Death by a Thousand Cuts

I don’t understand the supine passivity with which everyone in Ireland seems to accept “the adjustment.” What a useful euphemism that is. A mad policy is destroying the economy. Yet the only debate seems to be about how much more of the same poison to administer to the economy.
Ireland’s problems weren’t caused by public sector borrowing and they won’t be solved by public sector saving. The government should recognise that all the banking sector is polluted and needs to be flushed out and started again. Last year the advocates of austerity promised that it would open the way to growth. They were wrong.
There’s an old definition of insanity, which is believing that doing the same thing over again will lead to a different result. By that definition, and most others, the current policy is insane. Yet polls suggest people are so demoralised they can’t envisage an alternative. It is tragic to watch lives ruined while the bureaucrats in Brussels and the central bankers in Frankfurt collect their big salaries in the jobs which are never cut.

“most are willing to play their part – but only if assured that others are bearing their fair share”

I agree with that sentiment 100%. Unfortunately such a plan would require trust, and the trade unions have very good reasons for not trusting the the current government.

In the absence of trust I suppose we could have some form of enforcement mechanism, but legislation isn’t enough (the government can change it) and I can’t think of anything else apart from a new government.

Simpleton,

Sonce we can take it that you believe the present policy is doomed to failure, please sketch your alternative so it can be properly critiqued.

@JMcH: and others!

I object (in the gentlest way I can muster) to the use of the term ‘pain’ in the context of the wrenching social, financial and personal adjustments that will have to be endured by me, and my fellow citizens. We are human beings, real persons, and we having part of our lives and wellbeing sacrificed for what? For some sort of medieval, Calvinist theology: “the more one suffers here in the present, the greater ones reward in the hereafter”. Or even more obscenely: The Market.

OK?

As a Realist, my country comes first – and by extension all the citizens that have pledged their loyalty to our state. Hence, the survival of the state stands before all other considerations. If those financial institutions, which were operated in a totally reckless manner, had been allowed to go into liquidation, it would have been easier for the legislators to seize one of the insolvents and establish a plain vanilla bank so that us ordinary folk could have the basic, boring, financial services we need.

Simpleton: Your right. There was an alternative, but it was funked. None of the politicians (of all hews) had either the intestinal fortitude or the testicular equipment to shout STOP!. Irrational fear and anxiety triumphed over rationality. It usually happens this way.

The contemplated ‘austerity’ measure cannot work – the social, economic and political damage will be so horrendous. It may take two, possibly three, general elections for the awful truth to manifest itself: our (current) politicians are Strawpersons; The Market is a obscene myth; and, an annual, incremental increase in aggregate economic activity (the long-term trend line) is over.

Brian P

I think the annual round if budgets has been some what self defeating in demonstrating fairness.

When budget cuts of €3bn or €4bb are announced it is very easy for a particular group to say another group should be targeted.

Hopefully the multi year budget will go some way to addressing this problem.

If we need to make cuts of approx €12bn over the next 4 years we need to,have a menu of cuts/taxes that would cover €25bn or even €30bn.
That way when a particular group or political party suggests something shouldn’t be touched they would have to replace it with some other measures of equivalent value.

Some of this work has already been done through the Board SNIP report and the commission taxation but significant additional items would have to be added and a simple document produced showing simply the value or each measure in €

Compare Public Sector Salaries to New Zealand and OZ and Social Welfare there is a saving of 15billion Overpaid Incompetence and SW spongers is the reason the country is down the tubes. 15billion euros would be saved in 1 year pop NZ4.25 mil when Ireland realises that they are not any more intelligent but would appear to be dumber than the rest of the western world , that the rich have fleeced them and moved all their wealth offshore or to their wives and family , AIB will need 15billion more in bailout NAMA is SCAMA and only true solution is IMF intervention rather than Labour (Commies) and Fine Gael(INdaCOMPETENCEkenny).
WAKE UP SMELL THE BS

“Credit to Dan O’Brien and the others on the panel for being brave enough to be specific about where they would cut. ”

Is Dan O’Brien an economist or a contestant in a popularity contest?

If economists can’t tell it like it is, who will?

Should all this not be updated with yesterday’s exchequer returns for September? I expect, as per normal practice, that a thread will be opened on these later in the day. At the risk of pre-empting the thread and ruining the suspense, I’ll give briefly the main higlights:

tax revenues were up +11.4% in September over September 2009

this has happened only once or twice since 2007 – on those occasions, the increase was a freak, being concentrated in one tax, and due to a change in timing for payment of that tax – September’s increase was not like that, with y-o-y increases in tax receipts for corporation tax, income tax, excise, customs and stamps – of major taxes, only VAT is still showing a y-o-y fall, and even here it was just 2%

tax revenues were above target (profile) for the third month running, again the first time this has happened since 2007 – the amount by which tax revenues in the year-to-date are behind target (profile) has fallen from 1.6% in June, to 1.4% in July, to 0.7% in August, and now to 0.2% in September

compared with 2009, the cumulative year-to-date fall has come down from 18% in February, to 15% in March, to 12% in April, to 9% in August, and now to 6.5% in September – the government’s target is 6% by December, now well within reach

nearly all the y-o-y fall in 2010 occurred in Q1 – in Q2 and Q3, tax receipts were only 1% below 2009

Any continuation of the trend of Q2 and Q3 into Q4 will lead to tax receipts in 2010 being above target, not below, as every commentator has claimed in recent months, although it is possible that the media-inspired eruption of mass hysteria about the economy in recent weeks could lead to consumers reining in again in Q4, which no doubt was the intention.

September’s exchequer returns, combined with last week’s September live register figures, combined with figures in the past fortnight for manufacturing output, merchandise exports, new car registrations, redundancies, ppsn numbers, and others, make nonsense of claims that the economy double-dipped in Q3, and indicate that the Central Bank was displaying its usual imcompetence at economic forecasting when it revised down its forecast for economic growth in 2010 yesterday. I’m very confident that the Q3 figures for GDP will confirm this.

Credit to Dan O’Brien and the others on the panel for being brave enough to be specific about where they would cut.

Yes, ‘brave’ of well-off middle-class free-marketeer commentators to tell us all how PAYE wages and pensions should be cut. His constant refrain that “it gives me no pleasure” was the lady protesting too much.

@All
On the evidence of this thread so far, irisheconomy.ie is in danger of jumping the shark.

Simpleton
Can I correct the record. I have never thought current policy is optimal, defined as delivery of a satisfactory outcome. My argument has always been that certain options are not open to us given out membership of the European Union. These include unilateral debt restructuring at the senior bank and sovereign level. This forces us down the road we are on. Now clearly, this policy may fail if we do not have a favourable backdrop of a decent global economy and low real interest rates. I do not claim to be able to forecast the future other than to claim that whatever the consensus predicts is usually wrong.

However, it would be useful if you would sketch out an alternative plan. Summary points only.

Finally, I am not a supporter of FF, never voted for them. However, as their leader says “we are where we are” & we have to confront the legacy of their disasterous management of the country for a third time since 1932.

Austerity to build capital is needed in this economy – unfortunately the scheme here is to transfer consumption from the working and middle classes to holders of risk bank capital.
This is simply a wealth transfer scheme – pure and simple.
Building lasting capital seems to be beyond the imagination of all classes in this great little country.

@sim

I don’t think that my figures are wrong but I don’t doubt your claims either. As a guide, here are the deductions for a single person earning €100k:

Income tax – €29.7
Levy – €2.5
PRSI – €2.8
Health – €4.25
Total – €39.2
Effective rate of 39%

The marginal rate at €100k for a single earner is 50.2%

“You most definitely do not need to be earning as much as 1m a year to approach an average rate of 50%.”

This is not correct as you have to take account of the beneficial impact of lower rates, bands and credits. These all serve to push the effective rate well below the marginal rate for all low and medium incomes. The difference between these two rates declines as high incomes get higher. They effectively converge at incomes of €2+ million assuming there is no tax avoidance in action.

In 2009 this economy’s total tax revenues were €33bn whereas total output (on the same, cash basis) was €160bn. There is clearly scope for tax increases to make a contribution to deficit-reduction. Where from?

The incomes of all employees, including the self-employed were €76bn, on which they paid approx. €20bn in income tax and VAT.

The domestic profits of corporations was €38bn. But the taxes paid on those were €4bn.

Profits are one half of the level of incomes- but pay only one-fifth of the taxes.

While equity would demand a greater share of taxes from profits, so would economic rationale. Despite repeated cuts to incomes and higher taxes (as well as greater job insecurity) household consumption has attempted to keep the show on the road, contracting by 10.5% (real terms) fom its peak, an annualised fall of €10bn.

By contrast, business investment (GFCF) has fallen by 54% from its peak, a real decline of €27bn, accounting for the entire contraction in output. The economic purpose of retaining profits is for investment. While the business sector is unwilling or unable to do so, the government should channel those profits into productive investment.

@Brian F
I must be missing something. What is wrong with the following arithmetic?
Gross income 400k
income tax 152,696
income levy 28,000
prsi & health levy 22,052

total deductions 202,749

AVERAGE tax rate 50.7%?

You appear to be an expert in this area so I defer to you, but this arithmetic says that your claim about needing to earn a million to pay 50% to the state is wrong?
In addition, when you add the (regressive) indiect taxes to this high earner, I recon that a single person on 400k is already handing over close to 2/3 of her income to the state. Let’s all envy this person but also notice that taxing this person any more isn’t going to raise a whole lot as there isn’t much left.

@Sim

The technical stuff first – here are my figures:

Gross income 400.0k
income tax 152.6k
income levy 19.0k
prsi 2.9k
health levy 19.2k
total deductions 193.8k
AVERAGE tax rate 48.5%

The difference between our figures is linked to the income levy. I used 2% for first 75k, 4% for next 99k and 6% for balance of 225k.

I’m not an expert – just took an interest in the area. To be more precise, using my model a single person earning 500k has a effective tax rate of 49.2% and an earner with one million has a rate of 50.6%. Not exactly 50% but very close (I think). This ignores the scope of tax avoidance etc. which can (in theory) bring the effective rate to zero!!

“Let’s all envy this person but also notice that taxing this person any more isn’t going to raise a whole lot as there isn’t much left.”

If high earners actually paid the effective rates of tax as calculated, it would be enough IMHO. The reality is that they most pay less (in some cases considerably less). The solution would be to increase the minimum tax threshold for high earners from 30% to 40% or 45%.

@tull mcadoo

“Most of the indigenous employment intensive SMEs would be on wafer thin trading margins”

But it is a tax on profits, not revenue, so it shouldn’t affect margins.

@Brian F
You are right, the effective average tax rate is 48.5%. Still pretty close to half of income.
I think the point you make is absolutely correct. If paid, these rates are high enough. I would support the abolition of all allowances and reliefs other than personal tax credits. We can’t afford them.

@Sarah Carey

Nobody here assumes that trade unions are on the side of “all that’s wonderful and cuddly.” But the alternative assumption that you seem to operating under (that they all have cloven hooves and forked tongues) is equally ludicrous.

As for visiting the sins of the leaders on the rank and file, presumably it’d be OK if we blamed you and the other Irish Times columnists for the way in which that paper shamelessly fanned the flames of the property bubble, the better to profit from it.

@Sim

Sigh of relief that I hadn’t made an error. Now that we have settled the top rate etc. let us look at the other end of the spectrum. I am very concerned about calls to tax the 40% who do not appear to pay tax. These are the low eaners. Of course they could also be very high earners who live abroad or otherwise use tax breaks to maximum effect.

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% increased by the same 10% to 37%, a total of €1,606 million could be raised.

Some qualifications: The “effective tax rate” is different from that we discussed earlier. This is income tax paid divided by gross income (before certain allowances are deducted). Of course the rate excludes, PRSI, the income levy and increased health levy.

Even allowing for these qualifications, the scope for raising significant revenues from the high paid is very much greater than that from the lowest paid.

Note also that tax cases regard dual income married as single cases. This has huge implications for any proposals to bring more low-paid earners into the tax net because they are earning substantially less than suggested by official figures, or for increasing the tax take from high earners who are less numerous than reported in Revenue statistics. You can read more about this issue here
http://www.planware.org/briansblog/2009/12/tax-cases-vs-earners.html

@tull mcadoo

I agree that taxing something usually reduces what is taxed. Sometimes this is good (eg taxing polution) and often has a negative side effect.

We have to raise more taxes to pay for beneficial public goods that MNEs find useful, such as roads, rail, but also things that help them hire good workers like our education system, or health system (the majority of Google’s staff in Ireland are not Irish, and presumably are attracted by the money plus the general environment), and also pay for FFs banking feck up.

So I suppose the question is where can we raise tax with the least negative consequences? Personally I haven’t decided myself what I think would be an appropriate level of corporation tax, but I think the importance of the 12.5% rate is overblown. You’d swear the sky would fall if it was touched. In the media there is an absence of reasoned debate.

I get a headache whenever I hear it is part of our ‘brand’. It further convinces me that the government thinks everything is based on confidence, and that we can sweet talk our way out of the recession, rather than engage in concrete activities like improving infrastructure, public service productivity, regulation etc. etc.

@Brian F
I think, via my dodgy arithmetic, I agree with you. But your point is a subtle one and will be completely missed by the ‘raise taxes’ brigade. If means can be found to get high earners to pay 45-50% avergae tax rates (and no higher), I think that will be painful (for me anyway) but, all things considered, fair.

Brian,

the system seems extremely progressive from median to 3x and flattens therafter. This is hardly much of an incentive to seek advancement for people on middle incomes. It would also be worth comparing the tax take on incomes above say 50k across the EU My suspicions are that anybody single and with a portable professional qualification would be better off getting out of Dodge.

@Brian
The current tax rates on middle incomes are a clear incentive not to seek advancement and not to make an effort in Ireland. Right now my arithmetic tells me that anyone with portable skills should get the hell out of Ireland. Additionally all that’s likely to happen in the next few years is that they’ll get screwed because they’ve made the mistake of studying hard and working hard. The justification – as made several times on this page – will be that they have enough money to make taking it from them a worthwhile exercise. I’ve personally had the discussion with companies about coming to Ireland and it was on pay and conditions that things fell down. By the time you paid people enough to pay income taxes and to have a half-decent house and car, you were better off hiring three people elsewhere. Corporation tax is only an issue if you’re going to be making taxable profits, which many companies don’t do for several years after establishment.

Meantime much of the supposed logic behind progressive taxes is based on an incorrect assumption that high income is a permanent condition. That may be the case in some state protected positions, but it is most certainly not the case in much of the private sector where one good year may be followed by one (or more) lean years. However, the disproportionate tax of one year will not be refunded in the lean year. Progressive taxation is not only a disincentive to work but also a particular disincentive to work in the private sector.

The solution is not to tax everyone, but to reduce the pay in the state protected sectors either by introducing competition or by lowering pay.

Only when public servants start quitting to join the private sector will there be any evidence that public sector pay is too low…meantime, it’s too high. Benchmarking is not something that should be done through negotiation, but by facts on the ground. If attrition rates in the public sector are high and it’s hard to recruit to fulfil the service need, then pay might need to be raised. If the country is in the financial shi** and no-one is leaving their jobs then cut pay.

Either way, the state should have no interest in public sector pay other than to ask “Are we getting the services we need at the lowest possible sustainable cost?”. Sustainable means that pay for public servants shouldn’t be and isn’t a spot market, but politically motivated high pay for life is unsustainable too.

@Hugh

Largely agree with all you have said. However bear in mind that every euro of PS payroll reduction really only saves about 50c when loss of taxes etc. are taken into account. A euro increase in taxes is worth a full euro (in theory).

@John McHale

‘… a plan for the overall distribution of the burden across the income/wealth distribution.’

There is a first time for everything … and it might moderate the rapidly growing emergence of bantustani no-go areas across cities and towns …….. and the walls and security cameras that will proliferate in the domains of the untouchables …

@Brian
An increase in taxes not only discourages private sector activity from being taxable, thus reducing the incremental and ultimately the total tax take by creating a black economy and creating a warped morality in the country, it discourages the activity completely thus damaging the economy at a more basic level. Apart from the much mis-used laffer curve (on revenue) there’s another curve that applies to economic activity. I forget its name..

At a simplistic level, in the public sector an activity will continue to be performed at lower pay unless and until people actually leave the public sector..therefore a drop in pay can be done without any economic damage.

Any loss of spending power in the economy caused by public sector pay cuts could – for instance – be replaced by handing out random cheques to anyone and everyone to the same value. I doubt the unions would like that, but hey..

Waste spending on the public sector is like a triple whammy at the moment. It needs excess taxation, damaging the economy, it causes borrowing, damaging the economy, and it distorts the use of talent in the economy, damaging the economy.

We’ve gotten so accustomed to this idea that taxation should be used in a socially punitive way that we’ve become lazy. Instead of addressing protected industries and sectors, cronyism, etc., we just say “Tax them all and let God sort them out”. Wrong approach.

@Hugh Sheehy
“Benchmarking is not something that should be done through negotiation”
As workers has a constitutional right to join unions this is not achievable, and the notion of adjusting pay until workers join/leave would only work with homogeneous workers and a frictionless labour market.

As for fluctuating incomes, you could maybe allow tax credits and bands to carry over from one year to another. I wonder if it is feasible to administer it. If feasible I think it would lots of advantages.

@Michael,

I assume it does include Forest but it also includes Pfizer, Lilly, Wyeth, Intel, Microsoft, Merck, J&J, Stryker, State Street JP Morgan and BoNY. Collectively they employ thosuands of workers and no doubt do business with some indigenous. Most would not be here but for the 12.5% rate.

My understanding is that in Galway the med-tech industry employs hundreds if not thousands of highly paid workers. Most of these firms would have sister plants in Puerto Rico where the Corporate tax rate is zero.

Tull

you misunderstand the point. If it were simply about tax, they would have shifted all production to Puerto Rico, or ANother zeo-tax jurisdicion. They have to be in the EU, which remains a customs union, not a free trade area. They also much prefer to be in the Euro area, to avoid currency fluctuations/hedging costs.

Ireland could raise its cororate tax rate to 19% and still have the lowest rate in the Euro Area. It could also provide specific exemptions for foreign productive investment to take it down to that level, from a higher general rate.

And use the proceeds to invest, which the private sector fails to do.

@Liam

I don’t think we are as far as part as you suggest. What is wrong with starting with how you want to distribute the adjustment overall? It certainly then makes sense to focus first on bad policies (I would not be the 12.5 percent corporation tax rate in this category). As you say, there should be enough degrees of freedom with policies such as tax rates and tax credits to achieve the over desired distribtion of the burden while still targeting the bad policies — or even implementing some new measures where the cost-benefit case is strong.

You don’t seem to put much weight on the political challenge of pushing through a large package of measures that will impose considerable hardship. Believing that the overall package has been designed with a clear fairness goal in mind should help overcome the political constraints. While I hear what you are saying about the primacy of good programme evaulation, we also face macro and political economy challenges.

@All

I may have underestimated the extent to which the SWITCH model is being used in policy deliberations already. Tim Callan tells me that the Departments of Finance and Social Protection are using the model to examine the effects of policy options prior to the budget. I hope that the model will also be made available to Opposition members as part of their access to budgetary information. While it is encouraging that the Government is using the model, I think using the model to evaluate overall plans and making the information public would be a very useful in making the necessary mutli-year plan politically feasible.

Tull

this assertion rest on the notion of the absolute mobility of FDI and existing capital. There is no empirical evidence to support it.

Contrarywise, if it were true, all FDI would end up in the lowest tax jurisdction, which is demonstrably not the case.

With regard to corporation tax the real issue moving forward is not the rate (which the government can control) but the tax base on which the rate is applied. It seems clear that a number of EU countries will push ahead with a Common Consolidated Corporate Tax Base (CCCTB) under enhanced co-operation. Ireland and the UK will not join. When Gernany and France etc. now tell the MNCs that they are subject to tax based on a formula that includes sales in their country, the MNCs may not be able to shift all these profits back to Ireland to be taxed there. The question of how taxes will be allocated in the EU between those countries that are inside the CCCTB and those outside is very unclear, at least to me. This could have serious consequences, since implicit in the attraction of Ireland’s low tax rate is the fact that it can be applied to profits generated outside Ireland, through profit-shifting via transfer pricing. The ability to do this may be taken away.

@Bryan G

CCCTB remains aspirational … but certainly worth noting.

At the mo, there is no way that EU can move the discussion forward as it would require a few referenda – which no one wants – particularly the ECB. But European Federalism will certainly strengthen when the EZ figures its way out of the present turmoil …

As a gesture of solidarity with the host, and as the host is presently in dire need of a little stimulus (discussion of which appears to be the equivalent of legalising infanticide in the gadarene rush to kut kut kut), methinks it just might be appropriate that the welcome guests of the nation toss in a cupla billion to the national kitty to tide us over in difficult times ….. just for a few years …. or 14 til we reach 14 sounds about right, sensible and certainly not excessive …

Last word! Of course the deficit won’t be cut in 4 years and this is realised. However by making this the target it provides an incentive to make the deep unpopular cuts that would otherwise be avoided. Once these are in place in years 1 and 2 the target for achieving the further cutbacks required will be extended.

The SWITCH model has got several mentions in this thread. For those interested in how it works, Tim Callan gave a paper last week at SSISI about the data behind it: http://www.ssisi.ie/Data2PolicyAnalysis-28Sept10.pdf

I understand he will also be talking about some recent work using SWITCH at the upcoming Budget Perspectives conference: http://www.esri.ie/news_events/events/forthcoming_events/event_details/index.xml?id=248

However, it is also worth mentioning that SWITCH does not currently cover indirect taxes like VAT, so it could not be used on its own to estimate the distributional effects of all taxation. Some side analyses would be required.

@JH
Purposefully, I was modeling for a PAYE person, not for a self-employed so my calcs are correct.

I am self-employed and pay the 3% and don’t get the PAYE allowance even though I pay PAYE. I consider this unfair.

FYI, a single PAYE person pays taxes of 16.9% on an income of €30k, If married, the rate falls to 10.8% and if dual income married the rate falls to 3.8%. In judging the latter, bear in mind that their combined incomes are €30k and possiblly one would be earning €20k and the other €10k – not exactly high incomes that could/should be heavily taxed!!!

Based on your example, the 16.9% and 10.8% fall within your 10-20% range for excellent services. Just shows how poor the value for money here.