Paul Sweeney: This article by Douglas Coupland writing in the Financial Times deserves attention (click for full article on FT.com). He writes as follows:
One observation I’ve often heard from European friends, and visitors to North America, is, “It’s as if every single person in your culture has worked at one or more restaurants in their life.” I’d never thought of it before but they’re right … I can’t think of anyone in my orbits who hasn’t waited tables or bussed or dish-washed or cooked for some stretch. For Europeans visiting Canada or the States, remember that restaurant memories are a great conversation starter with most North Americans; everyone has their tales of psychotic bosses, Christmas morning shifts and après-work partying excess.
Working in a restaurant when you’re young doesn’t necessarily mean minimum wage (though it usually does) and, for many people, minimum wage is a stage-of-life thing that we all work through and gaze back on with rose-tinted glasses. When I put the word McJob in my 1991 novel Generation X, I wanted a word to describe what I saw as “a low-paying, low-prestige dead-end job that requires few skills and offers very little chance of intracompany advancement”. It made sense then, and it makes sense now. Back in the early 1990s I began to see the start of a process that’s currently in full swing: the defunding and/or elimination of the mechanisms by which we once created and maintained a healthy middle class. What was once a stage of life is now turning into, well, all of life.
[...]
McDonald’s campaigned for years and ultimately failed to have the definition of the word McJob revised in the Oxford English Dictionary, in 2006 even renting a big screen in Piccadilly Circus to put forth its viewpoint. The saga of this process is a fun read on Wikipedia but, given the accelerating shrinkage of the middle class, it all seems like a frivolous corporate bonbon from a nearly vanished era. Discussions of a minimum wage in 2014 seem to have a nasty bite. As I’ve said before, we’re all going to be working at McDonald’s into our eighties (not all, of course, on the minimum wage) but the relentless parade of numbers that are making this clear to us is starting to frighten people to the core. It’s really happening.
I guess the thing that bugs me about current minimum wage discussions is that the minimum wage has gone from being a drop-dead minimum salary that, if nothing else, protected the young, the weak and the less able from being exploited (and the moment people can exploit others, they will, and we all know it), into a mantra to the effect that if you can’t get by on a minimum wage – rent, food, transport, life – then tough luck sucker; you don’t deserve anything at all – and it’s all your fault – and by the way, you’ve forfeited your voice and participation in your culture.
The minimum wage is now used as a shield behind which politicians can deflect any social criticism that might be central to people who need a minimum wage – student life and education, most social and medical services, artistic and creative life and whatever else you can think of – and basically say, “Well, look, we gave you a minimum wage, didn’t we? So what’s your problem now? If you can’t stretch your minimum wage into food, shelter, lodging, medical, dental, education, then I guess it just sucks to be you.”
Minimum wage has gone from being a device created to protect the worst of power and labour imbalances to a fiscal panacea that allows its wielders to gut valuable social infrastructure while smiling beneath the cheesiest of haloes. I was 28 when I wrote Generation X but the last time I was officially an employee anywhere was in August 1989 – so, technically, I’ve been unemployed for the past 25 years. But about once a month I get this recurring dream where I suddenly realise that I’m unemployed, broke, living in a basement suite and desperately need a job – and so my mind automatically goes to having to work in a fast-food restaurant, and the sensation is terrifying because how on earth is anyone going to be able to live on what you make there? And then I wake up and say, “Phew. I’ve still got a few decades left before manning the French-fry computer. Dang, life is good.”
Douglas Coupland’s most recent novel, ‘Worst. Person. Ever.’, is published by William Heinemann. Twitter: @dougcoupland
(click for full article on FT.com)
Monday 30 June 2014
Thursday 26 June 2014
Innovation and jobs through public investment
Cormac Staunton: Ireland’s National Digital Research Centre (NDRC) has been ranked in the top 2.5 per cent of incubators; 19th worldwide and 7th in Europe, the highest placement for an Irish incubator. Incubators provide entrepreneurial support for start-up and early stage companies in particular sectors.
NDRC chief executive Ben Hurley said the endorsement provided further confirmation of the central place the centre maintains in the global ‘innovation ecosystem’.
NDRC describes itself as an early stage investor in innovation, making ventures happen by investing in start-ups and improving the environment in which ventures can grow. The NDRC began operations in 2007. Each year they work with approximately 1,000 individuals and invest into between 30 and 40 early stage technology ventures.
It is important to point out that this organisation is almost entirely government-funded and has registered charitable status. In 2012, it received Government subvention income of €4.3m (other income included EU Grant income of €325,319, and syndicated investment income of €10,000). Its main costs are research investment and fund management (€3.6m). Of its total costs, about 40% (approx. €1.8m of €4.5m) are staff costs for 23 staff.
By the end of 2013, the portfolio of start-up ventures supported by NDRC had secured €40m in commercial follow-on investment. The cumulative numbers of jobs created grew more than fivefold to a total of 250 by end 2012. Preliminary projections for 2013 suggest that this will grow further by well over 20% in 2013.
When ‘ripple impacts’ of digital jobs are considered, the NDRC estimates that the true value to the economy is up to 4.3 times the net digital jobs created. That would assume 1,075 jobs as a result of NDRC’s activities.
Without government funding, it is unlikely that an organisation like this would exist. It is a classic example of government investment ‘priming the pump’ for innovation and job creation, which contradicts the argument that the private sector alone can create jobs.
Investment (public and private) in Ireland has fallen from a high of 27% of GDP in 2006 to just over 10% in 2012, which was the lowest in the EU, and almost half of the EU average of 18%.
Cutting taxes is not going to close this gap. But as the NDRC shows, well targeted public investment has the ability to “crowd in” private investment to stimulate jobs, innovation and growth.
Links:
Irish Times Report 26th June 2014
NDRC Annual Report 2012
NDRC chief executive Ben Hurley said the endorsement provided further confirmation of the central place the centre maintains in the global ‘innovation ecosystem’.
NDRC describes itself as an early stage investor in innovation, making ventures happen by investing in start-ups and improving the environment in which ventures can grow. The NDRC began operations in 2007. Each year they work with approximately 1,000 individuals and invest into between 30 and 40 early stage technology ventures.
It is important to point out that this organisation is almost entirely government-funded and has registered charitable status. In 2012, it received Government subvention income of €4.3m (other income included EU Grant income of €325,319, and syndicated investment income of €10,000). Its main costs are research investment and fund management (€3.6m). Of its total costs, about 40% (approx. €1.8m of €4.5m) are staff costs for 23 staff.
By the end of 2013, the portfolio of start-up ventures supported by NDRC had secured €40m in commercial follow-on investment. The cumulative numbers of jobs created grew more than fivefold to a total of 250 by end 2012. Preliminary projections for 2013 suggest that this will grow further by well over 20% in 2013.
When ‘ripple impacts’ of digital jobs are considered, the NDRC estimates that the true value to the economy is up to 4.3 times the net digital jobs created. That would assume 1,075 jobs as a result of NDRC’s activities.
Without government funding, it is unlikely that an organisation like this would exist. It is a classic example of government investment ‘priming the pump’ for innovation and job creation, which contradicts the argument that the private sector alone can create jobs.
Investment (public and private) in Ireland has fallen from a high of 27% of GDP in 2006 to just over 10% in 2012, which was the lowest in the EU, and almost half of the EU average of 18%.
Cutting taxes is not going to close this gap. But as the NDRC shows, well targeted public investment has the ability to “crowd in” private investment to stimulate jobs, innovation and growth.
Links:
Irish Times Report 26th June 2014
NDRC Annual Report 2012
Monday 23 June 2014
What Now for Economic Inequality in Ireland?
Nat O'Connor: Last week, economist Thomas Piketty wowed a packed auditorium in Croke Park, with over 600 people in attendance to hear his analysis of economic inequality. But one key message from the TASC conference was that the debate must be carried forward from here.
As the Central Bank Governor, Professor Patrick Honohan, noted in his response to Thomas Piketty, the topic of income and wealth inequality is "a topic neglected to a surprising degree in most analysis of economic statistics." The Governor also noted "I appreciate the matter-of-fact concern with inequality - especially wealth inequality: I differ from those commentators who do not see the obvious policy relevance of these matters." (Professor Honohan's full remarks are here)
In terms of any policy response to economic inequality, there are three major 'equalisers' that need to be taken into account.
Firstly, good jobs are the primary equaliser for many people. A well-paying job is how many people provide themselves and their families with a dignified life. However, Ireland's economy has failed to generate enough jobs - and too many jobs are low paid, where even with full-time employment people are living in a precarious situation or in material deprivation.
The second great equaliser is redistribution of income through the combination of the tax, social insurance and social transfer systems. This system is progressive where higher earners pay more in income tax and PRSI (albeit regressive in terms of VAT and other indirect taxes, where people on lower incomes pay proportionately more). Social transfers like the state pension, Child Benefit, Rent Supplement, disability allowance, carers' allowance and other welfare payments play an important role in reducing poverty. However, too much attention is paid to the progressivity of the income tax system. While this is a good thing, it is too often seen in isolation from the whole system, which has weaknesses in comparison to other EU countries.
Thirdly, a decisive factor in the equality of 'quality of life' is public services. There are too many demands on people's net incomes in Ireland compared to other EU countries - even the UK. As a result, many people are unable to meet the cost of essential goods and services, which in Ireland include extremely high housing costs, health insurance, the world's most expensive childcare, transport and more. Nonetheless, the value of public services is that education provides opportunities for many people and public health services do mitigate risk for many people - although the length of waiting times rightly causes anxiety for those who cannot afford insurance as it is less the quality of service but the delays that are the greatest risk for those people solely reliant on the public provision of health care.
It is in public services that the weakness of Ireland's tax system is apparent. At only three-quarters of the EU average level of tax and social insurance, is it not surprising that Ireland's services do not provide to the same extent that public services do in many Western European welfare states. As a result of this 'low tax triangle' (low taxes, low service provision and higher out-of-pocket costs), Irish people have to spend more of their net income on services than they do in other countries.
The policy challenge in addressing economic inequality is how to move on all three points of the triangle at the same time: provide more far-reaching services or new services, lower people's cost of living, while of necessity raising taxation to pay for this.
In concrete terms, more far-reaching services might equate to health or education services that are simply free-at-the-point-of-use rather than coming with a slew of up-front fees, prescription charges, school book charges, etc. New services might include state-subsidised childcare or affordable rental housing for the mass market.
It requires detailed cost-benefit analysis to show whether or not expanded or new public services could reduce the cost of living for enough people to make the case for increased taxation persuasive. But the lack of exploration of this possibility is a major gap in the policy debate.
This gap in the debate is problematic because it is precisely through progressive taxation funding of public services that many European countries reduce economic inequality to an extent that Ireland does not. Taxation is not primarily about redistribution of income. In Ireland, social transfers account for less than a third of all spending. What is required of public services is distribution of opportunity, distribution of jobs and collective sharing of risk by all of society.
The counter-argument to this claims that taxes are too high and people want higher net incomes. But the tax debate leading up to Budget 2015 has been (to date) framed in the media as about the 41% higher rate of income tax. However, as TASC has demonstrated, only a third of income tax payers pay anything at this rate - and only a sixth of adults would benefit from any changes to it.
As such, the debate is currently a spurious argument about boosting economic activity through a tax change that will only benefit higher earners - not the large majority of people in Ireland.
The Economist illustrates effective tax rates on a 100,000 USD salary in a diagram here. Ireland's rate of tax and social insurance actually paid on this income level is around 35% (i.e. the middle of the chart - near Brazil and India, but below Germany or France) - and it would be far lower if Ireland's extremely low employer's PRSI was taken into account. What is really being suggested in the focus on the higher tax rate of 41% (52% when PRSI and USC are included) is that Ireland should be more like the UK or USA, countries where people on high salaries pay less income tax - and where overall economic inequality is higher than Ireland.
The progressive counter-argument always requires more evidence than populist anti-tax rhetoric. This is the argument that stronger public services and social transfers would improve the quality of life for more people - even if they had lower net income due to higher tax and social insurance to pay for those services. Moreover, more equal economies often do better. Higher social transfers means more money circulating in local economies. And stronger public services also both directly boost GDP and also can lay the foundations for stronger performance in the private sector (e.g. greater public investment in infrastructure, such as IBEC is currently calling for).
Given the strong evidence that more equal countries do better, and given the low level of Ireland's overall tax and social insurance, the balance of probability favours maintaining or increasing taxation in Budget 2015 - not reducing it. This is necessary to fund public services, social transfers and public investment, which in turn are vital to tackle economic inequality.
As the Central Bank Governor, Professor Patrick Honohan, noted in his response to Thomas Piketty, the topic of income and wealth inequality is "a topic neglected to a surprising degree in most analysis of economic statistics." The Governor also noted "I appreciate the matter-of-fact concern with inequality - especially wealth inequality: I differ from those commentators who do not see the obvious policy relevance of these matters." (Professor Honohan's full remarks are here)
In terms of any policy response to economic inequality, there are three major 'equalisers' that need to be taken into account.
Firstly, good jobs are the primary equaliser for many people. A well-paying job is how many people provide themselves and their families with a dignified life. However, Ireland's economy has failed to generate enough jobs - and too many jobs are low paid, where even with full-time employment people are living in a precarious situation or in material deprivation.
The second great equaliser is redistribution of income through the combination of the tax, social insurance and social transfer systems. This system is progressive where higher earners pay more in income tax and PRSI (albeit regressive in terms of VAT and other indirect taxes, where people on lower incomes pay proportionately more). Social transfers like the state pension, Child Benefit, Rent Supplement, disability allowance, carers' allowance and other welfare payments play an important role in reducing poverty. However, too much attention is paid to the progressivity of the income tax system. While this is a good thing, it is too often seen in isolation from the whole system, which has weaknesses in comparison to other EU countries.
Thirdly, a decisive factor in the equality of 'quality of life' is public services. There are too many demands on people's net incomes in Ireland compared to other EU countries - even the UK. As a result, many people are unable to meet the cost of essential goods and services, which in Ireland include extremely high housing costs, health insurance, the world's most expensive childcare, transport and more. Nonetheless, the value of public services is that education provides opportunities for many people and public health services do mitigate risk for many people - although the length of waiting times rightly causes anxiety for those who cannot afford insurance as it is less the quality of service but the delays that are the greatest risk for those people solely reliant on the public provision of health care.
It is in public services that the weakness of Ireland's tax system is apparent. At only three-quarters of the EU average level of tax and social insurance, is it not surprising that Ireland's services do not provide to the same extent that public services do in many Western European welfare states. As a result of this 'low tax triangle' (low taxes, low service provision and higher out-of-pocket costs), Irish people have to spend more of their net income on services than they do in other countries.
The policy challenge in addressing economic inequality is how to move on all three points of the triangle at the same time: provide more far-reaching services or new services, lower people's cost of living, while of necessity raising taxation to pay for this.
In concrete terms, more far-reaching services might equate to health or education services that are simply free-at-the-point-of-use rather than coming with a slew of up-front fees, prescription charges, school book charges, etc. New services might include state-subsidised childcare or affordable rental housing for the mass market.
It requires detailed cost-benefit analysis to show whether or not expanded or new public services could reduce the cost of living for enough people to make the case for increased taxation persuasive. But the lack of exploration of this possibility is a major gap in the policy debate.
This gap in the debate is problematic because it is precisely through progressive taxation funding of public services that many European countries reduce economic inequality to an extent that Ireland does not. Taxation is not primarily about redistribution of income. In Ireland, social transfers account for less than a third of all spending. What is required of public services is distribution of opportunity, distribution of jobs and collective sharing of risk by all of society.
The counter-argument to this claims that taxes are too high and people want higher net incomes. But the tax debate leading up to Budget 2015 has been (to date) framed in the media as about the 41% higher rate of income tax. However, as TASC has demonstrated, only a third of income tax payers pay anything at this rate - and only a sixth of adults would benefit from any changes to it.
As such, the debate is currently a spurious argument about boosting economic activity through a tax change that will only benefit higher earners - not the large majority of people in Ireland.
The Economist illustrates effective tax rates on a 100,000 USD salary in a diagram here. Ireland's rate of tax and social insurance actually paid on this income level is around 35% (i.e. the middle of the chart - near Brazil and India, but below Germany or France) - and it would be far lower if Ireland's extremely low employer's PRSI was taken into account. What is really being suggested in the focus on the higher tax rate of 41% (52% when PRSI and USC are included) is that Ireland should be more like the UK or USA, countries where people on high salaries pay less income tax - and where overall economic inequality is higher than Ireland.
The progressive counter-argument always requires more evidence than populist anti-tax rhetoric. This is the argument that stronger public services and social transfers would improve the quality of life for more people - even if they had lower net income due to higher tax and social insurance to pay for those services. Moreover, more equal economies often do better. Higher social transfers means more money circulating in local economies. And stronger public services also both directly boost GDP and also can lay the foundations for stronger performance in the private sector (e.g. greater public investment in infrastructure, such as IBEC is currently calling for).
Given the strong evidence that more equal countries do better, and given the low level of Ireland's overall tax and social insurance, the balance of probability favours maintaining or increasing taxation in Budget 2015 - not reducing it. This is necessary to fund public services, social transfers and public investment, which in turn are vital to tackle economic inequality.
Wednesday 18 June 2014
Ireland's Corporation Tax Residency Rules Under Scrutiny
According to Professor Jim Stewart of TCD, Ireland’s industrial policy is too tax-dependent and he suggested that policymakers were overly influenced by tax professionals who work for the major accounting firms that devise the tax strategies of the multinationals.
Up to €40 billion, or almost half, of the annual profits made by Irish-registered companies fall outside the corporate tax net because so many multinational subsidiaries here declare they are tax resident elsewhere. (read more in this Irish Times report).
Up to €40 billion, or almost half, of the annual profits made by Irish-registered companies fall outside the corporate tax net because so many multinational subsidiaries here declare they are tax resident elsewhere. (read more in this Irish Times report).
Monday 16 June 2014
Thomas Piketty and Ireland's Property Tax
Nat O'Connor: The Irish Times had a major article on Thomas Piketty on Saturday (click here) They also had an interesting angle on Ireland's property tax, with Professor Piketty suggesting it should be altered.
This gets us into one of the interesting issues raised by Piketty, which is how we define wealth or 'capital' - that being the key word in Piketty's tome, Capital in the Twenty-First Century. Piketty bundles together all assets - financial, housing, etc. - into aggregate wealth. And he allows the inclusion of negative numbers in this equation, in the form of debt.
One of Piketty's policy proposals to tackle rising inequality is the introduction of wealth tax. He says: “For the same tax revenue that you will get from a proportional property tax, I would transfer it to a progressive tax on net wealth, meaning real estate property value plus financial assets, minus debt, minus mortgage and other financial debt." As a result, he suggests that Ireland should re-calculate the residential property tax based on net value rather than nominal value.
But by extending property tax to include all property (i.e. making it into a comprehensive wealth tax), Piketty argues that "it would serve an important democratic purpose in bringing greater transparency to the distribution of wealth, allowing citizens and public representatives to make more informed decisions."
Crucially, better data on wealth would enable policy-makers to determine whether or not the wider economy and society is being served by wealth concentration, in terms of a jobs dividend. If not, wealth taxation could be adjusted until a better balance is struck.
A joint TASC-NERI paper exploring the potential of a wealth tax for Ireland can be read here
This gets us into one of the interesting issues raised by Piketty, which is how we define wealth or 'capital' - that being the key word in Piketty's tome, Capital in the Twenty-First Century. Piketty bundles together all assets - financial, housing, etc. - into aggregate wealth. And he allows the inclusion of negative numbers in this equation, in the form of debt.
One of Piketty's policy proposals to tackle rising inequality is the introduction of wealth tax. He says: “For the same tax revenue that you will get from a proportional property tax, I would transfer it to a progressive tax on net wealth, meaning real estate property value plus financial assets, minus debt, minus mortgage and other financial debt." As a result, he suggests that Ireland should re-calculate the residential property tax based on net value rather than nominal value.
But by extending property tax to include all property (i.e. making it into a comprehensive wealth tax), Piketty argues that "it would serve an important democratic purpose in bringing greater transparency to the distribution of wealth, allowing citizens and public representatives to make more informed decisions."
Crucially, better data on wealth would enable policy-makers to determine whether or not the wider economy and society is being served by wealth concentration, in terms of a jobs dividend. If not, wealth taxation could be adjusted until a better balance is struck.
A joint TASC-NERI paper exploring the potential of a wealth tax for Ireland can be read here
Thursday 12 June 2014
IBEC's proposed tax cuts and Ireland's 'Low Tax Triangle'
Nat O'Connor: The business lobby group IBEC is advocating cuts to the higher rate of income tax. Such cuts would only benefit one third of income tax payers, and one sixth of adults in Ireland. The Taoiseach is reportedly sympathetic to this viewpoint, and Minister Noonan has focused on the higher rate of income tax for any cut in Budget 2015 (Irish Independent).
TASC has just published a six-page summary of how much tax people actually pay out of their incomes, in order to inject the facts about income tax into the debate.
The risk for most people is that if the tax cut lobbyists are successful, there will be cuts aimed at the 41% rate, which will benefit only the better-off in society - yet public services and social transfers will be cut again to fund those tax cuts.
In Ireland, most of us pay far less than the 52% 'marginal' tax rates (made up of income tax, USC and PRSI) and we pay much less tax and social insurance than most other Europeans, because our system has more tax credits, tax reliefs, etc. But there is no doubt that many people like the idea of a tax cut because they are under such pressure to meet their needs from their take-home pay.
IBEC has characterised the tax increases in recent years as "penal austerity taxes". Yet, they are ignoring the fact that the tax base was hollowed out during the boom, and tax take collapsed by a third between 2008 and 2010. There is a need to bring in new taxes to replace the unsustainable reliance on property-based tax from stamp duty, as well as income tax and VAT that was ultimately linked to the property bubble. If the Government further reduces taxation in Budget 2015, existing public services will become unsustainable and the national debt could become unstable. As it is, Ireland is still not generating enough tax and social insurance to pay for services.
IBEC's press release argues: "Cut income tax: The tax burden is too high and tax on work is way out of line internationally. The entry point to the higher marginal tax rate should be increased, and the marginal rate reduced below 50%. This will put more money into the pockets of Irish consumers, and ultimately benefit the Exchequer though greater economic activity and tax revenue."
On all points IBEC is wrong:
"The tax burden is too high" - Ireland total tax and social insurance take is three-quarters of the EU average.
"tax on work is way out of line internationally" - As shown in the OECD's latest taxing wages report, the 'tax wedge' on average workers in Ireland is the lowest among EU members of the OECD, and the second-lowest in the whole OECD for single people. This is largely because employer's PRSI is so very low in Ireland.
TASC has just published a six-page summary of how much tax people actually pay out of their incomes, in order to inject the facts about income tax into the debate.
The risk for most people is that if the tax cut lobbyists are successful, there will be cuts aimed at the 41% rate, which will benefit only the better-off in society - yet public services and social transfers will be cut again to fund those tax cuts.
In Ireland, most of us pay far less than the 52% 'marginal' tax rates (made up of income tax, USC and PRSI) and we pay much less tax and social insurance than most other Europeans, because our system has more tax credits, tax reliefs, etc. But there is no doubt that many people like the idea of a tax cut because they are under such pressure to meet their needs from their take-home pay.
IBEC has characterised the tax increases in recent years as "penal austerity taxes". Yet, they are ignoring the fact that the tax base was hollowed out during the boom, and tax take collapsed by a third between 2008 and 2010. There is a need to bring in new taxes to replace the unsustainable reliance on property-based tax from stamp duty, as well as income tax and VAT that was ultimately linked to the property bubble. If the Government further reduces taxation in Budget 2015, existing public services will become unsustainable and the national debt could become unstable. As it is, Ireland is still not generating enough tax and social insurance to pay for services.
IBEC's press release argues: "Cut income tax: The tax burden is too high and tax on work is way out of line internationally. The entry point to the higher marginal tax rate should be increased, and the marginal rate reduced below 50%. This will put more money into the pockets of Irish consumers, and ultimately benefit the Exchequer though greater economic activity and tax revenue."
On all points IBEC is wrong:
"The tax burden is too high" - Ireland total tax and social insurance take is three-quarters of the EU average.
"tax on work is way out of line internationally" - As shown in the OECD's latest taxing wages report, the 'tax wedge' on average workers in Ireland is the lowest among EU members of the OECD, and the second-lowest in the whole OECD for single people. This is largely because employer's PRSI is so very low in Ireland.
"The entry point to the higher marginal tax rate should be increased and the marginal rate reduced below 50%" - Why? Ireland's system grants generous levels of tax credits to everyone, while other countries don't. Rates or bands don't matter. What does matter is effective levels of tax paid and in this regard Ireland is much lower than other EU countries (as shown by the OECD and in TASC's analysis).
"This will put more money into the pockets of Irish consumers, and ultimately benefit the Exchequer though greater economic activity and tax revenue" - This is unlikely. Firstly, IBEC's proposal is to give cuts only to the sixth of adults with the highest incomes rather than lower income people who are more likely to spend all of their income in the local economy. Secondly, the ESRI has just demonstrated that higher earners are more likely to pay down debt, not spend in the economy. Even if they did spend, they are more likely to spend on imports or foreign travel - with no benefit to Ireland's economy. Thirdly, many people will have to put their hands in their pockets to pay for services that will be cut if tax revenue falls - so an extra €200/year would quickly be taken back through school costs, medical costs, etc. In sum, there will be little or no boost to economic activity and the loss of tax revenue will simply result in a loss of services. Simultaneously, GDP will contract to the extent that Government spending, investment and social transfer are cut. So the net effect of tax cuts in Ireland's context is far more likely to be a shrunk economy (lower GDP).
One way to understand the issue is to see a triangle connecting low taxes, low services and high 'out of pocket' costs for goods and services that would be provided publicly and paid for collectively in many other European other societies.
If Ireland is to provide better public services and higher levels of social welfare in future, it is necessary to address all three parts of the triangle at the same time.
There is a need to examine cost of living - food, rent/mortgages, childcare, energy, transport and more. This does not need to cost the public finances much. Stronger regulation and enforcement of competition rules to break cartels and oligopolies could make a significant difference, but that would require political will to stand up to businesses not engaged in fair and open competition.
Taking some costs away from individuals and families in favour of public service provision could also be a game-changer. For example, most European countries subsidise childcare to a much greater extent than Ireland. Equally, affordable rental housing is much more frequently available from towns and cities across Europe. Any move to open up new areas of public provision (or subsidy) would have to be funded with new taxes. But it's a question of cost-benefit analysis. Would most people be better off if all of society helped pay for child care, so that they could work in other occupations (growing the economy and paying tax too)? Would most people benefit if the state stepped in to provide cheaper rental housing for a category of workers who will never become home owners? The answer is probably yes.
Tax and social insurance is therefore not a question of 'cuts good, tax bad' - but needs to be part of a conversation about public services, best value for most citizens in the balance of collective services versus individual costs, and working out how to pay for public services sustainably and equitably.
TASC's latest policy brief provides a factual basis to do just that.
One way to understand the issue is to see a triangle connecting low taxes, low services and high 'out of pocket' costs for goods and services that would be provided publicly and paid for collectively in many other European other societies.
If Ireland is to provide better public services and higher levels of social welfare in future, it is necessary to address all three parts of the triangle at the same time.
There is a need to examine cost of living - food, rent/mortgages, childcare, energy, transport and more. This does not need to cost the public finances much. Stronger regulation and enforcement of competition rules to break cartels and oligopolies could make a significant difference, but that would require political will to stand up to businesses not engaged in fair and open competition.
Taking some costs away from individuals and families in favour of public service provision could also be a game-changer. For example, most European countries subsidise childcare to a much greater extent than Ireland. Equally, affordable rental housing is much more frequently available from towns and cities across Europe. Any move to open up new areas of public provision (or subsidy) would have to be funded with new taxes. But it's a question of cost-benefit analysis. Would most people be better off if all of society helped pay for child care, so that they could work in other occupations (growing the economy and paying tax too)? Would most people benefit if the state stepped in to provide cheaper rental housing for a category of workers who will never become home owners? The answer is probably yes.
Tax and social insurance is therefore not a question of 'cuts good, tax bad' - but needs to be part of a conversation about public services, best value for most citizens in the balance of collective services versus individual costs, and working out how to pay for public services sustainably and equitably.
TASC's latest policy brief provides a factual basis to do just that.
Wednesday 4 June 2014
Want growth and jobs? First tackle inequality.
Cormac Staunton: A recent article by Ben Olinsky at the Center for American Progress brings together a number of key findings to show how greater economic equality can be a key driver of economic growth.
In Ireland this is often considered counter-intuitive because we experienced rapid growth alongside rising inequality from the late 1980’s. However, as the paper makes clear, Ireland (along with South Korea) was very much an outlier in this respect.
As Ireland now struggles for growth in the post-crisis period, there are a number of questions highlighted by the paper that are also important for us to consider:
The evidence from the three papers analysed by Olinsky is that economic policies that rely on “trickle-down” theories and the resulting inequality are bad for the economy. It is a reminder for us in Ireland that our reliance on these theories of growth is out-dated, counter-productive and in some cases harmful.
The paper identifies a number of explicit linkages between inequality and economic inefficiency, which lead to reduced growth and greater economic instability. Investment growth, productivity growth, employment growth, middle-class income growth, national fiscal health, and overall economic growth are all shown to be weaker or have declined under trickle-down policies.
The paper suggests a number of policies to combat inequality and to strengthen those on low incomes through a progressive economic agenda, which would in turn have a positive impact on the economy.
The message for Ireland is clear: we should focus on growing the economy from the “middle out” or the “bottom up” instead of from the top down.
Five reasons why inequality is bad for the economy
1. Increasing inequality is bad for growth
It is often assumed that tax cuts for those on high incomes, while deepening inequality, will lead to economic growth. However, empirical evidence does not back this up. For example in the US, in 1981 the marginal tax rate for the highest income bracket in the US was 70 per cent, but that fell to just 28 per cent by 1989. Taxes on high incomes were further cut in early 2000s. Yet economic growth in the US was greater after the tax increases of 1993 than in the periods after income tax cuts in the 1980s and early 2000s.
2. Inequality is bad for investment
Inequality leads to a lack of resources for public investment, which can have longer term costs. For example, when children lack sufficient access to educational resources and after-school activities such as art and music, they become less-effective ‘inputs’ into the economy, thus depressing the rate of growth.
There is also a strong correlation showing that as the size of government shrinks, inequality increases. In a cross country study, nearly 60 per cent of the variation in inequality was accounted for by size of government. This then creates a perpetuating cycle of spending cuts, low investment and increasing inequality.
3. Inequality affects consumption
Income inequality promotes inefficient patterns of consumption in a number of ways. Firstly, where individuals feel pressured to consume more than is efficient as a sign of social status, such as overly large and expensive housing, this wastes resources that could be used for productive investments.
Secondly, because of rising inequality, middle- and low-income families are forced to borrow to sustain their standards of living. This creates excessive middle-class debt, generating instability in financial markets, lower economic growth, and the potential for a market crash.
On the other side, the marginal propensity to consume is lowest amongst those on highest incomes. Redistributing income away from the top and to the middle and the bottom will generate increased consumer spending and thus stimulate the economy, a particularly important mechanism in periods of recession and weak growth.
4. Inequality reduces risk-taking
A core component of a healthy labour market, which is necessary for a strong economy, is the ability for individuals to start their own businesses. Job insecurity and a lowering of the social ‘safety net’ can reduce the incentives for risk-taking entrepreneurial behaviour. Social programmes can give aspiring entrepreneurs the security that is necessary to take risks for ventures that could be beneficial to economic growth.
5. Inequality produces inefficient labour markets
A well-functioning economy needs a healthy labour market that allows workers to find jobs that take advantage of their unique skills and experiences. However, with rising inequality many workers may be reluctant to change occupation or sector because they are worried about ending up worse off.
Policies designed to combat inequality lead to a more efficient labour market. A more progressive tax system and increased access to social services and transfers tend to encourage labour-market mobility and afford individuals, particularly those on low incomes, the possibility of changing occupations and sectors.
Increasing economic equality means that workers take jobs that best utilize their skills, suggesting a further link between fighting inequality and growing the economy.
The paper by Ben Olinsky and links to all the papers quoted is available here.
Cormac Staunton is TASC's Policy Analyst. You can follow him on Twitter @Cormac_Staunton
In Ireland this is often considered counter-intuitive because we experienced rapid growth alongside rising inequality from the late 1980’s. However, as the paper makes clear, Ireland (along with South Korea) was very much an outlier in this respect.
As Ireland now struggles for growth in the post-crisis period, there are a number of questions highlighted by the paper that are also important for us to consider:
- Should we raise or lower taxes on high incomes?
- Should we cut spending or make strategic investments in education, research, and infrastructure?
- Should we raise or lower the minimum wage?
- Should we effectively regulate financial markets or allow the free market to sort it out?
The evidence from the three papers analysed by Olinsky is that economic policies that rely on “trickle-down” theories and the resulting inequality are bad for the economy. It is a reminder for us in Ireland that our reliance on these theories of growth is out-dated, counter-productive and in some cases harmful.
The paper identifies a number of explicit linkages between inequality and economic inefficiency, which lead to reduced growth and greater economic instability. Investment growth, productivity growth, employment growth, middle-class income growth, national fiscal health, and overall economic growth are all shown to be weaker or have declined under trickle-down policies.
The paper suggests a number of policies to combat inequality and to strengthen those on low incomes through a progressive economic agenda, which would in turn have a positive impact on the economy.
The message for Ireland is clear: we should focus on growing the economy from the “middle out” or the “bottom up” instead of from the top down.
Five reasons why inequality is bad for the economy
1. Increasing inequality is bad for growth
It is often assumed that tax cuts for those on high incomes, while deepening inequality, will lead to economic growth. However, empirical evidence does not back this up. For example in the US, in 1981 the marginal tax rate for the highest income bracket in the US was 70 per cent, but that fell to just 28 per cent by 1989. Taxes on high incomes were further cut in early 2000s. Yet economic growth in the US was greater after the tax increases of 1993 than in the periods after income tax cuts in the 1980s and early 2000s.
2. Inequality is bad for investment
Inequality leads to a lack of resources for public investment, which can have longer term costs. For example, when children lack sufficient access to educational resources and after-school activities such as art and music, they become less-effective ‘inputs’ into the economy, thus depressing the rate of growth.
There is also a strong correlation showing that as the size of government shrinks, inequality increases. In a cross country study, nearly 60 per cent of the variation in inequality was accounted for by size of government. This then creates a perpetuating cycle of spending cuts, low investment and increasing inequality.
3. Inequality affects consumption
Income inequality promotes inefficient patterns of consumption in a number of ways. Firstly, where individuals feel pressured to consume more than is efficient as a sign of social status, such as overly large and expensive housing, this wastes resources that could be used for productive investments.
Secondly, because of rising inequality, middle- and low-income families are forced to borrow to sustain their standards of living. This creates excessive middle-class debt, generating instability in financial markets, lower economic growth, and the potential for a market crash.
On the other side, the marginal propensity to consume is lowest amongst those on highest incomes. Redistributing income away from the top and to the middle and the bottom will generate increased consumer spending and thus stimulate the economy, a particularly important mechanism in periods of recession and weak growth.
4. Inequality reduces risk-taking
A core component of a healthy labour market, which is necessary for a strong economy, is the ability for individuals to start their own businesses. Job insecurity and a lowering of the social ‘safety net’ can reduce the incentives for risk-taking entrepreneurial behaviour. Social programmes can give aspiring entrepreneurs the security that is necessary to take risks for ventures that could be beneficial to economic growth.
5. Inequality produces inefficient labour markets
A well-functioning economy needs a healthy labour market that allows workers to find jobs that take advantage of their unique skills and experiences. However, with rising inequality many workers may be reluctant to change occupation or sector because they are worried about ending up worse off.
Policies designed to combat inequality lead to a more efficient labour market. A more progressive tax system and increased access to social services and transfers tend to encourage labour-market mobility and afford individuals, particularly those on low incomes, the possibility of changing occupations and sectors.
Increasing economic equality means that workers take jobs that best utilize their skills, suggesting a further link between fighting inequality and growing the economy.
The paper by Ben Olinsky and links to all the papers quoted is available here.
Cormac Staunton is TASC's Policy Analyst. You can follow him on Twitter @Cormac_Staunton
TASC Conference Programme Now Available
The TASC 2014 Conference Programme is now available here.
20th June 2014, Croke Park Conference Centre.
Keynote address by Thomas Piketty, author of Capital in the Twenty-First Century, with a response by Patrick Honohan, Governor of the Central Bank.
20th June 2014, Croke Park Conference Centre.
Keynote address by Thomas Piketty, author of Capital in the Twenty-First Century, with a response by Patrick Honohan, Governor of the Central Bank.
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