B&F Article on Jobs and Pensions

Here‘s a link to an article I wrote for Business and Finance that (somewhat belatedly) discusses the government’s jobs initiative and its financing. (The headline I had provided was the probably too obscure to be funny “A Worthwhile Irish Jobs Initative?”)

17 replies on “B&F Article on Jobs and Pensions”

The alternative suggestion of “restrictions on tax reliefs for pension contributions” amounts to double taxation of some people’s money, but a free pass for others.

It might be less damaging, but it’s at least as unfair.

@ Hugh

“The alternative suggestion of “restrictions on tax reliefs for pension contributions” amounts to double taxation of some people’s money”

No it doesn’t. You can restrict the amount that people can get relief on — that’s not double taxation.

Beyond that, I agree that proposals that involve taxing income at 20% going into pensions and at 41% coming out is wrong and will discourage people from contributing to formal pension plans. For now, I think we can do the first part (limiting relief) in return for a promise to not apply full taxation rates later.

I agree that the pension levy is a move that only adds to the growing domestic uncertainty. However, if the money was raised by reducing the existing reliefs it would change the incidence of the tax.

The 0.6% levy will primarily hit those who have large pension pots built up and this will likely be those close to retirement. A reduction in the relief to 20% will primarily hit those who are in the process of building up a pension and will likely be those who are much younger.

There are reasons to support and oppose either measure but it is important to realise that they impact on different people.

There is an argument that if insufficient taxation was applied in the past – when surpluses should have been built up, or excessive tax relief on contributions was given, you might correct this by higher effective tax rates on high levels of income drawn from pension funds. The tax on pension payments is effectively deferred taxation of income.

Similarly, if a bankrupt state convinces itself it must pay very high unfunded retirement pensions straight out of taxes or borrowings, there is the option to impose high rates of income tax on high pension payments.

This bit:
“Economics started life as a discipline called Political Economy. That alternative description has never seemed more appropriate than over the past few months. Whether we are discussing big issues like Europe’s sovereign debt crisis or narrow ones like the terms of Ireland’s bailout, political concerns have been prevailing over economic common sense for some time now.”

Had me thinking back to the seventies struggling to come up with many examples when this was not the case. Usually even sensible economic decisions are by-products of politically driven agendas. “Some time now ” has been quite a while…..

How about we acknowledge – if our petty ideologies will allow us, that a just distribution of total incomes and wages is not attainable. Whereas a just graduation of wages/incomes, hence a just taxation scheme based on these, is attainable.

The consequence of this is that all allowances, write-offs, and other income tax dodges and scams are constitutionally proscribed. Also, there is a constitutional requirement to balance current spending and taxation. No ifs, buts or exemptions. National infrastructure projects are payable in part out of citizens savings, in part by external borrowing, not by private hedge funds controlled by financial pirates.

That’s political and economic reality. What we have – with our current bunch of political critters, is just another gang of ‘extenders and pretenders’. I cannot accuse them of outright lying about our fiscal and economic predicament – but they are sailing real close to a leeward shore on that one.

You want genuine Political Economy? Then ensure our institutions can move in the direction of this objective. And no more of this sort of ‘political terrorism’. “Don’t say that! You’ll spook the markets!”

As if our contemporary versions of ‘those markets’ were operated by irrational self-seeking egoists, conmen, cheats, villians and thieves. Which of course they are not! That cannot be possible – they being regulated and all. 😉

Brian Snr.

Yes, if you mean it in that sense, then you’re right. My reaction was against the general way I’ve seen that meant, i.e. only to give relief at standard rate (i.e. tax pension savings on the way in) and then to tax them again on the way out.

Political economy, maybe. One political party asleep at the wheel is the Labour Party.

Let me remind viewers of the history of ARFs. Charlie McCreevey, when he became MoF, just couldn’t understand why people who enjoyed huge tax breaks for saving for pensions that they didn’t need were forced to take these same pensions. His solution, let them keep the tax breaks but don’t force them to take the pensions. CHARFs were born, subsidised inheritance planning for the best off in our society. Indeed to qualify for a CHARF you had to prove that you didn’t need a pension. But to be sure to be sure, ordinary workers were banned from having CHARFs. Individual CHARFs of €70M (Dunnes) began to be reported in the press.

And now we have a retrospective tax on pension planning. How else do you describe a justification which says people enjoyed too much tax relief in the past, time to claw some back. But the biggest windfall beneficiaries of them all, the ChARFs, are to be exempted whilst Joe Higgins’ ordinary working man will have their pension reduced – yes, the legislation specifically empowers Trustees to reduce pensions in payment to pay for this levy. This is truly unbelievable.

Richard Bruton responded to this criticism by saying the CHARFs were already levied at 2%. He is either crassly stupid or a direct descendant of Pinochio for this is an absolute falsehood. Where is La Burton? Where is Howlin?

As explained above, this levy has been justified as a sort of retrospective clawback of over generous tax relief in the past. Fair enough, but let us target it in that vein.

It is very easy to determine from people’s tax records the tax relief they enjoyed in the past. If we think that was over generous then claw it back. But many, many retired workers received only standard rate tax relief and yet under this crude smash and grab they too are to pay back some of that “over generous” tax relief. And CHARFs get off.

@Karl Whelan

There are number points in your article that merit further discussion.

The truth, of course, is that there is little the Government can do to make a serious dent in Ireland’s unemployment rate over the next few years.

This idea which seems to have huge acceptance needs to be challenged. The unemployment situation is so bleak that consideration will have to be given to ‘new deal’ work programmes. Even if this means higher taxation all round to enable them. This is particularly true as growth has now stalled.

The juxtaposition of the €3.6billion squeeze for next year as against the €630 million tax-cut boost to the tourist-related sector is well made. As it is becoming clear the the €3.6 billion will not be offset by growth elsewhere, the composition of the €3.6 billion is critical. Surely it is not the weakest who will have to suffer again.

The levy thus risks undermining confidence in the safety of funds invested in Ireland and will do little to encourage people to keep their funds deposited in Irish banks.

As far as all domestic investors are concerned we are fast reaching a point of whose side are you on? If you want to take your money, here is a ticket for yourself as well. And don’t come back.

It would of course have been better to get rid of all pension tax reliefs.

Interestingly, Gerard Hughes, produced a paper on executive pensions, that said most exactly €630 million was going to a very small group of executives (estimate of 11,000 executives ?, would welcome a more accurate calculation).

That said much of the anti-pension levy protest is led by ‘well healed articulate’ suits with a vested interest therein. As somebody whose very small and only pension is affected, my view is that somebody will have to bear the cost of the crisis. Every interest group cannot be exempted.

In fact I would go much further and force the repatriation of these pension funds from foreign banks, bonds and equities into Government bonds.
This would also have the effect of negating the ‘economic rule of thumb’ that if debt interest is greater than growth, then the game is up. With a large portion of the debt interest being paid to residents, the game would no longer be up.

Some people may think this is madness. Yet in times of war countries encourage citizens to sacrifice their children’s lives, often for very suspect causes. Surely it is not inconceivable that citizens be forced to accept 3%-4% bonds in order that the country survive.

The country is in crisis, yet every citizen appears completely free to look after their own interests and property. Meanwhile the State drowns while providing them with health care, security, education and in many cases secure employment.
It is a contract that does not make sense.


ARFs attract either CAT or standard rate income tax (apart from the usual exemptions) on death?

There is now an imputed 5% pa drawdown for income tax.

@Joseph R
Two points..
(i) It is very difficult for a government of a small open country like Ireland to borrow money, use it to create “jobs”, and make any net impact..particularly if urgency matters. It’s probably not theoretically impossible, but would be difficult for financial sophisticates, let alone our lot.
(ii) People are less and less inclined to sacrifice their own children in wars. Asking them to sacrifice their children (militarily or financially) to protect other people’s near aristocratic privileges is not on.

Actually Karl Whelan thinks the Jobs Initiative is a wonderful idea that will create 100,000 jobs and last for 1,000 years. He told me so in conversation. I have it on a tape. Hang on, let me get it out. Oh wait.

On the issue Seamus raises about distributional impact and incidence of these measures–were they estimated beforehand, and if not, why not? Microsimulation models could have been employed, for example, to get a rough sense of impact. Teagasc have several people there with that kind of expertise.

@ JR: “Meanwhile the State drowns while providing them with health care, security, education and in many cases secure employment.
It is a contract that does not make sense.”

I might, in other circumstances, like to debate some points here with you. Your comments may appear simple, but they overly some critical and contentious social and economic constructs – now especially in respect of our contemporary, western developed economies.

See if you can locate this ref: ‘The Idea of Justice in a Political Economy’, Annals of the American Academy of Political and Social Science, March 1894, 1-40.

The article is a translation from the 1881 original (german), by Gustav Schmoller . I downloaded it from JStor.

Brian Snr.

@ Joseph Ryan

I broadly agree with your first paragraph.

@ grumpy/Karl Whelan

“Whether we are discussing big issues like Europe’s sovereign debt crisis or narrow ones like the terms of Ireland’s bailout, political concerns have been prevailing over economic common sense for some time now.”

Cor dear me, yes, those pesky elected politicians and their funny ideas.

If only they were all replaced by common sense economists. Is this the common sense of Smith, Marx, Keynes, Hayak, Krugman or Trichet?

@ grumpy

“ARFs attract either CAT or standard rate income tax (apart from the usual exemptions) on death?

There is now an imputed 5% pa drawdown for income tax.”

On passing ARF to children the CAT is covered by a 20% standard rate tax deduction. This is a big inheritance planning advantage and certainly behind the likes of the Dunnes’ Stores type mega ARFs.

Thankfully the original CHARFS which required no drawdown whatsoever now require an annual 5% income drawdown. This is where Bruton got his 2% levy, being the tax on the 5% drawdown. But this is an outrageous manipulation of the truth as ordinary pensioners are, by definition, forced to take an income, oft estimated to be 5%. All the imputed drawdown did was level the playing field a bit, there is no way that ARFs were already paying amn extra 2% levy compared to ordinary pensions.

Why is this not causing rebellion in the Labour backbenches? I’ll be kind and presume that they don’t understand the issue.

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