Nearly everyone pays more tax due to Budget 2011 (except for the self-employed earning over €200,000) but the extent to which 'those who have more will pay more' is lessened.
Some ESRI economists argue that the cumulative effect of now four austerity budgets since the crisis began has hit higher earners more.
Their chart, invisible on the online version, looks like this:
Q1, Q2, etc stands for the income quintiles. The chart shows that those in the lowest quintile are hit most in 2011, but the authors' argument is that higher quintiles have been hit more when all four budgets' effects are combined.
There is an important caveat in the Irish Times article: "Our analysis does not include the wage or employment effects of the reduction in the minimum national minimum wage." This obviously matters a lot to people in the lowest quintile, and potentially to some in the second quintile, whose earnings are linked with the minimum wage.
This example highlights that any model or calculation of the budgetary effects rests on a number of assumptions. The Irish Times article only skims the surface of the technical details of their analysis, but one question which I raise below is the extent to which they assume tax reliefs that already erode the progressivity of the income tax system. They state that they include changes to pension tax relief, among other variables, which is open to challenge.
Similarly, the official Budget documentation provides 12 example household types and how they are affected by tax changes (in Annex A). However, these examples are neither complete nor balanced.
For example, there are no examples of married couples with two earners, and the tables stop at earnings over €175,000; thus failing to illustrate that self-employed people on over €200,000 are in fact better off after tax and social insurance changes in Budget 2011. Also, an unrealistic assumption is made that a six per cent pension contribution is made by workers, regardless of their income. Firstly, the evidence shows that less than half of Irish workers have a private pension. Secondly, it is unrealistic to assume that workers on low gross incomes can afford to save anything, in the context of the current cost of living. Therefore, the examples and the changes in net income they illustrate must be regarded as inaccurate and misleading, which is a serious concern when it occurs in the official Budget documentation.
One way to get to the bottom of this, is to identify the 'baseline' tax system; that is, the bare bones of the tax system.
In the case of income tax, I argue that the baseline system is composed of three elements: the rates (20% and 41%), the bands (e.g. single people pay 41% from €32,800 upwards) and the basic credits (e.g. single person 1,650). I also add in the basic PRSI, USC, etc rates.
Everything else is an addition or modification of the baseline tax system, including the PAYE tax credit, pension tax relief, etc. A problem with the ESRI-SWITCH and Budget calculations of income change from the budget is that a number of tax reliefs have been 'absorbed' into the baseline tax system. In fairness, the SILC data used in the SWITCH model may have an empirical basis for who uses what tax reliefs, but making these assumptions can easily include normative judgements about what's 'normal' tax relief versus what is in effect a 'bonus'.
I argue that tax reliefs (beyond the basic single person or married credits) are a bonus. Someone using reliefs is paying less than the full amount of tax they should otherwise be paying, based on their income level. This, in turn, lessens the progressivity of the tax system. As such, the loss of a tax relief bonus is not the same thing as an actual increase in someone’s tax liability, such as occurred with the rate and band changes in Budget 2011.
Progressivity in the baseline tax system can be simply measured as to whether someone on a higher income pays not just more tax, but a proportionately higher part of their income. And, as the figure below illustrates, this is indeed the case (blue triangles for 2011, red squares for 2010).
Of course, what the curves illustrate is only the baseline, theoretical progressivity of the tax system. When people use tax reliefs, additional credits, etc. the level of effective tax they pay is reduced and progressivity in the tax system is likewise reduced. And we use a great deal of tax relief in Ireland.
What the figure also illustrates is that, with Budget 2011, the curve is slightly flatter in 2011 than in the previous year. That is, the overall effect of income tax (including USC and PRSI) is less progressive. Everyone pays more tax, and a higher proportion of their incomes, but those on higher incomes see their proportion rise by less than those on lower incomes. For example, someone on €40,000 pays 3.6 per cent more in tax/charges, whereas someone on €200,000 only pays an extra 2.2 per cent.
And at a certain point in time, percentage increases and decreases are not useful comparators. For example, a ten per cent income cut for someone on €200,000 is €20,000; whereas ten per cent for someone on €20,000 is €2,000. Yet, the person on the lower income might suffer more hardship than the person who remains on a very high income of €180,000. Hence, we need to move beyond comparing the percentage changes for different income groups and start asking how much money do people need to live a decent life.
The data used in my line chart is as follows. The 2010 position (single PAYE workers, with no children, paying the income levy, health levy, PRSI and income tax):
The 2011 position (single PAYE workers, with no children, paying the Universal Social Charge, PRSI and income tax):
A further point is that many of the real, material effects of Budget 2011 do not manifest as changes to income. Economic equality can be measured as the combined effect of wealth, income, costs and public services on a person’s total net ‘benefit’ from the economy. Budget 2011 affects all four dimensions of economic equality, but some of the Budget’s implications are not immediately obvious. For example, while the Budget makes immediate changes to tax and social welfare, changing people’s incomes, it also sets the available resources for different Government Departments. It will only be as 2011 progresses that people will see the erosion of local services, such as libraries, roads, public transport, as well as a reduction in the resources available to community groups, etc. These cuts to public spending will impinge upon economic equality, with those on the lowest incomes again most badly affected, because they are more reliant on public services.
There is a lack of distributional analysis in the Budget documentation, which is a major flaw. More sophisticated analysis is required to guage the full extent to which budgetary changes affect different people in society.
13 comments:
Good critique. Of course, for a really progressive Budget, those on low pay should not have to pay tax, levies, or USC, or whatever.
I see TASC is mentioned in today's Guardian in regard to this Budget, specifically, the super-taxation of the AIB bosses. Irish Capitalism - big rewards for big screw-ups! bonuses.http://www.guardian.co.uk/business/2010/dec/09/irish-bank-bonuses-supertax-demanded
While the anomalous gains for self-employed above €200k+ are clearly idiotic, wasn't it inevitable that the lowest quintile would eventually have to be hit hardest, given the previous shape of the effective rate tax curve?
i.e. if those in lowest quintile were effectively paying zero income tax, while the mid-to-higher ranges were approaching a ceiling above which further rate increases would become counter-productive, its unavoidable that the former group will have to see a bigger adjustment that the former.
The mistake of course was that the great "bringing back into the tax net" was done in one fell swoop. Each of the previous crisis budgets would have made small steps in this regard, so that each individual budget remained progressive (as opposed to the progressivity only being apparent when the combined effects of all these budgets are considered).
@Paul
Of course, for a really progressive Budget, those on low pay should not have to pay tax, levies, or USC, or whatever.
No, as an act of good citizenship and to ensure full stakeholder status in the economy, its absolutely essential that the low-paid have to pay all of the above (at a low rate of course).
The whole idea of taking vast swathes of the work-force out of the tax net was probably the second most damaging idea to emerge from social partnership.
It was effectively a government subsidy to employers and excluded those workers from full participation in our democracy.
Anonymous,
wasn't it inevitable that the lowest quintile would eventually have to be hit hardest, given the previous shape of the effective rate tax curve?
I agree that most people need to pay more tax. But it was not necessarily to hit low paid people the hardest. For example, we did not need to bring in part-time workers; everyone earning over €4,004 pa now pays the USC.
Unfortunately, it is hard to compare tax systems because each has many differences - tax credits, reliefs, etc. But one good reference is from the OECD, Taxing Wages, if you can get access to a copy.
From page 82, it has comparable graphs for each country. These suggest that middle to high income earners could pay more tax.* And the same charts don't factor in that practically every other OECD country has significant property tax or local residency tax, which come from net incomes (after income tax).
* The problem is that people in other countries pay more tax to get more services; hence their cost of living is lower, so they are better off despite lower net incomes. We are facing higher taxes to pay the national and bank debt, and we'll still have to pay for private services, where the state services is poor or non-existent.
The political parties are avoiding grasping the political nettle that is property-related tax. But if the Government needs to raise X in tax, it can do so from Y people in employement or Y+Z people with property; which would spread out the tax over more people, each of whom would pay less.
And if our model of property-related tax could keep renters out of the tax net, the Government could still raise X without punishing a lot of low income families.
Given that income tax is about a quarter of total revenue, I don't think hitting the low paid was inevitable.
From a pro-business point of view, its going to be a right pian sa thóin for small shopkeepers to calculate the social charge liability of low paid part-time staff. This administrative burden will probably increase the black market
Anonymous
'No, as an act of good citizenship and to ensure full stakeholder status in the economy, its absolutely essential that the low-paid have to pay all of the above (at a low rate of course).'
You seem to be conflating economy and state. Taxes are levied by a state on its citzens and not on 'stakeholders' in an economy. At least in theory Irish citizens have equal rights and as such should have a say in deciding how the burdens and benefits of their economic activities are shared. Regrettably reality is very much at odds with theory. However, I fail to see how good citizens can justify the imposition of taxes on fellow citizens who cannot afford them, particularly when it is patently obvious that burdens and benefits are unfairly distributed.
@Brian
The idea of taxation being bound up with the rights and duties of citizenship has been around in western culture for centuries.
In any case, only a decade or two ago the income tax base was much wider in this country, before it was decided for political reasons to start absolving an ever-greater proportion of the workforce from any income tax obligations. So its not as if levying income tax widely is a radical new idea. Rather its a case of abandoning the reckless experiment with concentrating the income tax burden on a narrow sliver of society.
And that's not an argument based on fairness, rather its simple sustainability. In a downturn, a narrow base leads to a precipitous drop in tax revenue. It also leads to irresponsible thinking on behalf of the non-tax-paying electorate.
Restoring widely based tax obligations will result in a mental shift from "Gimme more lollipops!" to "Who is paying for all these lollipops?" to "Lets ensure we get the best value in lollipop procurement and the fairest means of distributing said confections".
@Nat
But if the Government needs to raise X in tax, it can do so from Y people in employement or Y+Z people with property; which would spread out the tax over more people, each of whom would pay less.
Nitpick: your Y versus Y+Z assumes everyone in employment owns property, which is patently not the case.
In fact the algebra would be more like Y versus W+Z where W is a proper subset of Y, so that the set W+Z has a lesser cardinality than Y.
I contacted the authors of the report asking did they include non-wage income, tax breaks and vat. They said they did include non-wage income "as per SILC by CSO, which is the data source". They said they did not include Vat, but did include tax breaks on 3 areas: pension contributions, mortgage interest and health insurance. As they said, they did not include the minimum wage but also, it is important to remember the high concentration of wealth and income in this country; we were starting from a highly unequal base. Also don't forget the inequality between those who have safe jobs and those who have lost them are in fear of losing them - only a stimulus/job-creation and protection scheme can genuinely spread the burden around fairly in this regard.
Overall I think what is clear is that the bottom and the middle have been squeezed, while *some* at the top have taken hits while others at the top are doing very well. (see Michael Taft's post on millionaires slightly better off after this budget...)
I understand your point Anon about everyone contributing to the upkeep of the state in paying income tax. I should have said income tax in my initial comment. But you agree that it should be above a minimum amount. What that amount is is the heart of politics - not economics. Economics helps in doing the impact assessment. It was a key demand of Social Partnership to ensure that those on low incomes would not pay income tax. Unions were successful in that - till this week. But we failed to stop the direct tax cutting which was regressive and inflated the boom. Nearly all economists were silent on this pro-cyclical policy, which did untold damage to the economy.
But you forget a vital point - made indirectly by other contributors, like Dave C. That is for every €100 paid in income tax in this year an additional €135 will be paid in consumption taxes (I seem to recall that it was a higher proportion forecast in Budget 2010 for consumption taxes). That is the average so low paid persons will pay proportionately more. So they do contribute to the upkeep of the state and do so more than many wealthy people do, proportionately.
The studies by the ESRI on the impact of taxes in Budgets are useful but limited. They start from today vs this day last year. Secondly, as others have said, they focus only on income tax and welfare, ignoring many other factors.
@Anonymous
Now it seems that you have moved the goalposts. Your justification for imposing taxes on citizens who cannot afford them rests not so much on good citizenship as on 'simple sustainability'. And not on fairnesss. Furthermore, your understanding of the psychology of the non-tax-paying electorate is such that you predict that by being obliged to pay taxes they will learn to appreciate the value of the benefits they receive and cease to make demands on the largesse of good citizens.
We agree that the anomalous gains for self-employed above €200k+ are idiotic. We probably agree that a €40m bonus for AIB bankers for 2008 is just as ridiculous. Unfortunately there are many other examples to illustrate that the burdens and benefits of our economic activities are distributed inequitably. In my view equality is one of the hallmarks of a civilised society and it should be one of the yardsticks by which we evaluate our decisions in all aspects of social life. On this perhaps we disagree. If so let us leave it at that.
It may be that some inequity can be tolerated in good times. I doubt if this will be so in a prolonged period of austerity. Hence, in regard to the lessons to be learnt by the non-tax-paying electorate it is possible that, rather than seeing themselves as receiving unwarranted goodies they may instead consider themselves victims of state injustice and begin to question the legitimacy of the state itself.
@ Anonymous
Nitpick: your Y versus Y+Z assumes everyone in employment owns property, which is patently not the case. In fact the algebra would be more like Y versus W+Z where W is a proper subset of Y, so that the set W+Z has a lesser cardinality than Y.
You're right. First of all, I should have used a sub-set of Y for property owners; some people in employment don't own property, as I explicitly wanted to exclude renters, who often have low paid employment.
I also thought the 'set' W+Z would actually have more elements than Y.
However, in Apr-Jun 2010, 1.86 million people were employed, out of our adult population of 3.5 million. 1.36 people (aged 15+) were not in the labour force (e.g. students, retired, carers, etc).
But, in Census 2006, there were only 1.46 households, circa 1.1 million of which were in privately owned housing and c. 180,000 who privately rented. That grew in 2007-2010, but not by the 570,000+ needed to make it larger than Y (1.86 million).
Although the likely total of people in employment who own property (some % of 1.86 million) plus a proportion of those not in the labour force who own property (some % of 1.36 million) is likely to be larger than Y (1.86 million people), I omitted that many people in employment share a house with someone else who is employed; hence splitting any property-based tax between them. This includes grown up children who are working while living at home, as well as couples.
Comparing the flat increase in income tax in Budget 2011 with the property tax, the resulting distribution of property tax [assuming a system based on site value] would probably be: more tax on single earner households in better locations; less tax (per person) on people sharing housing; less tax on people (often on lower incomes) living in less valuable locations; and more tax (often deferred) on pensioners and other property-owners who are unemployed or not in the labour force. People in social housing would be exempt under our proposals, and people on any income struggling to meet housing and childcare costs (>50% net income) would be entitled to make deferred payments, which should cover most people who are unemployed, on disability, etc.
@Anonyomous: re:Of course, for a really progressive Budget, those on low pay should not have to pay tax, levies, or USC, or whatever.
No, as an act of good citizenship and to ensure full stakeholder status in the economy, its absolutely essential that the low-paid have to pay all of the above (at a low rate of course).
The whole idea of taking vast swathes of the work-force out of the tax net was probably the second most damaging idea to emerge from social partnership.
It was effectively a government subsidy to employers and excluded those workers from full participation in our democracy.
I work with many of those workers. They will now be hit with up to €20 per week between USC/ tax in new year.
Meanwhile the candles are burning at both ends to maximise tax advantage on pensions for high earners before year end.
BTW. Do our well known tax exiles fully participate in democracy. Seems to me that they seem very active participants in most facets of Irish daily life. But no taxes! and no sign of taxes!
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