test of effectiveness of a tax is its yield. Neither fairness nor comparability enter into it, unless circumstances allow for avoidance.

@ Aiman

“The first and last test of effectiveness of a tax is its yield. Neither fairness nor comparability enter into it, unless circumstances allow for avoidance.”

What if the highest yielding tax turned out to be one that took 90 percent of your income. Would you still be in favour?

I don’t see how fairness can be left out of the debate.

Karl is correct that fairness is key. Tax policy is not simply about collection and yields, but about how we as a country agree to fund the State and its activities.

A flat tax with credits for those on lower than 20,000 Euro would be preferable to bringing low-income families into the tax net. A tax system which takes into account the number of people relying on income would be fairer still, as is currently the case for single parents.

It’s all very well to say that low income earners should pay no income or social insurance taxes. It may even be fair. It will not, however, bridge the exchequer deficit nor the deficit in the social insurance fund…

No taxes on lower income earners, no more taxation on higher interest earners, no austerity.

It’s all down to spoof jobs and blustered GDP…

@ Karl
Does it seem rational that if Pfizer turn the viagra machine up to 11, and wash another €1.8bn through the country without spending an extra cent, or employing one more person in the country, does it seem rational that every worker in the country should pay an average of €875 extra tax every year.

Tax comes from people or companies. We have a low corporation tax rate by EU standards, so if the government is to raise average amounts of tax by EU standards, personal taxation must be higher thaN the EU average.

That is if you use GDP as the measure. I submit that it is better to use GNP as the measure, and be glad of the extra tax from the MNC’s as these serve to make the average corporate tax yield closer to the EU average.

I guess if CmcCarthy cannot convince you, I certainly cannot so we’ll agree to differ

@Aine
I’ll agree that fairness ought to be key, but Aiman still has a point. Taxation policy far too rarely considers fairness and focuses on inelastic behaviour responses instead. And as to Karl’s point, a 90% tax rate would be neither fair nor high yield since income would soon stop being generated in any taxably traceable way.

@Karl & Justin
Colm Mc’s comments on the http://www.irisheconomy.ie/index.php/2009/01/17/where-is-irelands-tax-burden-heading/ thread illustrate that the GDP/GNP discussion isn’t trivial, but that not all eminent economists agree with Karl either.

2 ideas to support economic activity and employment:

1. A flat tax.
2. Ensure a gap between low wages and social welfare supports.

Most countries don’t really have progressive tax when tax breaks are factored in, so why not just formalise it?

Much play has been made of the undeniable fact that top earners pay the most tax and that huge numbers don’t pay any or much tax as they earn so little.

According to Revenue’s Statistical Report for 2007, 661,000 tax cases had gross incomes of less than €15,000 a year and, as might be expected, paid minimal taxes totalling €14 million on gross incomes of €4,744 million. If, ignoring the social consequences, their effective tax rate of 0.3% could be increased by 10% to 10.3%, an additional €474 million would be raised.

At the other end of the spectrum, 81,000 cases had gross incomes in excess of €100,000 a year and paid taxes totalling €4,353 million on gross incomes of €16,065 million. If their effective tax rate of 27% (far cry from the marginal rate) increased by the same 10% to 37%, a total of €1,606 million could be raised.

Surely, it is obvious that, in this time of crisis, tax rates should be increased for those with the highest incomes (and highest propensity to save or spend abroad or on imports) and keep rates as low as possible for the lower paid who are most likely to spend all they earn and consume basic goods and services.

Whatever about the nature and scope of a ‘fair’ tax system, the actual predicament is on the spending side. There appears to be no realistic way that a majority political party, which is part of the government, can be prevented from splurging tax revenues on their ‘constituents’ Its become the norm in current politics. Mind you, the pols are not solely to blame for this. The economic and financial advisors to the Gov most likely promote the dopey historist notion that future incomes will ALWAYS rise – ‘and shrur we’ll be grand!”. Every carosel eventually slows down and halts. We’re there now.

So, we need structural reform of the process by which budgets are framed and passed through the legislature. This is completely anathema to most of our politicians. So fiscal reform will have to come from external Force Majeure, particularly if we wish to remain part of the EuroZone. If expelling us is not possible, then we will experience real economic hardship: Hardship from which we will never really recover from.

Messing with parts of the taxation system, whilst it may have some merit, is really only making a bad situation badder (sic)! Just grin and bear it I suppose.

Brian P

@ Brian

the report you cite is 2007. The tax increases since then have probably raised the effective tax rate of higher earners by around 6-7% already. Those at the lower end have seen essentially zero added on to theirs. There is only so much more you can expect the higher earners to bare by themselves given their relatively mobility. As suggested by Hoggie, income taxe increases probably need to be levied on all earners to close the gap.

@ Brian F
I know that you use 2007 data because it is all we have but you then discuss that data as if we are considering tax rises from that level. It’s a common theme: call for taxes to be raised as if they have been static (and low) for some time. And always notice that calls for tax rises always are made by those who want soembody else’s tax to rise. The marginal rate of tax in ireland has already risen, a lot, to at least 55%, dragging average rates up with it. The marginal rate is now not too far away from Swedish levels – often referred to as ‘eye-wateringly high’. Do not imagine that pushing up marginal rates from here will raise much revenue.

@ Eoin and Sim

Yes, the data is dated and the new levies have had a significant impact especially on high earners but the effective rates are still low(ish) for most high(ish) earners. Here is a chart I prepared about this:
http://www.planware.org/briansblog/resources/taxratechart.pdf

It shows the effective and marginal tax rates (combining income tax, the health and income levies and PRSI) for taxable incomes from zero to €1 million in €10k jumps for 2009/10. The only credits taken into account related to marital status so the rates depicted at each income level are maximums. Note that the overall rates takes account of the mix of single and married income tax payers at each income step based on Revenue data for 2005 – this wouldn’t have changed much since then.

Notable features include:

# the slope of the red line signifies the progressiveness of the tax system – very progressive up to about €60,000, moderately progressive up to €200,000 and much less progressive thereafter.

# the rapidity of the increase in overall effective rate from €20k up to €80k. The overall rate tapers off thereafter and effectively flatlines at about €500k.

# the erratic growth in the overall marginal rate at quite low incomes before it settles down at 52%. The saw tooth jumps are attributable to interactions between the different bands and rates. What the marginal rate graph does NOT show is the way in which marginal rates rise extremely rapidly for singles and one-income married.

# top marginal rates can be hit very early with a single earning €60,000 paying at 51% in contrast to a dual earning married couple earning €1 million and paying tax at 52%.

# the huge differences in effective tax rates for singles, married (one income) and married (dual income) particularly at low incomes.

This analysis takes no account of the fact that high earners, by virtue of having discretionary income, can reduce their effective tax rates very substantially by tax planning and availing of tax breaks with the result that people earning between €60,000 to €120,000 (my guesses) could be paying the highest “real” effective rates. And it appears from the chart above that many people on quite moderate incomes are paying tax and levies at a marginal rate in excess of 50%.

@ Brian

eh, here’s my problem – you start off with an argument using 2007 data saying that people earning 100k are only paying effective rates of 27%, and this should be raised to 37%.

We point out the problems with using 2007 data.

You come back with an updated argument, using a very well constructed graph showing effective rates. However, per THAT SAME graph, it shows both single and one-spouse-earning units ALREADY pay above 37% if they earn over 100k! No exactly sure what you’re trying to argue here, but you’re being somewhat stingy with the facts of it im afraid.

To really understand the personal tax burden I think it is necessary to factor out the income and tax related to intra-company transfers (e.g. Microsoft funnelling non-USA Windows 7 licenses through Ireland) from that related to actual value-add carried out in Ireland. This goes beyond simply assuming the difference between GDP and GNP is taxed at 12.5%. For details on some of the tax avoidance schemes in use see comments in http://www.irisheconomy.ie/index.php/2010/09/25/irrational-bond-markets/.

Also since the Obama administration has been turning up the heat on tax havens like Bermuda, a number of companies have been relocating to Ireland – for example Seagate, Ingersoll-Rand and Accenture are now “Irish” companies (and some even have a nice Irish flag in their Wikipedia entry). Assuming that the taxation generated in this manner is just the same as the “normal” taxation would be just like assuming that all the tax generated from stamp duties and levies on new construction during the bubble was just the same as “normal” taxation. It could all disappear in three years as Seagate et al decide they can save a few more dollars by relocating to Switzerland, and/or the European Commission put their foot down and impose different rules on how to allocate generated income across different countries (e.g. based on numbers of employees or sales). I’m not saying this tax base and tax should be ignored, just that in order to get the full picture you need to be able to calculate the tax burden both including and excluding these transient and volatile flows.

@ Eoin
I didn’t say rates should be increased by 10%. I was merely pointing out the impact of increasing rates by 10% at the top and bottom of the income spectrum on total tax revenues. Note use of word “If”. I don’t think that the use of outdated data diminishes my argument about the relative impacts of the 10% tax increases as the revenue values are so different – €474 million vs. 1,606 million.

The chart makes the point that mid-earners pay tax (plus levies) at more or less the same marginal and effective rates as very high eaners. However, very high earners can reduce their effective rates much more than can mid earners due to tax planning etc. linked to their surplus income. This option is not available to to middle earners as they don’t have any or much surplus income. So, either abolish all tax reduction schemes for high income earners or increase their tax rates. In this way, they might start paying tax at the same high effective rates as middle income earners.

@brian F
I think you will find that much of the tax planning that you refer to is also a very out of date perception. Especially for PAYE workers. Many of these breaks have been legislated away. Even AVC pension contributions are now much less of a shelter and are likely to become even smaller.
Your analysis also assumes no behavioural response: high earners are also typically mobile. And your use of averages conceals more than it reveals. There just isn’t enough income over 80k out there that if you taxed at 99% you still wouldn’t raise a material amount of revenue, relative to the hole that we have to fill.

@sim

Agree that tax planning for “pure” PAYE emplyees and self employed is minimal. The scope for tax planning takes place amongst directors where most of the very high earners are located. The following Revenue data for 2005 illustrates this:

Employees:
Gross incomes = €54,056 million
Total incomes = €53,335 million
Cases = 1,831k
Total income as % gross = 99%
Total income per case = €29k

Directors:
Gross incomes = €8,932 million
Total incomes = €7,995 million
Cases = 94k
Total income as % gross = 90%
Total income per case = €85k

Self-employed:
Gross incomes = €9,869 million
Total incomes = €8,110 million
Cases = 200k
Total income as % gross = 82%
Total income per case = €40k

This shows that:
– Directors have by far the highest average Total incomes at €85k per case.
– Total incomes as % Gross incomes are 99% for employees but much lower for the directors (90%) and self-employed (82%).

Unfortunately, the data is very out of date but I think that the pattern is till relevant.

As regards mobility (also mentioned by Eoin) , the most mobile taxpayers are probably the single medium earners who are emigrating. As regards the mobility of high earners, this could be stopped quite simply by introducing a regime similar to that in the UK.

Finally, I’m not advocating ultra high tax rates, I’m only suggesting that the existing effective and marginal rates (which are high enough) be applied FULLY at all income levels.

@Brian F
Common ground is certainly that tax breaks should be eliminated.

Even then, I wonder how much will be raised. Your very old data has 94000 company directors. How many of them were in construction and property related businesses?

Your valiant arithmetic efforts do not disuise the fact that if you want to raise a serious amount of money you have to follow the money. You have to increase taxes on a wide band of people centered on average earnings. thta’s arithmetic.

@ Sim
“You have to increase taxes on a wide band of people centered on average earnings. thta’s arithmetic.”

You gave out to me for using averages !!!! . Don’t agree with this statement – you start at average earnings or higher and work up to the significant few rather than go after the trivial many very low earners.

Remember, a lot of the Revenue income data relates to tax cases (where married dual earners treated as cases). So, a case with above average earnings of €60k a year could actually be two earners (with 40k and 20k which are not so high). For more on this, see http://www.planware.org/briansblog/2010/01/distribution-of-incomes.html
and get full details at http://www.planware.org/briansblog/resources/revenue_tax_cases.pdf

Nite Nite

@Brian F
“Surely, it is obvious that, in this time of crisis, tax rates should be increased for those with the highest incomes (and highest propensity to save or spend abroad or on imports) and keep rates as low as possible for the lower paid who are most likely to spend all they earn and consume basic goods and services.”

Completely agree – as to some other commentators suggestion that this was likely to drive highly mobile high earnerrs out of the country – what a pity we did not think of it years ago, maybe now we wouldn’t be talking about getting bailed out by IMF as Seanie and his cronies would have long departed our shores

@Justin

“Does it seem rational that if Pfizer turn the viagra machine up to 11, and wash another €1.8bn through the country without spending an extra cent, or employing one more person in the country, does it seem rational that every worker in the country should pay an average of €875 extra tax every year.”

I don’t think anything I’ve written on this issue could be seen as favouring the position you’re associating me with.

By Post Author

One other thing…could we at least not use the word “progressive” if we actually mean that we’ll disproportionately penalize high value activities, endeavors and investments.

I mean really, the last thing we want is to encourage people to invest wisely and work hard.

http://willyloman.wordpress.com/2010/09/20/eu-authoritarianism-exposing-the-eurocrats/

The tax debate is very entertaining! Sadly pathetic, too. Like Turkeys discussing the Christmas sauces!

The economic war is going well then. The losers are aceepting their situation and moulding minds of the masses, to accept it too.

Game, set and match?

I find the discussion of Switzerland interesting. It is now physically surrounded. Neutral? Perhaps not so!

Given the dangers of credit, those of you with aspirations should take companies private, after initial IPOs. Use that in a few decades, eh? The German model does seem successful?

@Karl, Justin

The way I read Justin’s point, and which was also my impression, was this – the B&F article says that one of the problems is that we take in too little revenue as a percentage of GDP compared to the European norm, with the implication that we should set a higher target – say 25% of GDP like our EU neighbours. The target tax yield would then be a function of GDP. Now due to Ireland’s corporate tax rate and generous exemptions for patent royalties, IP etc, there are lots of money flows through the system that increase exports/GDP but that have no or minimal associated value-add or employment in Ireland (e.g. the WIndows 7 licenses example I mentioned above, or a few containers of Viagra). I do not think GNP works as a better measure, since it is GDP that is subject to tax, and the GNP figures can be distorted as a result of the tax avoidance money flows through “Irish” companies like Seagate and Ingersoll-Rand. Hence if there is a target tax yield based on GDP, and GDP increases by 1.8bn due to Pfizer, and there are a little over 2m workers, this works out at $875 per person. (Also every Irish worker would have been hoping that Windows 7 flopped like Windows Vista…)

Perhaps I was reading too much into a couple of sentences in the B&F article but there seemed to me to be an argument that there should be a target tax yield, as a % of GDP, closer to EU norms.

@Hugh S
Completely agree.

@Karl Whelan

You joke about the conspiracy of silence about tax increases but it’s entirely real in the mainstream press: have a look at Arthur Beasley’s “analysis” of Olli Rehn’s comments in today’s Irish Times. Look at how the issue is framed: Rehn’s comments to the effect that Ireland needs to produce a multi-year plan for deficit reduction are characterised in the headline and throughout the piece as a call for “sustained cuts. It is this sort of insidious framing of the issue (not even mentioning or making token references to other options) that constitutes the Omerta. Nobody is silenced but other options aren’t mentioned.

@ Bryan G & Karl

Brian has understood my point perfectly. An increase in the GDP does not always mean the country is any richer and has the ability to be taxed more. I wonder what is the tax / GDP ratio of Bermuda?

Karl
As far as I know the highest marginal tax rate in Ireland at the moment is the 60% rate on unemployment assistance claimants who find some part-time work. They are allowed eur20 per day and their benefits are reduced by 60% of the remaining daily payments. They cannot work for more than three days. Presumably these restrictions (the three day limit and high marginal rate) are to ensure that full-time workers do not have the incentive to reduce their hours and claim some benefits. It seems to me that removing the eur20 allowance and the three day restriction which must act as a distortion and finding an appropriate average tax rate for welfare beneficiaries that is a good bit lower than 60% would be a better way to do it.

@Justin, Bryan, Karl
Indeed, that example – while extreme – does demonstrate why it’s not appropriate to use unadjusted GDP as the reference point for tax benchmarking with other countries.

If a significant part of the GDP only exists because it will not be taxed then you can’t count it for benchmarking purposes.

Moving entirely to GNP as the basis might not be the best adjustment, but GDP is certainly not correct.

The key is growth, or the lack thereof. So how do you grow this economy.?

Keynesians, since 1971 have had no clue. Then, the US economy suffered the dreaded stagflation, where both prices and unemployment rose dramatically. Now we have the great de-leveraging following the most extensive and exaggerated blowout in history. And following massive stimulus, quantitative easing, we see no perceptible increase in lending into the real economy. No inflation. Instead we have a savage deflation.

The Japanese tried to save face with the major lenders when their building bubble burst. By refusing to let their zombie banks die, they condemned their society to a stagnation which persists to this day, twenty years after the initial collapse. With NAMA we have followed in their footsteps and committed the same folly.

Simply put, our economy needs a shock to waken it up. Our society deserves to live and prosper, for no other reason, perhaps, than as an Irishman, I would feel happier if Ireland were to do so. So it behooves me to propose the following plan:

Simultaneous massive reductions in public expenditure with the elimination of VAT as a tax. Elimination of corporate taxes. Elimination of personal income taxes. All taxes on employment to end. End minimum wage nonsense. End trades unions grip on the working class. All they do is starve people of work.

Gradual (within the lifetime of one Dail) elimination of most Government departments, leaving, Finance, a new “State” department ( Foreign and Domestic affairs?), Justice (to include the Guards, Prison Services, Judiciary and a new system of Jurists) and Defence (To include Armed Services and Coastal Protection). A phasing out of the departments of Education, Health and Social Welfare. People will have to pay for their Health care (which most do at present) as well as for the education of their kids.

As all government intervention leads to waste of resources (capital), it means the elimination of all quangos and the ending of all subventions to Semi-states. If they can make it on their own, so much the better. If not then let them go.

Repudiation of this Governments commitment to bail out the banks. Those that can make it on their own, do so. Those that cannot, are liquidated through the courts. The recklessness of our banks warrants we do not rescue them.

Bad as bailing the banks out surely is, it does not compare to the cringing desperation of our leaders in their efforts to appease the higher powers in Europe to which we have ceded every last vestige of our sovereignty. So loathe is our government to offend these people that the prospect of bankrupting the country does not faze them.

We must leave the Euro as soon as possible. This is not folly. The Euro is a fiat currency and will suffer from not being pegged to a gold standard. It is also a monetary sledgehammer that is smashing our little fiscal nut. We need to adopt a gold standard. Over time we can build bullion reserves through trade.

Banks need to be reconstituted. Any bank that operates a fractional reserve of deposits will be prosecuted for embezzlement. We need to pay banks to secure our deposits. We pay them. No interest. No compound interest. On deposits.

If a bank offers an interest payment, then it is clear that this “deposit” is no longer a deposit but constitutes a loan to the bank, with which the bank can do what it wishes. In such a case the depositor has no comeback in the event of a run. The true deposit however, if not repaid will land the banker in jail. It is interesting to note that when this fractional reserve thing started out in the thirteenth century, bankers were shamefaced if their dirty little secret was discovered. Today, we have absorbed this thievery into the bankers manual of best practice. It is still thievery and needs to be eliminated.

We need Jurists to drive legal reform.

We must end the Social Welfare State.

All the elements of society will remain intact, as before. The educators will educate, the doctors will heal, the guards will arrest law breakers, rugby internationals and hurling finals will continue as before. There will not be as much work for solicitors, economists, social workers or bankers, but life will trundle along as usual. In fact it is very likely that the economy will take off like a rocket in the year or two following the changes. The key will be the liberation of entrepreneurship and the urgent need for capital, at present locked away in safety, to find a productive outlet.

This country and all countries need to find the nerve to wind back the twin evils of socialism and fractional reserve banking. The social welfare state is communisms last chance saloon, and it has been found out. A sham philosophy espousing altruism through coercion.

So, this is about maturity and a loosening of the socialist noose around our necks. In its place we need to recognize the truth, that human beings in a society which operates free markets and a system of devision of labour, will, unaided by government dictate, find a optimal use of capital and consequently yield a more equitable and just prosperity than we have at present. The spontaneously evolving capitalist society where mutually beneficial exchanges utilizing a sound money, needs no regulators or mandarins to function.

Two years from the initiation of these reforms, this country will be on the road to a sustainable prosperity free from the devastating effects of boom/bust cycles. This country can lead the way for all the others. We did it before in our escape from the clutches of Perfidious Albion.

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