Business and Finance Article on Tax

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

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

High Earners and Tax: Media Misinterpret DoF Report Again Department

The Irish Times reports:

For example, the latest official breakdown on the 423 highest earners in the State showed that for 189 individuals who earned €500,000 or more in 2008, the average tax rate was 19.86 per cent.

I’m afraid this isn’t true. This report does not relate to the 423 highest earners in the State, as I’ve written about here, here and here. It only relates to a subset of the highest earners who would have paid less than 20 percent because of tax loopholes but who are not doing so now because of the introduction of a minimum rate.

To be fair, I don’t blame the journalists because the relevant document is so poorly written.  At this point, however, I really think the folks in the Department of Finance responsible for this report should consider issuing an official clarification.

Update: In comments, Joseph O’Toole reckons I’m being mean to the Department of Finance because this is a Revenue Commissioners report. Well, I found the report here on the Department’s website, which suggests that they are responsible for its release. But, yes, the report is put together by Revenue Commissioners staff.  So let me rephrase my point: Whoever is responsible for this report might think about issuing a clarification.

DoF Document on Tax Reliefs

I wrote a couple of posts (here and here) earlier this year about a Department of Finance release that discusses the impact of restrictions on the use of tax breaks for higher earners via the imposition of a minimum effective tax rate. I pointed out that the document is very poorly worded and leaves itself open to being misinterpreted.

Well, the latest edition of this release is out and it’s still got the same poor wording and it’s still being misinterpreted. I had missed the release when it came out but realised that the DoF’s poor wording had struck again when I heard contributors to Sam Smyth’s Sunday morning radio show discussing the report and saying how puzzled they were at how few people seemed to be earning large salaries (e.g. puzzlement at the idea that only 23 people earned over €2 million in 2008).

Let’s recap on this report. The report does not purport to be a full accounting of the tax paid by rich people in Ireland. Rather, it only covers those who would have paid less than the minimum effective tax rates that have been introduced. So, the whole report relates only to the 423 people who earned over €500,000 and were subject to the minimum effective tax restriction.

The document should emphasise throughout that these 423 people represent only a small subset of those earning over half a million euros in 2008: Unpublished information from the Revenue Commissioners published in the Irish Times last year (nice table here) showed that there were 5,393 cases of people earning over that amount. However, the report does very little to emphasise this point, leaving itself open to misinterpretation.

Sure enough, many people reading the Sunday Tribune today would have been apalled to read this piece about the Department’s “analysis of high-income earners” informing them the report showed “most of those earning more than €500,000 paid tax at a rate between 15% and 20%” and also providing other estimated tax rates that are not at all representative of the rates being paid by average high earners. For example, the figures in the Irish Times table show that the correct figure for the average tax rate paid by those earning over half a million is 32%. Remember also that this doesn’t include PRSI and that these individuals are now paying an additional 6 percent levy on income over €175,000.

I’m not saying there isn’t room to raise more tax from the rich or that tax reliefs shouldn’t be closed but it hardly helps public debate about this issue when the Department issues documents that are so easily misinterpreted.

Update: Ian Guider who wrote the piece for the Tribune linked to above has written to me to point out that the piece mentions 423 individuals and so he reckons it should be clear that all subsequent statements in his article refer only to a small subset of high earning individuals.

A 20 Percent Tax Rate for Higher Earners?

On Tuesday night near the end of his TV3 show, Vincent Browne returned to one his favourite themes, the taxation of those on higher incomes. He put the following statement to Fianna Fail TD, Timmy Dooley

In June of last year, the Department of Finance showed that in spite of efforts to close off tax loopholes in the 2007 and 2008 budgets, people earning over a half a million still pay only 20 percent of their income in tax. Now why weren’t they targeted rather than people on social welfare?

Dooley told Browne that the budget had seen an increase in the effective tax rate for these individuals to 30 percent, to which Mister Browne responded, “Not true, It’s just not true.” Later, after Mister Dooley discussed other steps taken to stabilise the public finances, Browne asserted that “You could have achieved the same thing by targeting people earning half a million and you didn’t bother.”

On the same theme, in his column in Wednesday’s Irish Times, Browne stated

How come there was no crisis when a report by the Department of Finance last June disclosed that, in spite of the alleged attempt to close tax loopholes, the average effective tax rate for people earning over €500,000 was just 20 per cent?

I’d like to address three aspects of the TV exchange and this column.

Continue reading “A 20 Percent Tax Rate for Higher Earners?”

Property Scheme Tax Incentives

One of the major issues that I think needs to be addressed this year is the role played by tax expenditures in our budgetary system. Reports such as this one by TASC have pointed to closing off tax expenditures as having an important role to play in closing the budget deficit. Chapter 8 of the Commission on Taxation report does a pretty good job of listing many of these tax reliefs and recommends shutting many of them off. There are serious discussions worth having in relation to many of these reliefs, such as those for pensions, but I don’t have the time to get into these issues now.

Interestingly, one particularly controversial type of relief that the Commission report does not examine is property incentive schemes; the report argued that since the decision had been taken to close off these schemes on their completion, they should not be examined. Information on the cost of these schemes was, however, reported to the Dail by Minister Lenihan last November in response to a parliamentary question from Joan Burton. The link to this answer is here but I know not to trust links to the Oireachtas website so I’ve also put up the answer as a Word document here.

The total amount of tax revenue lost from these schemes in 2007 was €435 million. I suspect this is smaller than some people might have expected, given the widespread nature of claims that the very richest in society are managing to pay almost no tax through their extensive use of these schemes.

Still, it is a decent amount of money. It would be interesting to know what these schemes are expected to cost this year and next and whether they can legally be closed. I suspect they can. Another interesting question is whether many of the individuals that availed of these schemes are now bankrupt and wouldn’t be able to pay any tax.

Tax Breaks and Tax Rates for Top Earners

There has been a lot of discussion in recent months about the scale of tax reliefs in Ireland and I’ve been planning to write a couple of posts on this topic. In relation to this issue, an opinion that is commonly expressed by leading figures in the Irish media is that the very richest in Ireland pay very little in tax because of these reliefs.

Continue reading “Tax Breaks and Tax Rates for Top Earners”

Income Taxes Too High and Too Low

I’ve criticised Pat McArdle on a couple of occasions recently so I’m happy to say that this article on tax makes some useful points. In particular, the following points are correct and are simply not being said enough by our economic and political commentators:

Income taxes are both too high and too low. Too high because marginal rates have gone above 50 per cent – Irish people seem to be averse to parting with more than half of their extra euro. Too low because half the population does not pay any tax.

The problem is not just high rates but, critically, the low levels at which they kick in. It is astonishing that a PAYE earner on a lowly €40,000 has a marginal rate of 51 per cent.

And

From now on, the challenge is to broaden the income tax base not increase the rates.

Perhaps unsurprisingly, there some points of emphasis in the article I’d disagree with. That the 2009 tax yield has fallen below its 2008 level despite tax rate increases is not proof that “we’re into negative Laffer curve territory”. It’s proof we’re in a very severe recession. But yes, the top marginal income tax rates are too high and they could be pushed into Laffer curve territory if we’re not careful.

Moreover, whatever about the upcoming budget, it will be essentially impossible for the government to stabilize the public finances over the next few years without finding extra tax revenue. Hopefully, this can be done, as McArdle recommends, by broadening the income tax base and by implementing some of the revenue-raising recommendations of the Commission on Taxation, such as a property tax. But getting these measures through won’t be made easier by comments such as McArdle’s jibe here that “tax increases are the last resort of a weak Government.”

A Flat Tax for Ireland?

When addressing the issue of raising income taxes, two objections tend to come up. The first is that the combined marginal tax rate (including PRSI and levies) is already up to 54%  (see page 161 of the Commission on Taxation Report) and this marginal tax rate kicks in at fairly low incomes. Further increases in this marginal tax rate are likely to trigger increased tax avoidance and can also have negative side effects in terms of work incentives.

The second objection is that we don’t want to raise taxes on low earners because they already don’t make much money and we have to be careful about not creating poverty traps in which people are better off earning unemployment benefit than working (Suzanne Kelly’s Irish Times article on this presented some interesting calculations.)

One way to address these objections is to introduce a flax tax with a large exemption limit. This would keep the lower paid out of the tax net and keep marginal tax rates from reaching dangerously high levels. But this approach could raise additional revenue, essentially because it would abolish the 20% tax band.

Continue reading “A Flat Tax for Ireland?”

Limited Gains from Taxing the Rich

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

Continue reading “Limited Gains from Taxing the Rich”

Irish Times Article on Tax

Here‘s an article I wrote for today’s Irish Times on tax.  The article was slightly edited in a way that might obscure one of the points I wanted to make. I understand that the Commission on Taxation were not really given a mandate to think about what is the “correct” level of taxation but the fact is that we are going to have make serious Boston-versus Berlin-style decisions over the next few years and this issue will come up time and again.

I don’t favour raising income taxes in the upcoming budget and I do favour full implementation of the McCarthy report. But after that point, a decision to keep income taxes at current levels will have major implications for spending. I heard the Minister for Finance on the radio yesterday say that there is was “no further room” for income tax increases. It is possible he is referring only to the upcoming budget but the idea that income tax has hit some very high level that can’t be increased doesn’t strike me as correct in light of the facts.

Coleman on Taxes and the Evils of PhD Economists

Even by his own standards, Marc Coleman outdid himself in his latest column in the Sunday Independent. In addition to standard Colemanisms such as the invocation of the Laffer curve as an established fact (tax rate increases “emaciate tax revenues”) he delivered the following assessment of PhD economists:

With their theoretical backgrounds and lack of real world forecasting experience, many PhD economists sadly don’t grasp these realities.

Worse still, they have tremendous influence. Last January a bevy of them tried to prove that our tax burden was too low. By measuring our tax revenues as a share of GDP — which is about one fifth higher than GNP — they made the tax share of the economy look one fifth smaller than it actually is. This is because the bit of GDP that isn’t included in GNP — multinational activity — generates relatively little taxes and shouldn’t be included. Their point wasn’t just illiterate. They have been a major contributor to the disastrous mistake the Government has made, a mistake that will create tens of thousands of job losses. It is a good reason why the suggestion of recruiting PhD economists to the Department of Finance — made unsurprisingly by PhD economists — is at best wrong-headed (in John McGuinness‘s case) and at worst self-serving (in the case of PhD economists who want taxpayers to feather their nests).

I’ll leave it to our commenters to discuss the issue of whether a ban on PhD economists is the best way to improve the quality of economic analysis in the Irish public sector. However, as one of the apparently illiterate economists referred to (the chief dunce, I reckon — damning evidence here and here — and this despite years of “real world forecasting experience” at the Fed) I will note that I don’t agree with Marc’s argument that our tax base is best measured by excluding sectors “that generate relatively little tax”. This is for two reasons.

First, multinationals do pay taxes on their repatriated profits and it is incoherent (illiterate?) to include those taxes in a measure of the tax burden but not include these profits in the measure of the tax base.

Second, it is a deliberate policy choice to set a low corporation tax rate. One can debate this choice on substantive grounds (and we have had some discussion about the importance of corporation tax to the Irish economy on this site) but it is simply not correct to argue that multinational profits are not part of the tax base.

No Room for Tax Increases?

During last night’s Prime Time, former Department of Finance official Cathal O’Loghlin made the following comments:

There’s a €16.5 billion gap to be filled by 2013 … If we go down the tax route to fill the whole of that, we’d be talking about a tax burden which is way above European levels … solving one-third of that problem by raising taxes would push our tax burden to the same levels as the Euro area average.

If true, these figures suggest that the room to use taxation to close our deficit is very limited and this should be a central issue in public debates about the fiscal crisis. However, I would not have characterised the tax burden in this way and thought I’d explain why.  Continue reading “No Room for Tax Increases?”

Where is Ireland’s Tax Burden Heading?

In my discussion at Monday’s conference (slides here), I raised the question of where Ireland’s tax burden was going to settle down once the public finances have been stabilized. The Addendum to the Stability Report published last week by the Department of Finance shows how the Gross Budget Balance can be brought back to a deficit of 2.5% by 2013 through an adjustment process in which the revenue share of GDP stays roughly stable so that almost all of the adjustment occurs on the Revenue side. The document itself does not comment on the composition of the adjustment described in this table, so perhaps this isn’t an actual plan but instead an illustrative example. Still, it’s worth starting with as a baseline for discussing where we are heading.

I noted on Monday that the plan projects a government revenue share of GDP of 34% in 2013 and that this is well below the equivalent share for EU15 countries, which has been stable at about 45% for a number of years. A number of observers at the conference questioned this calculation on the grounds that the calculation should be done relative to GNP. In particular, since GDP has been about 17% higher than GNP in recent years, one might want to adjust the tax share upwards by this amount. Doing so would give a figure for 2013 of about 41.5%. This is still a reasonable amount lower than the EU15 average but not nearly as much as the figures I quoted

However, I do not view this higher GNP-based figure as a useful one, for two reasons.

First, I believe that GDP rather than GNP should be viewed as the correct tax base when making calculations of this sort. GDP represents all the income generated in this country and, technically, all of it is available to be taxed by the Irish government at whatever rate it chooses. Of course, profit income generated by multinational corporations is likely to move elsewhere if we tax it at a sufficiently high rate but this is an issue faced by all governments, not just our own.

Second, if one is going to exclude the substantial factor income repatriated abroad (€28 billion in 2007) from the tax base it is not consistent to then include the taxes earned on this income in the measure of the tax burden. Assuming that the €28 billion figure represents corporate profits repatriated after paying the 12.5% corporate tax rate, one comes up with a figure of €4.1 billion in taxes paid by multinationals on repatriated profits. Excluding tax payments of this magnitude would give a 2013 (adjusted) tax share of GNP of 39%. So, even if one agreed with the idea of GNP as the tax base, an internally-consistent calculation of the Irish tax burden would still leave it well below the European average.

The broader and more important point here is that we need a wider debate about the shape of future fiscal adjustment than the one currently taking place, which focuses almost without exception on the need to reduce public sector pay.