Power, Trust and the Household Charge

Sheila Killian: This afternoon Erich Kirchler gave a very interesting seminar here at the Kemmy Business School on the factors that affect taxpayer compliance or evasion. He finds two dimensions – power and trust – impact on the overall tax take. If the taxing authorities are seen to have high power, unsurprisingly this will mean greater compliance with tax laws. However it is equally important, particularly for self-assessment, that there is high trust in the system. If taxpayers don’t trust the authorities to use tax revenue properly, then the level of taxes raised will fall.

Professor Kirchler mapped the overall tax take along these two dimensions as a “slippery slope” that looks like this:




You can see how the ability of a country to raise taxes falls away if the power of the authorities, the trust in authorities or both are reduced.

Voluntary compliance is very a delicate thing, requiring a public understanding of the role of taxes in maintaining society. It’s very difficult to foster, particularly in a post-colonial society. In Ireland, only a few generations ago, to avoid your taxes was seen as a patriotic act of rebellion, and to pay was seen as funding the oppressor. We have an emerging maturity about taxes, visible in the way in which tax evaders are publicly criticised now, but this new understanding is shockingly easy to damage.

In Ireland, the fact that the household charge became the focus of the protest against austerity indicates that it has been damaged here. Since there is no sign that people believe the authorities have less power than before, it follows that trust in the system has been lost somehow, in a way that relates to the austerity measures, and the public discourse around them.

Some questions around this:
- If taxes in Ireland are seen as being used primarily to repay banking debts which are seen as unfair, does this diminish the overall trust people have in the tax system?

- How much does the artificial divide which has been created in the public mind between the public and private sectors degrade this trust?

- If the social norm becomes non-payment, even as part of a protest, will we reach a point on that slippery point beyond which it will be difficult to recover?

by Sheila Killian


Source of graph: Journal of Economic Psychology, Volume 29, Issue 2, April 2008

Budget 2012: carbon tax, motor tax and motivations

Aoife Ní Lochlainn: As we get closer to the budget day (or budget days), the shape of Government plans is becoming clearer. We know, both from leaks and from the Government’s own admissions, that there will be no changes to income tax and that the majority of revenue raising will come from increases in indirect taxes.

A two per cent rise in VAT will provide the biggest source of increased revenue for the state, followed by a household charge and increases to the carbon tax and motor tax. The introduction of a property charge has been heavily debated over the last number of months and will, more than likely, continue to attract serious attention. Likewise, the decision to raise the higher rate of VAT has also attracted much comment; given its regressive nature and the implications for household consumption it will no doubt continue to do so. But how much attention will changes to the motor tax regime and increases to the carbon tax receive?

Carbon tax was introduced in Budget 2010 with the aim of providing price for carbon. It was introduced at the level of €15 a tonne and applied only to oil and gas. A carbon tax at this relatively low level will not produce a meaningful reduction in emissions. International evidence suggests that carbon taxes are most effective when combined with other policy instruments and subject to few exemptions.

As argued by the ESRI, the relative effectiveness of carbon taxes is mixed and depends on various factors such as the elasticity of energy demand and the design of the tax itself. The value of a modest carbon tax lies in its role as a price signal to consumers and businesses that Ireland is serious about carbon reduction, while raising revenue which can be used for emissions reduction programmes such as home insulation. The Government seems set to increase the carbon tax to €20 per tonne. TASC, in its pre-budget submission proposed an increase to €22 a tonne, putting the carbon tax above the current ETS level of €21.50.

However, although the rise in the carbon tax has been well-flagged and to be welcomed from an environmental perspective, it must be accompanied by measures to protect those at risk from fuel poverty. Provision must be made for an increase to the fuel allowance and the continued investment in home insulation, both private and public. If rises in the carbon tax are not accompanied by such measures then the public will conclude that the increase is a revenue raising measure rather than an environmental measure.

The motor industry has already made clear its objections to any further change to the motor tax system, as have some environmental groups. Friends of the Earth described the proposal as unfair to those who had purchased greener cars and 'a stab in the back’ for motorists”. Motor tax and VRT were restructured in 2008 to take account of carbon emissions from vehicles. This had a substantial effect in terms of new car ownership, with consumers choosing more fuel efficient cars and many drivers switching to diesel. Richard Tol and Hugh Hennessy in an ESRI paper (2011) describe the shift to diesel cars as dramatic and conclude that this shift results in lower but not substantially lower emissions, as diesel cars are heavier. They predict a rise in emissions from car travel over the next 15 years due to an increasing car stock and a preference for larger cars. This rise, they argue, “is offset by the switch towards diesel cars”, but “as distances driven do not change (and indeed may well increase), the drop in emissions is limited”.

A €5 increase in the carbon tax is projected to increase the price of petrol and diesel by 1 cent per litre. When viewed with the restructuring and increase in motor tax, motorists and the motorists’ lobby will no doubt claim that they are unjustly bearing the brunt of the increase in taxation. The effect of this may well be to change the debate on carbon tax and motor taxation policies from one on emissions reduction to attacks on motorists. Support for environmental policies are hard won and it is incumbent upon policy makers to ensure that the public understands the policies and their aims. The public embraced the changes to the VRT and motor tax systems and may regard any further changes to these systems extremely cynically. This may have the effect of making it harder to gain public acceptance of environmental policies in the future.

However, the Minister could address some of these concerns by presenting a carbon budget as his predecessor did. This would allow the public to understand the environmental aims behind the policies. Furthermore, it would demonstrate that there is a co-ordinated approach within government to emissions reductions. Carbon tax and the switch to more fuel efficient cars have their place in the policy basket, but like other environmental measures, they work better when co-ordinated with other emission reductions policies.

While reducing emissions (or indeed slowing the growth of emissions) through promoting fuel efficiency is valuable, its effect would be greater if accompanied by other measures, such as the development of better public transport. However, the Government has already delayed key public transport infrastructure projects such as the Interconnector and parts of the Western Rail Corridor, and it indicated earlier in the year that the CIE group will see a large cut in its funding (PSOs). Therefore, as highlighted by Toll and Hennessy, even with better fuel efficiency, emissions from private car use will rise due to the distances travelled.

One must conclude, therefore, that climate change concerns do not figure largely in budgetary decisions. A possible decrease in emissions from increases in the carbon tax is a welcome side-effect perhaps, but if viewed alongside the possible changes in motor tax and the decreases in support for public transport, it is clear that there is little co-ordination on this issue. If Ireland is to reach its 2020 target of a 20 per cent decrease in emissions, then better co-ordination is required. The recent decision to delay climate change legislation does not bode well for future policy making. Without the co-ordinated approach to policy making that would be required by legislation, budgetary decisions will continue to be made in a haphazard fashion, with environmental aims last on the list of policy concerns.

Chemical solutions to economic problems?

Rory O'Farrell: I feel it rare that I have reason to be thankful to the FF/PD government of 2002-2007. However, they had one policy that was so dramatic, that we can smell the change.

Last Saturday evening, while enjoying the Tall Ships festival in Waterford, a friend and I decided to go for a beer in a popular city centre pub. The lack of indoor seating pushed us outdoors into the 'smoking area'. At one point a stranger interrupted our conversation and asked for a light. I told him I don't smoke, and we looked around the 'smoking area' to find someone who did. We noticed only a minority of people smoking, and in the relaxed atmosphere and dimming sunlight of the summer evening the stranger laughed at how even in the smoking area people don't smoke. Since Charlie Haughey was Minister for Health Ireland has been at the vanguard of restricting the advertising of tobacco, a tradition which continued when Micheál Martin banned smoking in the workplace. The success of these policies are measured by reduced lung cancer, lower levels of tobacco use, and the fact that our policies have been imitated throughout Europe, rather than vice-versa. Let’s hope Micheál Martin is selective in how he emulates his predecessor as both Minister for Health and leader of Fianna Fáil.

In an article from the Sunday Independent that contained errors in as diverse a range of topics as etymology, and statistics, Marc Coleman says "high taxes on drink and cigarettes are not designed to curtail drinking or smoking" and "unless we want another civil war, we have to put an end to highly paid servants of the State using spurious morality to defend indefensible restrictions on our right to live the way we want to live." I am not sure which highly paid public servants he is referring to (certainly not I as I’m not a public servant).

To back up his claim he states "Those in the lowest income decile spend one-tenth of their income on drink and tobacco, compared with 4 per cent for those in the highest income decile." In fact, Table 2 of the 2004-2005 Household Budget Survey gives very interesting details of spending by income group. Marc Coleman does make a silly error when he calculates "the lowest income decile spend one-tenth of their income on drink and tobacco, compared with 4 per cent for those in the highest income decile". He appears to confuse the average gross income for the bottom (top) ten percent with the upper (lower) bound for that group. Accurate data can be seen in the below Figures, 1 and 2. The first shows average weekly expenditure on a selection of items, and the second give the expenditure as a share of gross income (one could argue that disposable income is more appropriate, but as the CSO only gives percentiles by gross income, this was used). Nevertheless, the core point that the poor spend a larger proportion of their income on cigarettes and alcohol than the rich remains.

However is this information shocking to the average follower of the TASC blog? Does it alter the general policy prescriptions for recovery? Not at all. It is common knowledge, that across the world, that the poor spend all their income, while the rich are more likely to save. In fact, the poorest 10% spend more than their income, possibly incurring debts or getting some help from others. The poorest spend less on drink and tobacco, but their income is also lower. It is said that “as with stamp duty and other taxes, the penal levels of indirect taxation are bringing our social contract into disrepute and killing the economy.” As Marc Coleman correctly states, indirect taxation (such as VAT, or excise duty) is usually regressive. This is commonly accepted. A more egalitarian tax policy will boost the economy, by increasing demand in the economy. Other policies, such as maintaining the minimum wage, and proper enforcement of JLCs, can also help boost the economy.

However, Marc Coleman also says “high taxes on drink and cigarettes are not designed to curtail drinking or smoking. It is precisely because the Government knows that the consumption of these products is inelastic that they are easy targets for a selfish state-driven tax trap”. Past governments are open to accusations of economic illiteracy, but if past governments were cynically trying to wring cash from smokers, would they really have banned tobacco advertising and smoking in pubs? It’s not a government conspiracy. Smoking is bad for you.

Of course economics is the study of choices over scarce resources. Irish alcohol and tobacco cost 70% more than the EU average. This is not a problem of structural competitiveness, it is purely due to taxation. As a country we made a choice to put high taxes on these items, and this choice could be reversed tomorrow if we wanted to. If we slash prices on tobacco it is unlikely to be a major boost to competitiveness. Tourists are unlikely to flock to Ireland because 20 John Player Blue no longer cost €8.65 (which coincidentally is the minimum wage). A choice has been made that it is better to tax tobacco highly, and questions of equality are not best dealt with through excise duty.

There is no chemical solution to an economic problem.

Budget 2010: carbon tax

Nat O'Connor: The Taoiseach goes to the UN climate change summit in Copenhagen flanked by two Green Party Ministers. Budget 2010 introduced Ireland's first carbon tax at €15. Ireland has never looked greener, but have we got carbon tax right?

The Economist magazine (5-11 Dec 2009) says that "Economists reckon a carbon price of around $40 is needed." (p. 12). That's around €27. Friends of the Earth present a more technical paper here.

I am not an expert in this area, but I have a few queries that I hope others can answer.

A carbon tax is meant to be a one-off pricing of carbon emissions and it is meant to be a sufficient disincentive so that the producers and consumers in the economy make a decisive shift away from oil and other carbon-heavy resources. We are setting our tax at just over half the recommended level, so it looks like we'll have to nudge it up incrementally over time. Yet, isn't incrementalism part of the problem, that we need to be decisive about this in order to create the disincentive effect?

We already disincentivise a number of carbon-heavy things in our economy, such as through the 'old reliable' excise on petrol and diesel. But we effectively have a situation where carbon price is mixed in with excise. Wouldn't it be more ecological to undertake a thorough set of tax changes and replace excise with carbon tax, plus ensure that carbon tax meets the full €27 in all cases?

To clarify the point, we are now going to have two situations in parallel:
1. Some fuels (like petrol, and coal since 2005) are affected by Mineral Oil Tax. I am going to assume that there is more than enough tax added to bring it over a carbon price of €27 or more. Hence, we could convert some of the excise to carbon tax.
2. Some fuels (like turf) are only affected by the new carbon tax, so the carbon price is effectively €15. We should really go the whole way and increase carbon tax here to €27.

A carbon tax in one country seems to depend on other countries also having a carbon tax, so that oil-based products are already carbon-taxed when they arrive in Ireland. In the absence of global agreement on this, should Ireland impose some or all of its own carbon tax on imported goods (like plastic) from countries that do not impose an equivalent tax?

In short, if we are taking global heating and climate change seriously, why shouldn't Ireland go all the whole way and introduce a carbon tax at €27 (or more)?


Of course, the disincentive to use carbon-heavy resources assumes that it is possible to move to alternatives. In this respect, governments must lead the way towards alternative energy sources, public transport, etc. But these too will either require governments to spend (and carbon tax provides revenue) or else they require private investment (which will be more incentivised by a strong carbon tax, not a weak one).

The Economist editorial (p. 11) provides a reality check about getting this right:
"Although the benefits of averting... catastrophe are incalculably large, the costs of doing so should not be enormous - as little as 1% of global output, if policy is well designed... This newspaper reckons that the world should fork out, rather as householders spend similar proportions of their income on insuring their homes against disaster."

Later in the same piece, they note: "A percentage of global economic output is affordable for a worthwhile project. Saving the banks has cost around 5% of global output."

Carbon taxes - not 'just another tax' according to Commission

John Barry: This post is a very quick ‘cut and paste’ pulling together some of the main carbon and environmental related aspects of today’s Report, which will require more analysis in the coming weeks.

The Commission’s recommendation that a Carbon Tax be imposed (p.28) is on many levels to be welcomed, and is clear evidence of the influence of the Greens in government – since this was part of the 2007 agreed programme for Government between Fianna Fail and the Green Party. While there may be some debate as to whether the suggested level (€20 per tonne, p.342) is sufficiently high to encourage a shift away from carbon-intensive energy, heating and transport activities, there is at the very least in the report a clear beginning heralding long-overdue environmental tax reform in Ireland. It is a moot question as to whether now, given the economic recession, is the time to introduce a carbon tax.

It is particularly welcome that the potential adverse knock-on effects of such a tax on the most vulnerable members of society are explicitly recognised. As the report puts it, “Imposing a tax on the leading greenhouse gas (carbon dioxide) will incentivise the action needed in ways that leave the response up to the emitter and that reflect the polluter pays principle – in essence those who emit more pay more. We also recommend that specific arrangements be put in place to ensure that those who experience energy poverty will be fully protected from the impacts in terms of price rises” (p.2, also p.330). This sensitivity to the unequal distributional impacts of a carbon tax is to be welcomed.

The commission recommends the hypothecation of the carbon tax (in keeping with recommendations from research and other carbon taxes). “We recommend that carbon tax revenue should be used, in the first instance, to combat fuel poverty. The overall effects of the carbon tax on vulnerable households should be appraised to ensure that such households (urban and rural) are cushioned from the effects of the tax.” (p.367). This explicit hypothecation of taxes ensures the revenues raised from a carbon tax do not simply disappear into the black hole of general taxation (which could undermine any public support for such a measure) – a key component of the commission’s concern that the carbon tax not be viewed as simply another tax, but one with behavioural effects at the individual level. As the Commission puts it, a carbon tax “should be visible at the point of final consumption, to help ensure that behavioural change aspects are maximized and it is not seen as ‘just another tax’.” (p.12). Another implication (though not explicitly stated in the report) is that a carbon tax signals a shift towards a low carbon economy. The commission rightly prioritises ‘energy efficiency’ as the main focus of fuel poverty efforts, given that this is often the best value for money and ‘bang for your buck’ in terms of combating fuel poverty as well as addition benefits in terms of potential job creation, something which dovetails with the arguments for a ‘Green New Deal’discussed in previous posts.

The Commission, in part in keeping with the Smart Economy document from last December, is keen to be seen to be promoting the ‘Green Economy’ (Part 9 of the report ‘Tax and the Environment’), though oddly there is only one cross-reference to the Smart Economy document in the report (and that in relation to innovation, rather than the Green Economy). Another welcome feature of the report is the recognition that the introduction of a carbon tax is within the context of broadening the tax base, rather than imposing new taxes, and in particular it should lessen the burden taxation on labour (p.73). In the words of the Commission: “Broadening the base by introducing an annual property tax and a carbon tax is generally better for Irish economic growth than increasing rates of income tax.” (p.77).

In relation to transport emissions, the Commission states “We support the introduction of fiscal measures aimed at reducing car use,” (p.361), given that transport emissions from cars are the fastest growing component of Irish CO2 emissions. Their proposals include: VRT exemption for electric vehicles; workplace parking levies; tax-exempt cycle to work schemes where cycles are treated as tax-exempt benefits in kind, road pricing and congestion charging.

Perhaps we are witnessing the slow beginnings of a shift in our taxation system – where the state taxes 'bads' such as pollution and not 'goods' such as income and employment. As the report puts it “A broad programme of environmental tax reform would shift the tax burden from ‘goods’ such as employment, to ‘bads’ such as pollution”. (p.331).

A final question is whether such environmental tax reform will be enough for the Greens in government, in the light of NAMA and the prospect of an upcoming savage budget?