Death by a Thousand Cuts

Pat Kennys Frontline made for depressing watching last night.   The first segment focused on the level and composition of the fiscal adjustment for the next four years with an emphasis on next year.   Credit to Dan OBrien and the others on the panel for being brave enough to be specific about where they would cut. 

But given the size of the needed adjustment, I worry that this formula of focusing on specific adjustments one-by-one is just not going to work.   For each proposed adjustment means testing child benefit, cutting publicservice pensions, introducing a property tax the affected group will focus on the negative effect on them and will inevitably try to shift the burden. 

Recognising the size of the overall adjustment, I think it is better to start with a plan for the overall distribution of the burden across the income/wealth distribution.   The pain will need to be spread broadly but progressively.   After recent budgets, the ESRI has provided an excellent analysis of the distributional implications of tax and benefit adjustments using its SWITCH model.   This tool could be available prior to the budget to evaluate alternative four-year plans.   The key is to make people think about the overall effect on them in the context of how the overall burden is being shared.   My sense is that there is recognition a large adjustment must take place and most are willing to play their part but only if assured that others are bearing their fair share.   The alternative of arguing about specific cuts in isolation of the overall distribution of the pain is probably doomed to failure. 

80 replies on “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.

@John

It is not an exaggeration to say that companies are falling into insolvency by the day. Liquidations are all too common. A furniture company I deal with has been receiving email notifications from suppliers going into liquidation at the rate of 2 or 3 a week for months. Private sector employment is not improving. A severe ‘adjustment’ in this context can only make matters worse. The 3% deficit target for 2014 is impossible to achieve, yet rather than admit this and go back to the EU with a much longer term plan, the government panics and seeks certainty in demonic grandiosity. Only very gradually are politicians of all parties waking up the the implications of thousands of unserviced domestic mortgages. Previously this problem was acknowledged fleetingly, only to be used as a political baton against opponents. The government seems heedless in this regard.

And no matter how big any ‘adjustment’ is, unless growth in employment returns to the economy it is likely that yields will remain high, too high to go back to the market. Just as Lenihan, in Joan Burton’s terms, has taken the longest route to nationalization, it seems increasingly likely that he has taken the longest route to securing EFSF help. As David Blake indicates above it is time to thing differently. Adjusting government deficit plans would be a good place to start.

“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.

@John
Don’t you think some consideration should be given to the following questions:
1. Is there any economic theory, whether Monetarist or Keyensian (neo, new or old), Real Business Cycle, Rational Expectations or any linear combination of same, that says a 4 year austerity program on this scale, given where we are starting, will work?
2. Is there any historical precedent for an austerity program of this scale being pursued under a fixed exchange rate and, as seems likely, rising real interest rates?

Can somebody out there explain to me why they think this is going to work? And, Tull, don’t give me ‘there is no alternative’. Please.

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.

@David Blake

You could say the same thing about people who advocate failing to address our budget deficit. They keep on rolling out the same old arguments, don’t engage with the counter arguments adequately, and then expect people to be persuaded. Insanity

@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

@Tull,

You have spent the last two years saying (a) current policies are optimal and (b) show me an alternative. I have responded with (a) no they are not and (b) lots of alternatives which you have either rubbished or ignored. Now, despite my nom-de-guerre, I am not in government so there is no onus on me whatsover to supply you with an alternative policy proposal. I am entitled to point out the lunacy of your policies. It’s your job as the party of permanent government to come up with policies that stand a chance of working.

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 €

@Simpleton

I hear what you you’re saying. I probably have been more concerned than most about the demand implications of austerity. Although we hear it being denied by both left (stimulus will reduce the budget deficit) and right (expansionary fiscal contraction), I don’t think there is any getting away from the trade-off between creditworthiness and demand that faces us when formulating fiscal policy. Unfortunately, this trade-off has shifted badly against us recently.

If we wish to avoid default or a reputationally damaging bailout, we have no choice but to put in place a credible multi-year plan. My hope, however, is that we can shift the trade-off in our favour with a credible strategy, thus allowing us to avoid having to excessively front-load the plan. The alternative seems to be the Eunan King strategy as outlined last night and also in the SBP on Sunday. I think this would be a disaster.

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

@christy,
no you can’t say the same thing about people who say it’s wrong to destrroy the economy. because most of the people who say that have realised that there is no chance of breaking through the mumbo-jumbo of the austerity fanatics. So we do not think that making these arguments is going to have a different outcome this time.
But justr because we are faced with apparently invincible ignorance doesn’t mean that we should join that club. It just leaves us wondering why people are so determined to cause and suffer economic pain.

“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?

Recognising the size of the overall adjustment, I think it is better to start with a plan for the overall distribution of the burden across the income/wealth distribution.

It’s called income tax. It was introduced by Pitt the Younger to pay for the Napoleonic Wars, and has been a staple funding source for post-agricultural-economy governments ever since; despite being deeply unpopular with the post-agricultural big earners.

A further innovation on this is called “progressive income tax”. This means simply that the more you earn above certain amounts, the higher rate of tax you pay. This is especially useful in distributing the tax burden equitably as well as in curbing excessive remuneration and maintaining competitiveness, but it is correspondingly abhorred by large income earners.

Implementing such taxes is typically a political and legal nightmare for most governments. It’s actually easier—though less lucrative—to implement either cuts, or else agricultural-era income solutions such as property taxes, or say charging for water(historically obtained for free at parish pumps).

Happily, Ireland does not need to negotiate such treacherous territory as we already have 3 (really 2.5) tax bands. A lower and higher rate of income tax, as standard in most countries, but also a third income tax rate in the form of the health levy. This quintessentially Irish invention breaks the Gordian knot of providing granulated tax bands without actually ever implementing them.

A few more such innovations could do wonders for Government finances in the next budget. It would allow them to tap into the GETRTCs (GEneration That wRecked The Country)—the ~55-65 year old professionals approaching (handsomely pensioned) retirements, with no mortgages, and who were paid enormous salaries for very little work courtesy of the 2-3 mortgaged generations below them. These people have hardly been touched by the recession at all—indeed NAMA exists largely to protect them from it—and they are an as yet untapped resource in the quest for sovereign solvency in this country.

However, there’s about as much chance of such an equitable distribution of burden as there is of Dan O’Brien suggesting something imaginative. We’re in for 40+ pupil classrooms, no buses, hospital closures and probably wholesale privatization of most utilities. Fianna Fail and the GETRTCs are running this country, and they’ll run it into the ground as long as it means they’ll get their pensions.

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.

@Obsessivemaths Feeeeeek
Do the maths. Consult some contemporaneous facts.
Ireland already has a steeply progressive tax system. One of the most progressive tax systems in the world.
Consider 2 facts:
1. Average earners with2 kids in Ireland are net recipients – yes, they receive, not give to the State.
2. The marginal rate of tax is now at least 55% for high earners.

A question: What’s not progressive about that?

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.

@ simpleton
Progressiveness must also include the other taxes.

Of the €22.2 billion collected in tax so far this year, only €7.36 billion was income tax, VAT was €8.2bn and excise duty €3.3bn. These last two taxes are generally regressive.

Also, how much does the average family with two children pay in VAT and so on?

@sim

“2. The marginal rate of tax is now at least 55% for high earners.”

That is only correct for very high earning self-employed but these are relatively small in number as virtually all high income business people are directors of companies.

If you refer to the following chart for 2009/10, you will see that tax cases earning about €180k have the highest marginal rate (due to band anomolies). You will also see that cases earning about 70K a year have a marginal rate in excess of 50% as compared with 52% for cases earning a million. Note that tax cases treat a dual income married as one case.

Whatever about marginal rates, you need to be earning over a million a year to be paying tax at an effective rate of 50%. This assumes that you don’t engage in tax avoidance measures (as your right).

You’ll find the chart and commentary here
http://www.planware.org/briansblog/2009/12/marginal-and-effective-tax-rates.html
I refer to 2009 but there was no change in rates for 2010.

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.

@Brian Flanagan
I am 100% PAYE, I don’t any shares in any business, let alone my own. I am trying to work it out but even I am confused – the Revenue’s website is very unclear. My marginal rate is either 55% or 56%. It isn’t less than that – your 52% is just wrong. If I stand up and look around this office I can see quite a few others on same.
You most definitely do not need to be earning as much as 1m a year to approach an average rate of 50%.

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.

@Tull
‘Well, what would you do?’ has been your response since this blog began. Do you really think it merits a response?

@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.

Simpleton,
It would be nice if the critics of the current policy would come up with an alternative. Perhaps, you don’t accept my premise that the current policy is dictated by membership of the EU and that we have a degree of indepenence greater that I imagine.

Why do you not think that questioning alternative proposals to the current policy is woithout merit?

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.

@Rory O’Farrell

“Of the €22.2 billion collected in tax so far this year, only €7.36 billion was income tax, VAT was €8.2bn and excise duty €3.3bn. These last two taxes are generally regressive.”

Exactly. We took too many people out of the income tax net and slapped them with indirect taxes. We should be raising more from income tax ( by taxing more people) and less from consumption taxes.

btw, could we stop assuming the trade unions are on the side of all that’s wonderful and cuddly in the world? These guys sat at the trough, side by side with FF and the bankers. They signed off on the massive wage hikes and pensions for the higher civil servants and armies of quango CEOs. David Begg was on the board of the Central Bank and they always had a rep on FAS. Their arguments about the demand implications of cuts ring hollow til they accept closing the gap between top and bottom must happen AND that productivity agreements should be implemented because its the RIGHT thing and not because they are bought.

@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.

@Sarah Carey

“btw, could we stop assuming the trade unions are on the side of all that’s wonderful and cuddly in the world?”

These agreements must been seen in the context of bargaining, the haggling that went on, and the initial positions of the respective players. No one (anymore I hope) would suggest that Michael Collins was in favour of the oath of allegiance or dividing Ireland in two, but he went along with it as part of a bargain.

But to show that I personally am “on the side of all that’s wonderful and cuddly in the world” I propose removing VAT on childrens toys, especially teddy bears (provided they aren’t made in a sweatshop of course, but by unionised workers) 🙂

@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%.

@Michael Burke,

there are two problems with your proposition.
i) Bodies like the ACC have warned us about the negative impact of raising our CT rates. If we take them at face value the profit pool will diminish. Lake Pfizer’s activities in Cork. Lipitor loses patent protection in 2012 and Viagra soon after. Will Pfizer manfuctature successor compounds if the CT tax rate went to say 20%. Most of the indigenous employment intensive SMEs would be on wafer thin trading margins so any change in CT could have a disproportionate effect on tax take
ii) Is govt driven “productive investment” not an oxymoron.

@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.

Rory,

apologies you are correct. however, investment and dividends are paid out of after tax income. Raise taxes and you get lower dividends and lower investment. The former may result in business owners acting to increase their divis by cost cutting which impacts on somebody elses income.

In any event, an increase in the CT rate is likely tohave some unwelco
me perverse effect on employment, investment and tax take. That is all.

@BF,

It might be worth looking at where a c. 50% effective tax rate kicks. Is it at relatively low incomes. I recall from tables at the time of the budget that tax rates on people above median income are in line with European averages. The take at lower levels is low and is it possible that progressivity in the tax system evens out at relatively high incomes. Do you have a large number of people at say 1.5x to2x median incomes who are paying most of the tax simply because there are lots of them.

The only substantial relief these people would have is tax relief on pension contributions to schemes. Is theis a relief at all or a defferal?

@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

The Irish Times reported today that a plan for a “new world-class skills organisation” is scheduled to be agreed at a meeting of the Fás board today.

The joker who used that bullshit must be stone deaf rather than tone deaf.

Amidst the wreckage, the gombeen men are chanting the old mantras and we are far more interested in bankers, bondsmen and bolsheviks than looking at curing the disease and discussing structural reform, accountability and how the economy on this Atlantic rock can be put on a sustainable basis.

All that is of course boring and as the mobile phone companies confirm , we love to talk but likely about nothing too challenging.

Of course selling retrenchment when life is hardly changed for the powerful in society and more importantly, where there is no hope on offer for those who are unemployed or fear it, is not easy nor should it be.

It’s interesting that the vested interests preparing their pre-budget submissions, have had nothing of substance on how we should get out of the mess many of them hugely benefited from.

They are of course all doing well – – a slight adjustment here and there from the bubble time costs – – but fat pensions are in prospect and what’s to worry about?

So lets have academics pushing for reform and accountability under their own noses as well as elsewhere; it’s not only bondholders who are in the trough.

Where is the opposition within the universities, with the exception of UCC, to the faith-based innovation policy requiring billions of euros in public funding?

David Blake said: “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.”

The main responsibility is in Dublin; a panic in Sept 2008 then slow-motion; last week an announcement of a hope for 300,000 new jobs that was risible; no credible jobs strategy and no reform.

In the US in 1930, the International Apple Shippers Association, faced with a surplus of apples, decided to sell them on credit to jobless men for resale at a nickel each. Overnight there were shivering apple sellers everywhere.

Asked about them, President Hoover replied: “Many people have left their jobs for the more profitable one of selling apples.”

How different is Ireland?

An open season on sacred cows whether icons of left or right is needed.

There is still time to give people hope.

Ireland: From prosperity to austerity – – Higher taxes and review of Croke Park agreement

@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.

@ John

“Recognising the size of the overall adjustment, I think it is better to start with a plan for the overall distribution of the burden across the income/wealth distribution. The pain will need to be spread broadly but progressively.”

I agree that using Switch in this manner would be a very good idea. But I would add that as well as examining the distribution across the income distribution, Switch can be used very effectively to look at the distribution across family types and sectors – and was in Callan, Keane and Walsh’s post budget analysis in the Irish Times last year. It might help to highlight fairness issues across demographic as well as income lines.

@Sim
“completely missed by the ‘raise taxes’ brigade.”

The “raise taxes brigade” know exactly the score. They are accountants, tax advisers, senior managers (IBECists), bankers, highly paid civil servants – exactly the sort of people who sat on the Commission on Taxation. Their job is to keep taxes as low as possible for their clients and themselves by means of tax breaks etc. and by shouting as loudly as possible that there should be higher taxes for the lower paid.

Another trick they have is to seek the tax bases to be broadened – encourage water use and property taxes as these are likley to impact least on the highest paid (on proportionate basis) unless, for example, they have multiple showers per day etc. or change to water in the swim pool.

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.

@tull

Medium earning singles are absolutely screwed by the tax system as can be seen in the chart. The solution is to emigrate or marry another earner!!!

The most extreme differences between effective rates for single and dual income married are:

40k earnings – 22.1% effective rate for single and 5.2% for married
70k earnings – 34.5% effective rate for single and 17.4% for married

The gap obviously narrows as incomes rise and effectively disappears at an income of about one million.

@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.

@Bf & Tull
Your comments about not screwing the lower paid are well made. But, again on my dodgy arithmetic, a married person with 2 kids earning 35k a year remits a net zero to the state when child benefit is taken into account. If they claim for mortgage relief/medical expenses etc they are net recipients from the state.
If this is to be sold ‘we are all in this together’, should someone on average earnings be a net taker from the state? In how many other countries is this true?

@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 …

@BF

Good to see that the tax system still encourages marraige. Marry or Emigrate. Good to see that the gap disappears at a million per aunnum. I was really worried about that.

@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.

Tull

“however, investment and dividends are paid out of after tax income. Raise taxes and you get lower dividends and lower investment.”

Dividends are merely the circulation of capital (and are actually partly taxed, except by MNCs- who pay nothing by offsetting them against intracompany loans).

This issue is precisely investment- there isnt any. In 2007 both profits and investment equalled €50bn. In 2009, profits exceeded investment by more than 50%, €38bn to €25bn. It is this investment strike which needs to be broken- by state investment.

The American Chamber of Commerce is hardly a disinterested party commenting on Irish tax rates. I don’t know if the ACC includes Forest Laboratories Inc., who, according to Bloomberg, have just 5% of their workforce in Ireland yet their activities account for 70% of net sales, apparently. And this economy received just 2.4% tax on that -by shifting the bulk of the profits through the Netherlands and then Bermuda.

http://www.bloomberg.com/news/2010-05-13/american-companies-dodge-60-billion-in-taxes-even-tea-party-would-condemn.html

Why wouldn’t they be in favour of low taxes here? They employ a couple of hundred people (which hasn’t changed -despite no taxation in Bermuda). And pay next to nothing in taxes.

@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.

@ John McHale

“Credit to Dan O’Brien”

Just watched the show on RTÉ player. Dan’s whole hypothesis seems to be that he views the labour crisis as a supply issue (hence we shouldn’t tax labour more as it would harm job creation). I think this is completely wrong. The labour market problem is on the demand side. All the evidence (such as hundreds applying for a few jobs) points to this.

Separately I think Blair Horan acquitted himself quite well, despite or because of Pat Kenny’s (now there is an overpaid public sector worker) sneering tone. None of the trade union leaders are media personalities or politicians and don’t always come across as well as they might, but I think Horan was on top of his game.

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.

I can’t agree we need to stop arguing about specific policies to reduce spending in specific areas. I would question John’s view that you should begin with the overall income distribution in your mind and then start tweaking all the policy levers to achieve that. You should begin with a belief that policies should have a proper rationale and be designed and evaluated correctly. There is no rationale whatsoever for paying an untaxed cash transfer to people paying the top income tax rate and therefore there is no problem debating this particularly in an environment where we are trying to make a fair fiscal adjustment. Ditto for other sacred cows such as a potential small increase in corporation tax, taxing pensions at the normal rate, and so on. You do, of course, need to have a general as well as a partial sense of how all the various welfare and tax changes add up to impact on people to ensure that you don’t end with undesirable disincentive effects. But you could certainly start with taking out silly things from the system and then use the taxation system to deal with income distribution issues.

@BF maybe I’m missing something but my by calculations if you’re self employed and single you will get 46% effective rate at 135K. At 225K you hit 50% (86,416 PAYE, 8,620 special levy, 6,810 PRSI and 10,600 health levy). You get nothing for your PRSI.

Why is 50% a good thing ? surely we should be incentivising people to work harder and not pay more than half their share of it to a wasteful, lazy, incompetent government.

@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.

Michael
With respect, I think you are missing the point.
i) If we raise the CTR we will lose on future FDI and we will lose some of the existing tax base. The owners of this profit pool are telling us that. Now we can call their bluff and see but with 14% unemployment that might not be terribly smart.
ii) not all the stuff manufactured here goes on sale in the EU. Take Genzyme’s fill and finish of orphan drugs in Waterford. Most of this goes back to the US. I am pretty sure a lot of the pharma stuff winds up back in the US. If you raise the cost of doing business here via taxation, the MNC can easily switch capacity.
iii) At the mo, our 12.5 % rate is the third lowest in the EU. 19% would put us a par with Slovakia and Poland and above Bulgaria, Cyprus, Romania and Latvia. Crucially we would be at the low end of the UK band. You also have to take into a/c reliefs. NL has a CTR 2x ours yet U2 have relocated there.

I think its disengenous to imply IBEC as calling for higher taxes. Perhaps your tongue is in your cheek here. They are calling for user charges and taxation at the bottom end of the spectrum. Interestingly, they are calling for a lower level of cuts than some of the speculation implies.

Lastly, what is the real level of taxation in the economy. If you include all the PRSI and other fees for govt services is it not closer to 50billion and is spending not over 70billion.

I love the idea of govt investing money more effieicently than the private sector. Granted it is a low bar but some of the capex programmes probably yield returns far below the bond rate. I could point to glorious failures like the Airport terminals, virtually unused motorways to the SE & some of the HSE & FAS skills programme which appears to have only stimulated tourism in Florida.

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.

@Hugh
Good posts – many points well made.

Benchmarking is not something that should be done through negotiation

Agree – I would say unions have every right to make their case and lobby for their members, as have industry groups like banks, insurance companies etc. I would not expect, however, to “negotiate” financial regulation reform with banks – the rules of the game, as it were, need to be made in the public interest. Similarly for public sector reform. The public sector should not be artificially sheltered from the forces that apply in the private sector – e.g. real incentives for performance, serious consequences for failure, awareness of effectiveness compared to equivalent groups in other countries etc.

While we’re on the subject of lack of serious consequences for failure – why wasn’t Batt O’Keefe fired from his job last week? The jobs strategy document that he signed his name to last week was an utter disgrace, and has been suitably pilloried on this and other blogs. Richard Bruton in the Dail last week stood up and said it was an appalling document and a cynical exercise (he’s too polite to really tell it like it is). O’Keefe then gave an incoherent speech which involved lots of self-congratulation and sneering at the opposition (followed by other FF deputies who also seemed to think it was wonderful). This is the person supposedly leading the charge to a smart economy and to cut unemployment? How can a government credibly push for serious reform in the public service on the one hand, while sending a clear message that such low standards are acceptable on the other?

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.

@JH

For a single person earning 225k under PAYE, I get:
Income tax – 80.9
Income levy – 8.5
PRSI – 2.9
Health – 10.5
Total deductions – 102.8
Effective rate – 45.7%

Nothing sacred about 50% – a 40% deduction would be much nicer !! You get the contrib OAP for your PRSI but not dole if self-employed.

Agree with your remark about “pay more than half their share of it to a wasteful, lazy, incompetent government” but it obviously shouldn’t apply to everyone working in the public sector. Lots of wasteful and incompetent people in the private sector too who have cost us dearly.

@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 …

@DOD

The CCCTB has been around for years but is recently back on the agenda again:

http://www.tax-news.com/news/Semeta_Sets_Out_EU_Tax_Policy____45668.html

I would say there is no chance of EU-27 wide agreement here, but there is a possibility that a smaller group of countries could move forward themselves. Ireland would not opt-in. No-one is seriously proposing harmonization of tax rates and I don’t think treaty changes are needed for what is being proposed. It would be somewhat like a Schengen area, but for tax.

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.

@ Kevin O’Rourke

Kevin,

I acknowledge that there has been dissent here on the research bonanza but generally like land zoning, it is almost a taboo subject.

@ Brian G

When Germany 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.

US data shows that the combined net profit of US corporations in Ireland doubled between 1999 and 2002 from $13.4 billion to $26.8 billion and was $48 billion in Ireland in 2005, compared with $37.01 billion in the UK and $74.06 billion in the Netherlands. US companies in Germany made net profits of $11.22 billion in 2005; French affiliates reported income of $9.52 billion and Italian operations made $8.58 billion.

http://www.finfacts.ie/irishfinancenews/article_1015201.shtml

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.

@Brian your PRSI calculations are not correct. It’s a flat 3% on all income so comes out at 6.75 rather than your 2.9. Also you’ve included a PAYE credit in your calcs which you don’t get as self employed therefore 50%.

I pay my taxes to the Govt not the public services it is the former that decided how it gets spent but take your point.

The whole tax base is out of kilter, Ronan Lyons has some good articles on this. We have too many people working but paying no tax. Problem is in France for example you might earn 30K and pay 10 – 20% tax but you’ll get excellent public services. The contract has totally broken down here – no value for taxes just overpaid ps, hundreds of quangos and a culture of waste.

@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.

I’m sympathetic to Liam Delaney’s view that the first cuts that should be made are those that involve reversing bad policies.

But the fact that you’re reversing a bad policy doesn’t obviate the need to consider the distributional implications of the change seems a step too far. In the case of CB, for example, people (even the relatively well off ones) decide to have kids on the basis of their expected income and those decisions are irreversible. If you cut CB for the well off, you could justifiably be charged with making middle class parents and their kids take a disproportionate amount of the pain of the adjustment. Perceptions of fairness matter.

On CB, perhaps there’s some kind of middle ground, and this could be facilitated by the four year time frame that the budget is being framed for. If it were stated that, say, taxation of CB (which we mostly agree is optimal to avoid threshold effects) would be introduced within the four years (to allow time to sort out the technicalities), and that in the interim, it will be means-tested for all kids born at least a year from now, that would allow for a more gradual change in expectations. It would also allow us to avoid ending up with means-testing, just because we needed to do something quickly. And it will certainly reduce the structural deficit in the medium term.

If this had been applied to the over-70s medical card – no new entrants to the scheme from now on, and possibly a gradual winding down of the scheme for existing beneficiaries, we could probably have saved ourselves a lot of trouble.

@Rory
I have no problem with people joining a union, and no problem with a union doing negotiation, except where that union and those workers have essentially monopoly power to shut down the state.

If we were in a situation where there were multiple competing service providers for, say, air traffic control and there were different unions in each company then the unions could negotiate all they want. Other service providers could step into the breach and maintain some services.

However if the staff in a public service job want the right to strike en masse then there need to be other changes too, like competition and the chance that if they strike their employer will eventually go bust and they’ll end up out of a job.

Public sector workers have too much power right now, and governments are afraid of them. It’s undemocratic and does not represent any economically efficient result, much like any monopoly is undemocratic and does not provide any economically efficient result. SIPTU and Standard Oil are soulmates.

Long ago I wrote a couple of letters on the topic, although you’ll have to excuse the brevity imposed by the letter writing format.

http://www.irishexaminer.com/opinion/letters/strikers-should-try-another-viewpoint-106378.html

Note also that I’m not picking on public sector workers or on the services they provide. My point is that the way pay is set for the jobs and the way that the jobs are protected from competition is essentially immoral and an anti-citizen collusion. If companies created a similar set up they’d be prosecuted.

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