Tom Healy: The Nevin Economic Research Institute has published the Autumn Economic Observer here. The key messages are:
* We have choices
* A smaller fiscal consolidation (€2.7 bn) combined with an accelerated investment stimulus next year (of which €500m 'off the books') could create 21,000 additional jobs compared to 'Plan A'
* A Plan B would raise revenue starting with the highest income households (>€100K p.a.) and maintain front line services while re-investing any 'savings' into priority areas such as a Youth Guarantee for unemployed school and college leavers.
* Plan B envisages -7.5% government deficit in 2013.
We have used HERMIN to model the impacts. We have gone with Department of Finance projections and estimates and used the model to show how a reversal of planned cuts would be beneficial and just as efficient in reaching 'Troika' targets. A seminar will present the results today while my colleague Rory O'Farrell and I will present a paper on 'Alternative Fiscal Adjustment Pathways' at the Dublin Economics Workshop to be held this year in Galway next month.
10 comments:
Hi Tom,
This is a useful contribution and raises many important points.
However, I think there is a big difference between a group that has "an average income of €100,000" and a group with "incomes above €100,000".
In the post here you say "Plan B would raise revenue starting with the highest income households (>€100K p.a.)" but this is at odds with what is in the report. The proposed income tax increase is on the top 20% of tax cases and while this quintile has an average income of around €100,000 it has a lower bound of around €55,000.
Around 5% of tax cases have a reported income of more that €100,000. If the extra 1.5 percentage points on the effective income tax rate was applied to this group it would raise around €300 million.
It is only by applying the proposed tax increase to all tax cases with an income above €55,000 that the full €650 million would be realised. A household with an income of €55,000 would face an increase in their income tax bill of over €800.
I don't disagree that income tax should be raised but it is not correct to say that the proposal to apply extra tax to the top 20% of tax cases means only those with incomes above €100,000 would be affected. The proposal means that a double-income couple each earning €27,500 would face a significant rise in their tax bill.
Also, the report suggests that €2,250 million of tax measures be introduced this year. The following are provided for:
Budget 2012 Carryover: €300m
Site Value Tax: €300m
Tax on Incomes > 55k: €650m
Wealth Tax: €200m
CGT and CAT Reforms: €100m
Corporation Tax: €50m
This comes to €1,600m so a further €650 million of revenue raising measures are still required.
@ Séamus Thanks very much for your observations which are very useful. You are completely right that the ‘top 20%’ of tax cases includes households with just about €55,000 of gross income per annum and up. This is clear from indicator 4.6a in our NERI Quarterly Economic Facts here. In proposing additional tax of 1.5% on average for the whole group of 20% of tax cases it was not our intention that this would be necessarily a constant figure all the way from €55,000 up. One option which I would consider feasible and fair would be to levy a modest addition from a relatively high level (say €80,000) and increase this gradually with the same effect of reaching an overall average of 1.5% for the group as a whole and yielding €650 million in additional revenue. My apologies for any possible confusion by referring in this blog without qualifying further to the need to ‘raise revenue starting with the highest income households (>€100K per annum)’. Such an approach is possible and would make sense and is not incompatible with an overall target of 1.5% for the top 20% of tax cases (and as you know tax case income distribution data does not match household income distribution data).
In regards to your point about the shortfall of €650 million when you add up the elements of our tax proposals we have summarised our measure and allowed for a separate additional amount under the already signalled Government plan.
Hi Tom
In your Morning Ireland interview, you referred to incomes above €100,000. You repeat it in this article. You also had it in your executive summary.
The €100,000 figure is an average and is irrelevant. It includes a married couple who both earn €27,500 and a single person earning €2m. That is why the average effective tax rate on these "high earners" is only 21.5%. The guy on €27,500 pays 1% and the guy on €2m pays 53%. There are far more of the lower paid 1% tax payers, so you can claim that the average person earning over €100,000 is paying only 21.5% tax.
It sounded very reasonable on the radio. Impose a tax increase of 1.5% on the 430,000 people earning more than "on average, €100,000" and we get just under €700m
You seem to be actually proposing something quite different.
You are increasing tax on people earning much less than €100k - possibly as low as €27,500. And you are proposing a much higher figure than 1.5% on the 60,000 who do earn more than €100,000.
I don't object to paying higher taxes, but I do object to paying 40% of my income in tax and charges while at the same time, being berated for paying on 21.5%.
Brendan Burgess
Oops!
The guy on 27,500 is paying about 18% tax and charges this year.
Brendan
Tom, with respect to your reply to Seamus (post 2 above): You say that it was not the intention that the 1.5% would be a constant applying to the full group of the top 20% of tax cases (433K cases earning over about €55K) and then you suggest one option as having a modest % starting at say €80K income and increasing above that so that the overall average from ‘the group as a whole’ would be 1.5%. If no adjustment is applied below €80K, then you are no longer talking about adjusting the top 20% but only those with income above €80K (which would be fewer than 10% of tax cases) – so why say you are proposing an increase for the top 20% of tax cases?
The wider issue that needs to be addressed before the easy ‘slap a bit more tax on the higher earners’ option is suggested is the one that underlies your report but gets very little mention: effective tax rates are nowhere near as high as scheduled tax rates. Why do you think it’s fair to suggest extra taxation on someone earning, say, 250K and paying their full scheduled 35%-37% income tax (that’s the actual average tax rate, not the marginal rate and not including a further 11% USC and PRSI) without first addressing why the effective rate for that income band is below 30%?
And it is clear that that IS your suggestion: your two examples (Table 11) move your argument from an abstract ‘increase the effective tax rate of this group’ to a specific ‘here’s what the impact would be on two high-earning households’. The examples apply your suggested increase of 1.5% (and as an aside, 100K to 120K must be the tipping point for your scaled increase as both examples use 1.5% rather than progressive % that you say is the intention...) to scheduled tax amounts rather than effective tax amounts. So the taxpayer who avails of no tax breaks or shelters will be hit again while those who creatively (but legally) manage their tax affairs will still pay much lower than scheduled rates. And you’ll get to write another report next year bemoaning the fact that ‘on average’, the top tax payers don’t pay very much at all...
Alex B
Tom, getting back to your assertion that it wasn't the intention that the 1.5% would apply as a flat rate for all tax cases above €55K income, how does that fit with the text below Table 10 on page 25? Average increases of €6,000 for the top 1% (A: 130M from 21,650 cases), €2,000 for the top 10% (B: 433M from 216,500 cases)and €1,500 for the top 20% (C: 650M from 433,000 cases) imply (taking B from C) that you are forecasting €216M of the €650M additional revenue to come from the 'second 10%' group - ie those earning from €55K to €80K. Any comment on this?
Alex B
Seamus Coffey wrote:
< This comes to €1,600m so a further €650 million of revenue raising measures are still required. >
And note how Corporation Tax forms a paltry 3% approx. of that € 1600m figure. How long will we continue to ignore this elephant in the room?
Brendan G
Just to pick up on a number of points. I fully acknowledge that taxation is a difficult subject to discuss anywhere in the world but especially in Ireland. All from left to right, unionist to nationalist are agreed that each of us already pays too much tax (and we also want better public services). The fact that many find hard to believe or accept is that the average effective tax rate is very low whether you use Revenue 'tax case' data or CSO household data (the latter shows significantly lower effective tax rates on the high-income households in 2010 = 21.6% - see table 1.1. of EU-SILC). We decided to go for a cautious and up to date source - Revenue. Hence we cited tax case data estimated for 2010 by Revenue. that:
1. Data cited by us in the NERI Quarterly Economic Observer were based on statistics quoted by the Minister for Finance in a reply to a recent Dáil Question.
2. The data show that, on average in 2012, it is estimated by the Revenue Commissioners the top 20% of income tax cases pay 21.5% of their ‘gross income’ on income tax.
3. Although very important and useful, the data which was provided by the Revenue Commissioners is limited in a number of respects.
4. The data (as noted in our publication) do not include PRSI and USC which, together, would typically add just over 10 percentage points to the average effective tax take; and
5. The definition of ‘gross income’ on which tax is deducted does not include certain other income ‘which is not income for tax purposes’. Examples given by the Revenue Commissioners include employee contributions to pension funds (which are tax deductible) as well as interest income that does not need to be declared or is not recorded.
comment cont'd It is therefore difficult, using Revenue data estimates for 2012, to know the up to date income distribution of households (as distinct from ‘tax cases’ which includes single, widowed, jointly assessed couples and non-jointly assessed couples). Revenue can split out tax cases by marital status and individual/joint assessment up to the year 2009 only (refer to Statistical Report of the Revenue Commissioners for the year 2010).
EU-SILC data published by the CSO provides a more complete view of income but the data refer to 2010 and there are inconsistencies between estimated total household income and tax paid as estimated from administrative and statistical survey data. Administrative data are based on a different definition of income and coverage of population.
We chose to cite ‘tax case’ data from the Revenue Commissioners because it provided the most up to date and reliable estimate of the total income tax payable by high earners and that in the current year. However, nobody is claiming that revenue stats provide a complete view of household income and its distribution. It is true that there are 430,000 ‘tax cases’ receiving on average €100,000 ‘gross income’ per annum. It is also the case, as noted by Séamus and Brendan, the top 20% of ‘tax cases’ includes cases in the gross income range of €55,000 and above (this information is also contained in our Quarterly Economic Facts – indicator 4.6a – page 69-70).
We have proposed a ‘modest increase in the effective income taxation rate faced by the top 20% of tax cases’. We proposed that the effective tax rate paid by this group rise by 1.5% in 2013 meaning that, on average, the top 20% of tax cases would pay almost 23% of their income in income taxation – yielding approximately €650 million in a full year. We gave a number of examples of how this would affect households on the assumption of a constant additional amount of 1.5% of gross income to all tax cases in the top 20% of all tax-cases. These figures are compatible with those cited by us in the reply of the Minister for Finance. However, to propose precisely which
We indicate in the QEO, that it is a choice for Government as to how it might implement a proposal to increase the average income tax rate on the top 20% of tax cases. However, we suggest that one of the approaches would be to recapture tax credits from high earners.
My preference would be for a steep progressive additional tax with a high rate applying on incomes in excess of half a million euro per annum (of which there are 3,200 individuals according to Revenue and that based on a restricted (possibly very restricted) measure of true household or individual income. I estimate that these folks receive 3 billion and pay on average 1 billion in income tax. add to that PRSI and USC and it might come to 40% - say 1.3 bn. I would suggest pushing this to 50% by closing reliefs. I also allow for the fact that 40% might be an under-estimate because their gross income might be significantly different from true income.
why did go for the top quintile or top two income deciles? I think that tax raising needs to start at both the nineth and tenth income deciles. but it needs to be more progressive by hitting the 10th decile more. thanks for raising the issue. we will be more explicit about the hitting the top decile the next time!
Hi Tom
There is no difficulty in discussing tax in Ireland. The difficulty is that some people persist in perpertrating the myth that High Earners pay no tax in Ireland.
This myth suits no one as it achieves nothing.
Increasing the margingal tax rate on people earning over €100k will raise very little. If it did, I would certainly support it.
From reading your contributions, it seems that you would like to get to the truth. To do so, you have to stop using "averages" and "tax cases". If I have an income of €10k and you have an income of €190k, our average income is €100k.
You are doing something similar by lumping in two married individuals who are earning €27,500 each with a single person earning €2m. The average earnings of all these tax cases is €100k.
Brendan
Post a Comment