News Reports of Tax Cuts are Deeply Flawed

Nat O'Connor: Reporting of taxation issues is very flawed in Ireland. From before Christmas, we had reports like: "Income tax may be cut in the next budget for 'certain groups'" (Irish Times). All the way up to early May, the news media carried stories like: "Middle and low-income families have been promised tax cuts by Finance Minister Michael Noonan in his strongest comments yet ahead of October's Budget." (Irish Independent)

The local and European elections took place on Friday 23rd May, and the tune changed: "Minister for Finance Michael Noonan has said Ireland has limited room to ease Budget cuts of €2 billion to be outlined later this year." (RTÉ news)

Change of spin is not unusual for politicians. Even if a Minister is simply getting on with his or her work, the back office PR team will seek to make the best out of news items to manage expectations while maximising support for their party.

Yet, there are grounds to question the quality of reporting on the topic of taxation. Speaking at a TASC lunchtime seminar about the social market economy model, Dr Dieter Benecke noted that one of the key requirements was that journalists are well-trained in economics and can pose serious questions of policymakers. Similarly, at a recent TASC Nordic Models seminar, a number of Nordic speakers reinforced the point that a strong media is vital to the operation of their systems.

What is required includes investment by media organisations in investigative journalism, data journalism and in the tedious detail of public administration - as well as sufficient staff well-training in economics and public finances.

The problem - and the above links are only a few of many examples - is that every word the Minister utters is seized upon as a hint about the next Budget. Or the Minister's words are built up in a way that feeds expectations among voters for a tax cut or some other concession.

However, the sad reality is that the economic damage done to Ireland is far from healed. On the contrary, the tax system is hollowed out by tax breaks and social insurance is incredibly weak in European terms; personal and business debt is high and its sustainability is too often unresolved; prices - not least housing - are again moving above what's affordable; banks are still dysfunctional; public services are starved of cash and creaking at the seams; poverty and deprivation are rising; and real wages stagnate and joblessness continues to be far too high. Yes, some parts of the economy are going well - there are hundreds of thousands of people with 'good jobs' and high pay. But the vast majority, millions of people in Ireland, live a very different reality. That's the message from the European and local elections.

Economists such as the ESRI's John Fitz Gerald and UL's Stephen Kinsella concur that a €2 billion budget adjustment is likely in October (RTÉ news). There is - as the Minister most recently said - "limited room" for tax cuts.

Whose job is it to provide the public with clear data on taxation and public spending? The civil service have been providing the same kind of Exchequer Returns and Public Spending Estimates for decades. They appear to limit their public role to providing the documents and figures, requiring users (e.g. politicians and their staff, business and academic economists - and citizens) to develop the requisite knowledge and expertise to use this data. Recently, small improvements have been made through the provision of data in Finance and PER's online databases.

On the media side, most of the focus seems to be on reportage and opinion rather than analysis of either the true state of Ireland's tax system or the economic and social implications of tax cuts and the lost public service to fund those cuts. For another point of view, see TASC's Defence of Taxation.

The Secretive TTIP Agreement Threatens Democratic Regulation of European Economies

What follows is a statement which was unanimously adopted at the Congress of the Nordic Transport Workers’ Federation in Malmoe, Sweden, last week:

The EU and the USA are currently negotiating – in secrecy – a new treaty called the "Transatlantic Trade and Investment Partnership" (TTIP). It is being made out as a trade treaty, but it is much more far-reaching than a regulation of trade between the EU and the USA. While we realize that balanced and politically regulated trade is important for the development of our economies and our societies, the on-going negotiations between the EU and the USA represent challenges and threats which dramatically can change power relations in our societies in favour of multinational companies and other strong economic interests.

Since trade tariffs between the USA and the EU already are very low, these are not the main concern of the TTIP negotiations. The main focus is rather on other types of so-called "trade barriers", and it is particularly the interests of big multinational companies which form the premises of the negotiations.

Central among the so-called "trade barriers" we find national legislation and regulations which are introduced in order to protect trade union and social rights, the right to enter into and maintain national collective agreements, consumer rights, public health, food security, the environment and a number of other essential values in our societies.

A TTIP agreement can, in other words, end up as a comprehensive project of deregulation, where rights which the trade union and labour movement and other popular movements have achieved after decades of hard struggle, can be weakened or abolished through a binding agreement between the EU and the USA. For example, powerful economic interests are now putting enormous pressure on the negotiators, in order to "harmonise" standards between the USA and the EU. Knowing that the US, particularly regarding trade union and social rights, have much weaker protection than what we have achieved in our countries, there are many reasons to fear the result of such a harmonisation.

These negotiations also aim to introduce a so-called investor-state dispute settlement mechanism. This means that companies will be given the right to sue states, if they think that new laws or regulations can reduce future return on investments – including claiming compensation for possible loss of future profits. There are already many examples of states which have been sentenced to pay such compensation when they have accepted investment treaties with such clauses. In the next round, this can frighten politicians from adopting necessary laws in the future, since they can fear compensation claims from companies.

The Congress of the Nordic Transport Workers’ Federation therefore demands:
1. That the negotiations of a TTIP agreement must be fully open and transparent, so that the population both in the EU and the USA can hold their politicians accountable for the results.
2. That no investor-state dispute settlement mechanism is accepted into the agreement.
3. That a possible agreement does not contribute to weaken laws and regulations which protect the environment, public health, trade union and social rights, the right to enter into and maintain national collective agreements, food security, consumer rights – or to prevent further development of such legislation. These must be subject to democratic processes – in the EU as well as in the member states.

See also Norway's Campaign for the Welfare State.

Thomas Piketty in The Financial Times and Tax Transparency

Nat O'Connor: It's an old stereotype that you can tell who are the serious left-wing economists by whether or not they read The Financial Times. The point being that only those who understand what 'the other side' is saying can hope to critique it. Well, this works both ways and it is no surprise that the FT's economics editor, Chris Giles, has been reading Thomas Piketty's Capitalism in the Twenty-First Century and has had a poke at it.

Specifically, Giles criticises the data on income and wealth inequality upon which Piketty's critique of capitalism as we know it is based.

Note: if you are not a subscriber, you need to sign up for a free FT account, which allows you to read a small number of articles per month.

Giles's critique is here (and also here) with a much longer blog version too that goes into some detail.

However, the strength of Piketty's work is precisely the level of detail that he has amassed and made publicly available online. Piketty and colleagues have built up The World Top Incomes Database from tax data from numerous countries, and they continue to refine and expand this data source - with the aim of including more countries and including new sections on wealth inequality alongside income.

Piketty himself dismissed the FT critique, in a letter published by the FT here. And other academic economists have supported him (Washington Post).

This is not to say that Piketty's data is perfect. However, as others have said, there is plenty of alternative supporting data that reinforces the central tenet that economic inequality has been rising inexorably in recent decades. What should be noted is that it took a number of serious academics - including Piketty - several years of work to collate and organise public data on taxation that arguably should have been readily available in machine-readable formats for public consultation.

In Norway, tax returns are publicly available online (in Norwegian); including the names and addresses of people alongside their income, wealth and how much tax they paid. In Sweden, there is a similar system, although you have to apply to see the data and the person concerned is notified who has sought to check their records. This openness about distribution in the economy allows policymakers in those countries to respond more quickly and accurately to ensure balanced development and shared prosperity.

Culturally, many people in Ireland may not be ready for that level of transparency and honest discussion about money. But there is an onus on Revenue and other public bodies to publish clear, accurate information about income and wealth in as much detail as possible; even if anonymised. Only this way can citizens can see who is winning and losing from the current set of laws and practices that shape our economy and tax system, and make up their own minds whether the growth in economic inequality is an acceptable price to pay to maintain our current economic model.

For the curious, Revenue do publish annual statistical reports, and the latest income distribution report gives useful data for 2010. However, both the format (PDF) and the time-gap between the latest data and now makes these reports less useful than they could be. Some of this data is discussed in more detail in TASC's recent report: A Defence of Taxation

Most people won't benefit from any change to the 41% higher tax rate

Talk of cuts to the 41% higher rate of income tax ignores the fact that two-thirds of people paying income tax do not pay any tax at that rate. The main beneficiaries will be those on higher incomes, whereas everyone will lose from cuts to public services.

A new report launched today by TASC provides a detailed analysis of the Irish tax system. While some higher earners will benefit from tax cuts, everyone will lose from the resulting reduction of public services like health, education and social protection. Tax cuts will also reduce funds available for public investment in the economy, which has a vital role in sustainable economic recovery. 

Main findings:

• A single person on €40,000, despite paying some tax at the "higher rate”, actually pays less than 10% income tax. On an income of €275,000, actual income tax paid is only 30%.
• If PRSI and USC are included - for a "marginal tax rate" of 52% - in fact a single person on €40,000 only really pays 15.5% of their gross income.
• Two-thirds (65%) of people who pay income tax do not pay anything at the higher rate.
• Only five per cent of people who pay income tax actually pay the higher rate of tax on more than half of their gross income.
• Everyone is a taxpayer, and families on the lowest incomes pay more than a quarter of their income in consumption taxes like VAT and excise.
• The public cost of tax reliefs and tax breaks, which greatly benefit the highest earners, is equal to more than a quarter of all taxes raised. This is far above the European average, and the cost of tax breaks has increased despite the economic downturn.

The report has six recommendations:

• Maintain, and if possible increase, public service provision. Everyone in Ireland benefits from the ‘public value’ of public spending and most people in Ireland would be better off maintaining public services rather than paying less tax.
• If the Government wants to cut tax in one area, they should offset it elsewhere. Introducing a third marginal rate of income tax of 48% on incomes above €100,000 would affect less than one in 20 people who pay income tax, but would raise €365 million to pay for public services or tax cuts.
• Likewise, tax cuts and public services could be funded by reducing Ireland’s high level of non-basic tax reliefs, which cost €9.6 billion in 2010.
• One equitable tax cut would be to remove a 'step effect’ in the PRSI system. At worst, the current system can require an employer to pay €1,680 to give a low paid employee a net annual raise of just one euro.
• In terms of income tax changes, increasing tax credits rather than changing the 41% rate or the bands would benefit nearly all workers equally in real terms, although some part-time workers would still not benefit.
• Lowering the VAT rate by 1% would benefit far more people than income tax cuts.

Symposium at NUI Maynooth: "Can Social Investment Save Social Europe?"

On Thursday, 29th of May, a special seminar on Social Investment in Europe will be hosted by the Department of Sociology/ NIRSA, Political Economy and Work Cluster and the New Deals in the New Economy project. The seminar will run from 9.30 to 1.30 and will be followed by the launch of a new MA in Sociology (Work, Labour Markets and Employment) by Minister Joan Burton.

‘Social Investment’ focuses on investing in people’s skills and capacities and supporting them to participate fully in employment and social life (EU Commission). Does ‘social investment’ lead to a renewal or an erosion of the welfare state? Will ‘social investment’ support economic and social recovery?

The event will start at 9.30 with registration and coffee followed by the seminar at 10.00 in the Phoenix building on the North Campus in NUIM keynoted by Prof Anton Hemerijck, VU University Amsterdam and Prof Brian Nolan, UCD, and chaired by Prof. Seán Ó Riain.

Following a break for coffee there will be a roundtable discussion with: Rossella Ciccia (NUIM), Tom Healy (NERI) and Rory O’Donnell (NESC), chaired by Mary Murphy (NUIM).

See more at: http://www.nuim.ie/sociology/news/can-social-investment-save-social-europe

Please register for seminar by emailing newdeals@nuim.ie before May 26th, 2014

Piketty and Inequality in Ireland

Cormac Staunton: Considerable attention is being given to Thomas Piketty’s influential work on economic inequality – “Capital in the 21st Century”. As Piketty’s book is discussed more and more, it is important to understand what his analysis means for Ireland, and not dismiss Ireland as a ‘special case’ to which his findings do not apply.

One of the great advantages of his work is that it is rooted in an enormous volume of data, which he has helpfully made available through the “World Top Incomes Database”. It can be accessed here.

The analysis includes data from Ireland (courtesy of Brian Nolan) which give us an insight into the changing nature of inequality over time, and can be used to compare Ireland with other countries. I've used the data to make four observations about inequality in Ireland – see below.

The IMF, the World Economic Forum, the White House and many others are paying more and more attention to the growing risks associated with economic inequality. Looking at the data for Ireland shows us that it is something policy makers in Ireland need to take seriously too.

1. Piketty’s findings about growing inequality, and its implications, are as applicable to Ireland as anywhere else.

While the levels might not be as dramatic as in other countries, we are witnessing the same phenomenon in Ireland of a steady rise in economic inequality, after a decline in the middle of the last century.

2. Inequality in Ireland grew as the country became more prosperous.

As the economy grew in Ireland from the early 1990’s, the share of all income earned by the top 1% in Ireland rose very quickly.

Over the same period, the proportion earned by 90% of the population fell.

 3. The gap between the average income of the top 1% and average incomes of everyone else has also risen significantly.

The actual income (in euro terms) of the top 1% in Ireland has risen dramatically since the late 1980’s, while average earnings have risen much more slowly.

4. Despite the downturn, levels of inequality in Ireland have remained high.

The "World Top Incomes" data on Ireland only goes to 2009, and appear to show a reversing of the inequality trend after the crash. However data from the CSO Survey on Income and Living Conditions (SILC) show that 2009 was an unusual year. Since then, overall levels of inequality, as measured by the Gini coefficient, are once again on the rise. They are now back to almost the same levels as before the crisis, and are above the OECD and EU averages.

An Equitable Solution for Water Charging (and Leaks)?

Nat O'Connor: We now have more detail about the Government's proposed model of water charging. Minister Phil Hogan called water charging "“one of the biggest decisions this government will ever make” (Journal.ie). But is it equitable?

One important issue for equity is the detail about when people must fix some of their own leaky pipes.

Water charging is a culture change and it will make more people aware of the cost of public services. But given the enormity of other Government decisions - like increasing VAT or cutting back on public services to a much greater extent - paying differently for water is not such a big deal. We already pay over €1 billion for water (through income tax, VAT, etc.) so paying via water charges is just a change in how we pay.

The deficit in the Government's finances is still enormous, around €12 billion, so if water charges weren't introduced, there would have to be other tax increases anyway. In that context, introducing water charges is a genuine example of real public service efficiency as the fact of charging people for water makes us less likely to waste it - thus saving us all public money that is currently spent on clean water that is leaking out of the system; much of it on private land. And we can only find the private leaks in the system by installing meters and introducing the reality of fix-or-pay for property owners who have not maintained their pipes. (In the long term this is probably good for these owners too, as leaking pipes are going to cause rot and rising damp, which could take tens of thousands off of the value of their property - so a nudge in the direction of repairs is no harm).

The issue of water affordability is a different question, which TASC has addressed through its equality-proofed proposals for Water Credits.

But the major cost of water charges in the early years is not going to be the charge for using water. Rather, it will be the property owners' costs to fix their pipes.

Minister Hogan's press release had this to say about the 'first leak fixed free' part of the water charging policy: "An additional €200 million over 2 years for Irish Water’s capital investment - to include a free first fix scheme, providing each household with a free fix of the first leak on a customer’s water supply pipe. Irish Water will be outlining its proposed capital programme, subject to CER approval, in the coming weeks."

The important words there are the "water supply pipe". This is, presumably, the section of pipe from the meter to the house that delivers the fresh cold water. But how far does it go before it becomes an 'internal' pipe? Will it go as far as the kitchen sink? Or to the water tank in the attic?

To achieve equity in the water charging system, we do not want public money being spent on digging up and putting back really expensive kitchen tiles, printed wallpaper or the like. Property ownership has its responsibilities as well as its rights. This will be the real equity test, as politically and economically more powerful, wealthier households may seek to access public money to fix their leaks, rather than taking personal responsibility and paying to fix their own pipes. And if interior fittings or even an expensive lawn or paving have to be replaced at public expense, you can bet that it will cost much more to fix the pipes belonging to wealthier households than those on lower incomes.

For people who are 'cash poor, asset rich' (such as pensioners on a fixed income who own their own home), there may need to be a scheme to fix the leaks and recoup the cost years later if the property is sold or from their estate upon decease. Local authorities should be well placed to deliver these repairs, but someone will need to finance it for the intervening years. However, the Local Property Tax law provides a deferred payment mechanism that could perhaps be used to carry and recoup such costs - although its punitive interest rate should be lowered.

Low income households will be in trouble if they cannot afford to fix leaks. Many people on the lowest incomes rent, rather than own property. So there will need to be measures to coerce landlords into fixing pipes, so their tenants are not faced with exorbitant water bills.

Enough Said about the Wealthy in Ireland?

Nat O'Connor: A quote from The Irish Times (2 May 2014): "RTÉ's managing director of news and current affairs Kevin Bakhurst said one of the ways broadcast news was under pressure was through increased and costly legal challenges and threats. He said RTÉ was facing legal actions from “some well-known political figures”. While some actions were fair, others were “spurious, expensive and are a public game of who-blinks-first, with a major price tag attached on our side – and where we are dealing with public money.” He added there were “a small number of extremely wealthy and extremely litigious individuals who seek to use the courts to shut down any public debate or discussion of their affairs – which in most cases would be perfectly legitimate areas of exploration or discussion. I think probably enough said on that one.”

Given the rise of inequality in Ireland, it should be of major public concern when a senior manager in the national broadcaster talks about “a small number of extremely wealthy and extremely litigious individuals who seek to use the courts to shut down any public debate or discussion of their affairs – which in most cases would be perfectly legitimate areas of exploration or discussion.”

The "extremely wealthy" are obviously a small minority, and we don't have accurate data on their incomes and wealth, other than 'Rich Lists' or Top 100 lists published by newspapers or magazines. And it would be a mistake to simply assume everyone in the top 100 is included in Mr Bakhurst's statement.

But we do know about the rise in incomes of the top 0.5 per cent of tax units (individuals or households). Using the World Top Incomes Database, which is based on tax data, we know that the top 1 in 200 taxpayers in Ireland have incomes that average €500,000 - five times more than their average income of €100,000 (in today's money) in 1977.

We also know that this represents a greater share of all income, at 7.5 per cent, doubled from around 3.7 per cent in 1977.

Who are the one in 200 on this income level? Revenue figures for the number of income tax payers in 2011 shows over two million cases (2,0,88,443). One in 200 represents around 10,000 income tax payers (individuals or couples making a joint declaration). Actually many of them may not have incomes of €500,000 because people on even larger incomes will skew the data, but that is still a lot of households with incomes of several hundred thousand.

In more detail, Revenue reports 9,830 cases of income tax payers declaring more than €275,000. Between them they declared a total collective income of €5.1 billion, giving an average income of €522,062. Of course, hidden in the data a couple might make separate tax declarations of €250,000 each, yet not appear in this top income group.

As an aside, for anyone who is still worried about Ireland's legendary 52% marginal tax rate. These high income tax payers paid an average of 30.1% effective tax. (That's 0.1% above the new legal minimum of 30% for high earners. Someone's tax accountant/lawyer slipped up there).

But Mr Bakhurst is hardly talking about one in every 200 taxpayers. So the "extremely wealthy" presumably have much higher incomes. Unfortunately, we don't know anything as much about wealth - which allows people to pay capital gains tax rather than income tax, or to hold their personal wealth at arms length in companies and trust funds.

And of course, many extremely wealthy Irish people do not pay income tax in Ireland. So they are not even contributing to the public funds that have to pay the legal expenses of the national broadcaster when it is hauled into court by them for daring to encourage legitimate public debate or discussion of their incredible privileges.

Tackling Health Inequalities (IMO)

Nat O'Connor: I had the opportunity to address the IMO's annual general meeting on Friday 24th April, at a scientific session entitled "Balancing a Strong Economy and an Equitable Society" (click here for my paper and presentation).

The IMO themselves have published a position paper on health inequalities, and as part of the AGM they launched a new paper on Balancing a Strong Economy and an Equitable Society, which is not yet on their website.

Tom Healy (NERI) also gave a paper in this session, on economic growth for a better, fairer society.

The key message is that distribution of income in the economy is deeply linked with health outcomes, and only by addressing inequalities in the economy (through wages, taxes, welfare, services, etc.) can we hope to make the necessary improvements in public health, especially among people who gain least from the current system.