The effect of marginal tax rates

It has sometimes been suggested that marginal tax rates in Ireland are too high, and that raising them would harm growth. They may affect the incentive to work. It is true that they are 10th highest, of the 34 countries in the OECD. Also the marginal rate hits in relatively low (affecting average earners). Helpfully, the OECD provide the data here.


However, what is the link between marginal tax rates and the economy?

 

As can be seen in the above graph there is no negative relationship between GDP per capita and marginal tax rates. In fact it is slightly positive. Of course this is not conclusive evidence of a positive link, but the evidence certainly does not support the hypothesis that high marginal rates harms GDP.

But does it affect the incentive to work?

No relationship is found between unemployment rates and marginal tax rates in the OECD.

High tax rates are not the problem. In other countries, such as the Nordic countries, high tax rates are used to fund social services such as child care, which make it easier for people to work in the market economy.

Open debate on paying the promissory notes - the long countdown

Tom McDonnell: Various official sources (including Ministers) have been making the claim in recent days that the 2012 promissory note to the IBRC went unpaid. Sadly this is untrue.
The ECB insisted all along that it receive its ELA repayment from the IBRC on time on 31 March and this is exactly what happened.  The repaid money was then destroyed/deleted/burned/expunged on time and as scheduled.

It is true that the money promised to the IBRC was initially paid to the zombie bank by the state-owned NAMA (in exchange for a 13 year government bond given to IBRC by the Irish State) rather than by the exchequer. Nevertheless it was paid using 'our' money - we own NAMA after all. Following a series of subsequent exchanges the bond is currently held by Bank of Ireland.

A slightly irritated ECB watching the shenanigans merely acknowledged that it got paid on time as expected and that it had observed certain transactions betwen various Irish state institutions.

That the promissory note was paid (by issuing a sovereign bond) is stated clearly in the Department of Finance's Medium Term Fiscal Statement. Much of the confusion may stem from the media's general failure to accurately report and explain what happened on 31 March - understandable given the byzantine nature of what occurred. Fortunately not everyone in civil society has been taken in by the official line. For example the Debt Justice Action group has a letter in today's Irish Times which draws attention to this issue.

The government's next payment to the IBRC will not be made for 108 days. There needs to be an open and honest public debate about the subsequent promissory note payments to the IBRC. All options have to be on the table.

TASC's more detailed response to Budget 2013

Nat O'Connor: TASC's more detailed response to Budget 2013 is here.

Budget Transparency Pledge Weakened by Lack of Detail

Nat O'Connor The issue of budget transparency is so important that it deserves special mention.

With the possible exception of elections, there is no other single most influential event in our democracy than the national budget. The budget is where all is revealed in terms of the values and priorities of the current government and it is often when it comes to spending money that promises made in manifestos are fulfilled or broken.

While the Government is moving towards some important reforms, like the strengthening of the Freedom of Information Act, there were some major surprises in the dilution of the quality and depth of information provided in the Budget 2013 documentation.

The current Programme for Government agreed by Fine Gael and Labour is full of commitments to openness and transparency. Not least, on page 23, the pledge that “We will open up the Budget process to the full glare of public scrutiny in a way that restores confidence and stability by exposing and cutting failing programmes and pork barrel politics.”

Yet, for the first time in years, we were not given a full break down of spending decisions to the level of expenditure programmes and organisational budgets for a number of Departments. What might have been three or more pages of detail in a previous budget for some of the key departmental blocks of voted expenditure was reduced to just one page per vote block in the Budget 2013 Expenditure Report. The votes affected were: Gardaí; Prisons; Courts; Justice and Equality; the local government fund under Environment, Community and Local Government; Education and Skills; and Agriculture and Food. Only Social Protection and Health provided the same break down of sub-heads as last year.

What this means in effect is that some publicly-funded organisations are no wiser after the budget about what level of change has occurred in their individual budgets for next year, which begin in a few weeks’ time. It also means that policy analysts and journalists cannot give people in Ireland as full a picture on what promises and policies are implemented or not through the decisions made by each Minister on how his or her budget allocations will be spent.

For example, we know that in Vote 24 (Justice and Equality) there will be a 20 per cent reduction in programme expenditure to ‘promote equality and integration’ (line item D). That’s a €5.8 million reduction in that programme.

The equivalent information in Budget 2012 was part of item G: ‘equality, integration and disability’. However, in last year’s document the amount of money going to 10 different line items is shown, such as ‘grants to women’s organisations’, ‘equality proofing’, ‘Traveller initiatives’ and so on, with the specific changes to each area open to scrutiny.

Such missing detail means that people in Ireland have far less clarity on what is being done with their money and in their name. This lack of transparency is a retrograde step from the point of view of Ireland’s democracy.

TASC's initial response to Budget 2013

Nat O'Connor: TASC's initial response to Budget 2013 is as follows. (PDF available here).

Lost opportunity to provide a pathway to an equitable economic recovery
Continued pensions inequality and cuts to investment underline the need for a process of equality proofing and economic impact assessment to improve Budget process

In an initial analysis of the measures introduced in Budget 2013, TASC Director Nat O’Connor welcomed the introduction of the local property tax, but expressed concern at the likely damaging effect of others measures on economic equality and on job growth.
“As TASC highlights in its own pre-budget analysis, property tax is shown by international evidence to be the least damaging form of tax on jobs and growth.” Dr O’Connor noted. “Likewise, the introduction of deferred payment options makes sense from an equity perspective, whereas a bad precedent was set by the waivers given to those who can afford to buy an empty house in the next three years, as that waiver will be paid for by many people who cannot afford to buy.”

“It is surprising and disappointing that, despite a range of announcements in Minister Noonan’s speech, the Government has not in fact made any real change to Ireland’s pension tax breaks for 2013. All that has been substantively announced is that the Government will consider changes in future years. Pension tax reliefs favour better off sections of society and those subsidies are paid for by other taxpayers who will never enjoy those benefits. The ESRI has shown the 80 per cent of the benefit of pension tax reliefs goes to the top 20 per cent of earners. It is a missed opportunity that TASC’s proposal of reducing relief to the standard rate was not adopted, as this would have raised €500 million that will instead be found through less progressive tax measures and cuts to public services that people on lower incomes rely on more heavily.” Dr O’Connor concluded.

Commenting on the overall Budget package, TASC economist Tom McDonnell expressed serious concern at the cuts to capital expenditure. “The disproportionate cuts to capital expenditure are a false economy and represent a failure of economic policy, which will undermine our medium-term growth potential. All the international evidence shows that an economy’s capacity to grow depends on productive investment. Yet Ireland is projected to have by far the lowest level of investment (gross fixed capital formation) of any country in the EU for the coming years, which is highly likely to mean a weaker growth going forward.”

“The PRSI changes made in the budget represent a highly regressive form of tax increase on earned income that will almost certainly worsen economic inequality in Ireland. TASC has repeatedly emphasised the need for equality proofing of budget measures in advance, in order to ensure that Ireland’s budgets reduce rather than increase inequality.” Mr McDonnell concluded.

Lessons from the UK

Nat O'Connor: The UK's Chancellor of the Exchequer, George Osborne, gave his Autumn Statement early this afternoon, as the UK too examines its debt and deficit levels. One striking feature is that he cited at length the independent Office of Budget Responsibility, which generates the growth forecasts used by the UK Government instead of the civil service predictions used in the past.

Despite presumably being disappointed by those independent forecasts (including the prediction of UK GDP decline of 0.1%), the Chancellor nevertheless praised the independence of the OBR. Given the history of optimistic growth forecasts by the Irish civil service in recent years, there may be a lesson for us in the value of having independent growth forecasts.

The OBR notes that problems in the Euro zone will "constrain growth for several years to come" in the UK. The Chancellor (citing the IMF and others) laid the blame for the UK's low economic growth on the problems abroad. Limited growth in the UK likewise affects Ireland greatly, as they remain our major trading partner. Of course, Ireland's woes are part and parcel of the Euro zone's problems and our growth will be even more constrained than the UK's until strong action is taken to repair the institutional weaknesses in the Euro zone.

The UK is not cutting spending in its Revenue service, but is instead clamping down on tax evasion and avoidance, including measures to close hundreds of tax loopholes and tax breaks, including pensions tax relief (which in Ireland has been described by the IMF as tax relief for richer sections of society).

The UK government is also increasing capital spending by a modest amount (£5 billion GBP) to improve economic infrastructure, which is exactly what is needed to foster long-term growth. Another lesson for Ireland there, as our capital expenditure has been slashed in recent years.

The UK is also creating a new business bank to ensure lending to SMEs. The lack of credit from Ireland's dyfunctional banks is currently killing businesses in Ireland.

The UK has capped rail fare increases for the next few years, unlike in Ireland where they continue to rise - including Dublin Bus's recent fare increase of c.18 per cent following a rise of around c. 15 per cent earlier this year!

Not that I'd agree with a lot of the Chancellor's other measures or rhetoric. Some bad moves include limiting welfare increases to below inflation (which will lower aggregate demand), tax incentives for shale gas extraction (which will be environmentally damaging) and ruling our further property taxes (which are less damaging to job growth than any other tax increases). But it will be interesting to compare the measures taken by the UK coalition with our own coalition budget later today.

The deficit and debt repayments

Nat O'Connor: The brief ten pages of the 2013 Estimates include the stark reminder of just why the Government is set on €3.5 billion of tax increases and spending cut today. Receipts in 2012 were just under €41 billion, wheresas spending was around €56.5 billion. That's a gap of €15.5 billion.

The actual deficit in the General Government Balance is slightly less, at €13.4 billion (Table 1a in the same document).

The gap shows the growing importance of the national debt interest repayments in making the public finances unsustainable. Servicing the national debt cost us nearly €6.5 billion in 2012 and is set to rise to €8.1 billion in 2013. That's nearly as big as the entire education budget (€8.7 billion in 2012). The details of public spending can now be seen at DoPER's databank.

This point is graphically illustrated on page 12 of the Medium Term Fiscal Statement, which is the other document currently on budget.gov.ie. A copy of that image is below:

The debt interest burden is projected to peak at 16 per cent of all Government revenue in 2014.

A serious concern with these projections (and the assumption that the deficit and debt interest payments will stabilise) is that projections of economic growth have repeatedly been over-optimistic. The IMF now calculates that austerity in developed economies means that for every €1 taken out through tax or cuts, between €0.9 and €1.7 will come out of economic output (GDP) - see page 43 of IMF's World Economic Outlook. There is a real risk that even this grim picture of debt interest repayments may be over-optimistic.

At any rate, it is certainly the case that a major win on reducing the bank debt part of the national debt (and annual debt servicing costs) needs to be achieved.

#Budget2013

Nat O'Connor: As the new era of budget transparency dawns (or should that be New Era?), the Government's official information service (MerrionStreet.ie) will be tweeting budget soundbites to the nation, via hashtag #Budget2013

For more conventional information, official documents will be made available on the Government's Budget website budget.gov.ie as the day progresses.

Clamping Down on Tax Injustice—Sharing the Price of Austerity

Daragh McCarthy: On Wednesday, the EU’s tax commissioner will outline a set of proposals aimed at reducing the level of tax evasion and aggressive tax planning in the EU. The Commission estimates that tax dodging, in all it's various guises, deprives Member States of almost €1 trillion every year.

Reports suggest that the plan will detail the need to agree a concrete, shared definition of a "tax haven", and to create a blacklist of jurisdictions that match the definition. It is hoped that this measure will make it easier to tackle tax evasion and to take action against jurisdictions that fall outside the norms governing the taxation of cross-border corporate transactions.

The Commissioner's report will look at ways of closing-off access to loopholes that facilitate the development of aggressive tax avoidance structures. To this end, it has been suggested that states adopt "general anti-abuse" legislation that would allow tax authorities to disregard any corporate arrangements deemed to solely serve the purpose of tax avoidance. In addition, the Tax Commission will outline the need for countries to insert a clause into their double-tax agreements specifying that one country is precluded from taxing income only if that income is taxed in the other contracting state. It is hoped that is would prevent double non-taxation of income.

Efforts to extract a greater tax yield from transitional businesses must address several challenges. TASC's report highlights the difficulty of assigning a market value to transactions between subsidiaries of the same parent company. By making it hard for officials to identify and place a true value on intra-group deals that purely facilitate tax reduction, multinationals retain the capacity to substantially reduce the potential effectiveness of some of the measures being proposed. The 2006 European Court of Justice ruling in favour of Cadbury Schweppes established that putting subsidiaries in low-tax countries was not necessarily tax avoidance—so long as the activity carried out by the operation was not "wholly artificial"—which makes legislating for reform more problematic. Finally, Feargal O'Rourke recently argued that the increasing prominence of online business is reducing states' ability to collect tax from corporate entities, though it's difficult to establish the extent of the hindrance that this creates.

Effective regulation of the problem requires enhanced international co-operation. It's a well-worn argument, but aggressive tax code competition between countries results in jurisdictions that unilaterally decide to take a harder line with regard to taxing transitional subsidiaries being punished through the loss of foreign investment. Ireland's model of industrial development is, however, largely predicated on enticing multinationals to the jurisdiction on the basis our low-tax regime, so, in the medium term, the proposals represent a potential threat to economy. If the Commission's ideas gain traction—and the EU moves closer to the creation of a Common Consolidated Tax Base—pleasing the multinationals while remaining a full-fledged member of the EU could become an increasing precarious balancing act.