Bathing the rich

Michael Taft: Okay, so you’re not one of those who believe in soaking the rich. But what about bathing? A good bath is healthy for the body and the mind. And the economy. There are a number of arguments for increasing taxation on high incomes: that low-average income earners can’t afford to pay more; that there’ s a lot money to be gained; that it is less damaging to domestic demand; and that it is part of a general egalitarian and solidarity strategy. All these work – though there is always a debate over degrees.

What is not debatable is that inequality is accelerating in Ireland. In the run-up to Budget 2013 there are political choices to make. Let’s be clear: our rich are richer than the rich in other European countries. And we’re in recession. And we’re in bail-out.

Let’s take a tour through some data on high-income groups, how much they make, how much tax they pay. Let’s see if there is an argument for Budget 2013 to disproportionately impact on the highest earners.

1. Share of Income

How much share of the income pie do high income groups take? And how does it compare to other EU countries? All figures are taken from Eurostat. Statistical note: this refers to ‘equivalised income’. This is an artificial measurement that factors in the number of people in a household. For example: you might have two households with the same amount of income. However, there are more people in the second household which means that individually they have less income. ‘Equivalised income’ takes account of this.

As seen, high income groups in Ireland take a larger share of equivalised income than in other EU countries. The top Irish 1 percent takes over 6 percent of total income here. Throughout Europe, the top 1 percent take less – 4.6 percent; while in more egalitarian Sweden, the elite 1 percent takes only 3.7 percent of total income there.

The story is similar for the top Irish 5 percent and 10 percent. Our high income groups take up more of the national income pie than their counterparts throughout the EU-15.

To put this in perspective, the top 10 percent in Ireland take in almost as much income as the lowest half of the entire population. The lowest half takes in less than 28 percent, while the top 10 percent takes in 26.6 percent.

In short, our high income groups take more from the economy than high income groups of any other EU-15 country.

2. Levels of Income

What does this mean in income terms? Eurostat provides some insight but, again, here are some stat notes. First, it only provides the minimum and maximum income per decile. For instance, in Ireland the middle 5th decile household averages €31,565 in Disposable income. The range of Gross income in this 5th decile goes from €30,361 to €37,467. So an income of €30,361 is the starting income for the 5th decile.

Second, the following figures, again, refer to the artificial equivalised income.

So let’s look at the starting income for high income groups. What is the minimum income you need to get into this exclusive company?

In Ireland, the minimum equivalised income needed to get into the elite 1 percent is €98,000. In other EU-15 countries it is €67,000 while in Sweden, it is nearly half that of Ireland - €50,200. In other words, our elite 1 percent pull receive a lot more money than their elite EU counterparts.
Again, the story is similar for the top 5 percent and top 10 percent. In Ireland, these income groups not only take a larger share of the national income pie, they take in more Euros than similar high-income groups in the EU-15.

Just to remove any confusion – these income figures refer to ‘equivalised income’ and only to the minimum income in each decile. For instance, the the chart above shows that the minimum equivalised income to get into the top 10 percent to be €41,200. However, the actual average income for the top 10 percent is over €123,000. The difference is down to factoring in the number of people in the household.

The main point here is that Irish high-income groups compare very favourably to high income groups in other countries.

3. Implications for Budget 2013

Let’s play a game. Let’s say that the Government wanted to increase taxation on high-income groups but didn’t want to ‘soak’ them. Let’s say that they would only increase taxation to the extent that it reduces the disposable income of high income groups to EU averages. How much revenue could they expect to take in? This is based on the disposable income figures provided by the ESRI in their recent Economic Commentary.

If the Government fashioned a set of tax measures – rates, reduction of tax expenditures, new taxes, etc. – to bring the disposable income of the top 10 percent to EU averages, it would take in between €3 billion and €3.5 billion, enough to reach their Budget 2013 deficit target. If the Government went Nordic, it would be enough for the next two budgets.

Would this be too onerous on high income groups? No. It would mean they would be ‘earning’ the same as their EU counterparts. But let’s not forget: we are in recession, we are in a bail-out. If there is a time to ask people who can afford it to make a sacrifice, now is that time.

None of the above should be taken as an argument that we can tax-the-rich out of this crisis. For that, we need to increase growth, employment and wages. However, increasing tax on high-incomes can supplant cuts in public services, public investment and social protection, and would minimise damage to domestic demand. One does not need to be some wild-eyed, paid up member of the local ‘eat-the-rich’ chapter to see the pragmatic benefits of this approach.

Others have. As Cedar Lounge Revolution points out – in one country a party and presidential candidate actually kept their campaign promise to increase taxation on high income groups; up to 75 percent on the richest in the economy. Vive la France!
So let’s apply a little common sense. Let’s pursue a rational fiscal approach. Let’s bring a little equity into policy.

Let’s turn on the bath water.

Thanks to Dara Turnball for alerting me to this Eurostat database.

Cutting Human Rights

Tom McDonnell: It was good to see the Council of Europe's Human Rights Commissioner Thomas Hammerberg wade into the austerity debate (See Here).

He talks about his recent visit to Ireland and about Governmental decisions to erode funding and structures used to support human rights and protect the most vulnerable.

His last paragraphs are important:
"In a longer perspective there is no contradiction between measures to ensure economic growth and stability and to protect and care for the most vulnerable. Austerity measures which exacerbate inequalities will only postpone problems and in some fields make it even more costly to resolve them at a later stage.

At stake are essential values of basic justice and social cohesion. Those already disadvantaged have no belts to tighten and must not be asked to make sacrifices for a crisis which was not of their doing."

Crisis shedding light on the Irish state

Peadar Kirby: We may live in very exceptional times, in which the speed of how the Irish crisis is developing is literally breathtaking. Yet, for all that, what is most disturbing is how it manifests just how little has actually changed, illustrating yet again in stark terms some long-standing features of how the Irish state operates. Despite the intense focus on the immediate pressure of events, it is most important that we recognise the very familiar posture adopted by Irish policy makers and by the Irish state, since it highlights what will have to change if we are to have any hope of building a more sustainable and equitable future. Another way of putting this is to state that the largely economic and financial discourse that dominates debate needs to be balanced by a discourse that focuses on the administrative and the political features of the current crisis.

While it is true that a crisis requires crisis management, what we need to examine is how this crisis is being managed, as it is this which is very revealing. What is most striking is that politicians and policy makers give the impression of being dragged along by events to which they are reacting, with little sense of forward planning. While this might be understandable amid a crisis that is far more severe than could have been reasonably anticipated, it also needs to be recognised that the intensity of the crisis right at this moment derives from the fact that the state has a very poor capacity for longer-term forward planning and has failed to even begin to address the challenge of designing a more adequate system of taxation. These failures cannot be blamed on the present crisis as they are very familiar features of the Irish state. Why did it take so long to realise that the present crisis required multi-annual budgetary planning (indeed long before the present crisis, this capacity should have been developed) and, even more glaringly, why have the recommendations of the Commission on Taxation not been used as the basis for a re-design of the taxation system? If this had been done, not only would it help inform the budgetary strategy but it would also have helped give a sense of confidence that the state would be able to deal with the crisis.

Take the issue of corporation tax. What is remarkable about the present debate on these issues is just how successfully powerful vested interests have created a firm consensus throughout Irish society that the present level of corporation tax is untouchable. It is simply ruled out as a possible subject of debate any time it is raised, and the Irish media and Irish society as a whole (judging by the complete lack of debate on the issue) seem to acquiesce in this. Is this not extremely revealing? At a time when we are agonising over cutting back welfare payments, pensions, various supports for the most vulnerable in our society, and core funding for our health and education services, and are being told that the pain must be widely shared, we all seem to accept that powerful global corporations who declare a very high level of profits in Ireland should share absolutely no part of the adjustment. This remarkably benign and subservient treatment is based on the claim that raising corporation tax by a percentage point or two might undermine a core part of the state’s development strategy. But instead of debating whether this might be so, and seeking evidence as to what impact it might have, we simply succumb to a response based on fear.

Long before the present crisis, it was evident that the normal posture of the Irish state, particularly in the social sphere, was reactive crisis-management. There are very few examples where the state proactively instituted an ongoing process of reforming itself so as to avoid the emergence of crises. Indeed, the very term ‘reform’ appears to be equated to a process of cost-cutting rather than to a complex process of institutional design so as to more effectively achieve public goals. One could adduce numerous other examples which illustrate both the lack of policy-making based on hard evidence and also the lack of a process of robust and wide deliberation in the formulation of policy. The first weakness derives in part from the gap that has for too long separated those who make policy from those who could provide evidence that might inform the process; instead, civil servants all too often rely on consultants who are not intimately familiar with the latest research nationally or internationally. The second gap derives from the weakness of a culture of robust deliberation, not only in the political realm but also in the media. One can only hope that the present crisis will make policy makers more aware of the need to draw on social scientific evidence and generate a broader debate on the options facing us as a society. There is some evidence that the latter is happening; I’m not aware of much evidence that the former has begun.

All pain, no gain, no gain at all

Michael Taft: No doubt the Government will blame the need for increased contraction through a multi-annual budget on the banking crisis. There certainly is a good reason doing so – the banking crisis impacts on finances in a number of ways: debt addition, interest payment, addition, impact on bond yields, output depression and opportunity costs to beat the band. But don’t buy into the diversion. The blame lies with the Government’s own fiscal policy – a deflationary strategy that has proven self-defeating.

One of the central contentions on this blog is that deflationary policies will do just that – deflate the economy. They will depress growth which, in turn will depress tax revenue while increasing public expenditure through higher unemployment costs arising from the low level of output. Recent estimates from the Central Bank (and, no doubt, data that only the Government has sight of) is starting to show this. Growth figures are coming in well below Government projections in the last budget.

Nominally, the economy will be much lower than the Government originally projected. This is particularly borne out by key domestic indicators:

As can be seen, every indicator is going south. While the Government expected consumer spending to increase towards 3 percent, the Central Bank estimates that it will be effectively stagnant. Critically, while the Government estimated investment to grow by over 4 percent, the Central Bank estimates it will still be negative. The result is that the Central Bank estimates the domestic economy will grow at about half the rate as the Government hoped.

What does this mean for the deficit next year? The Central Bank doesn’t give an estimate. But even if the Government’s budgetary targets are met (tax revenue, current and capital spending) the deficit will start to rise – merely as a function of lower GDP. Instead of being -10 percent as the Government hoped, it will be -10.5 percent.

However, if the Government’s own tax revenue ratio holds (i.e. tax revenue as a percentage of GDP – the Government uses a ratio of 19.3 percent between 2010 and 2014), then the real trouble starts. With the deflated GDP, tax revenue will undershoot by €1.5 billion. If this holds, then the deficit will slide back to levels this year. In other words, there will be no progress on the public finances. In fact, it could be even worse.

The Government hoped that employment would rise by approximately 18,000 in 2011. The Central Bank estimates it will continue declining – by 7,000. Unless emigration increases, unemployment could rise – increasing public spending above what the Government estimated, thus adding even more to the deficit.

So, all that pain and no gain at all. And none of the above counts the cost of the banking crisis. Now, throw in the cost of that – the extra interest payments, the higher rates on Government borrowing and no wonder the Government is going back to the drawing board. Because all its current projections are beyond repair.

This is the result of the Government’s deflationary policies – the very deflation demanded by commentators, analysts and politicians on both sides of the house. If the Government continues to pursue this strategy through a multi-annual programme, then it will be continuing policies that have failed to date.

And if the Opposition parties buy into this – in the name of a ‘national consensus’ – they will be aiding and abetting what is essentially a crime against the economy.

Prudence in the Face of the Unknown is Key

Stephen Kinsella: It is almost never correct to sacrifice a present benefit for a doubtful advantage in the future. Ireland's political classes understand this truism at the genetic level. In a world where less and less seems predictable, Ireland faces multiple uncertainties: we cannot afford to splurge on one by neglecting the other.

The coming budget will unhinge whatever remains of social partnership, and may even bring down the Government. The coming wave of mortgage defaults will ensure our banking system remains under extreme pressure and international scrutiny, no matter how well NAMA does or does not perform in cleaning up the balance sheets of recalcitrant banks. It is uncertain how many indigenous Irish businesses will weather the unprecedented economic storm they find themselves in, and what the resulting level of unemployment may be. The slow, but steady, international recovery may leave many parts of Irish society not directly tied to export industries behind. These are short-term concerns.


The negative social consequences of mass unemployment are starting to be felt. The cost to families and communities of increased domestic violence and criminality is incalculable. The security of every family against unnecessary hardship is an invisible social asset on which our culture is dependent: we don’t see this asset until it is gone. These are longer-term concerns.

In the midst of these uncertainties, the government must display prudence in the face of the unknown. Freeing up resources through increased efficiencies in the public sector will take time. One swipe of a pen can reduce incomes of public sector by thousands. A cut in public sector pay is inevitable. An increase in efficiency in the public sector—doing more with less—is not. Which course of action is more prudent, and which more likely to save taxpayers’ money in the long run?

In attempting to be prudent in some areas— fiscal policy, for one—the government may lose the good will of its citizens. By being extremely imprudent, in the cases of NAMA, the stalled reform of the taxation system, the crawl toward accountability, and most of all in a claw back of frontline public services, the government may damage the long run interests of its citizens.

The government has a duty to provide the highest standard of living for its citizens the nation can afford. That appears to be at 2003 levels of income at the moment. Our spending remains at 2009 levels. Prudence dictates the most likely course of action for the government in the coming budget. Actions are not without consequences, however, and a prudent public will do well to remember the choices made on their behalf come election time.

Child Benefit and teddy bears' picnics

"As we are all frog-marched down to the Finance Minister’s picnic, let’s see what effect cutting Child Benefit will have. For all the indications are that this payment is in the firing line. Many have argued that it’s a no-brainer – sure, doesn’t Child Benefit get paid to rich folk? Doesn’t that mean it’s regressive? We could cut the payment without harming (too much) low and average income groups – and save the state a lot of money". You can read the rest of Michael Taft's post on the effects of a cut in Child Benefit here.

Labour and the budget

The story goes that, when asked to evaluate the long-term impact of the French revolution, a student replied that it was too early to say. The long-term implications of Budget 2009 (Round Two) will as hard to assess as the impact of Round One last October. One detects a subtle shift in public mood – on the street, on the bus and in the workplace (for those still in employment) – from a predominant mood of intense anger to one of anger plus fear, with the latter beginning to swamp anger. Whatever the political (and electoral) implications of recent Government economic and fiscal policies, it is clear that ‘Ireland’ is deeply divided on where we go from here. Political leadership is called for. On the left of the political spectrum the two main parties – Labour and Sinn Féin - are enjoying a boost in the polls. Enjoy it while it lasts, say some on the Government benches.

Could we even see the emergence of a real choice between two competing visions for society in a general election some time in the next few years? – one pointing towards a high-skill, high-productivity, high-wage, high-tax, high social services, competitive social market economy – the other towards …. a continuation of the present paradigm? Some argue that the Irish people have never had a real choice in any general election since Labour first contested in 1922.

So, what is Labour saying?.....

On Thursday 2^nd April, Labour published Building a New, Better and Fairer Future – Labour’s Priorities for the Emergency Budget.

In summary:

1. Labour is cross that detailed information on budget trends and forecasts has been withheld;

2. Labour argues for a comprehensive and multi-annual approach to the fiscal problem;

3. It warns against too fierce a fiscal adjustment in the next 9 months which might only place us on a further deflationary slide (there is evidence that the Department of Finance’s overly-conservative fiscal stance in the 1950s was a major break on economic development at the time).

4. Labour settles for a target reduction in borrowing of around €2.8billion in a full-year term from this April – which is no small fry.

Read on ………

To be credible, Labour needs to spell out its key priorities and how it would seek to move from where we are now to one of sustainable recovery. People ‘on the street, on the bus and in the workplace for those still in employment’ are concerned about Jobs, Jobs and Jobs. Just listen. It is the economy ….. as the saying goes. Labour’s pre-budget submission does offer important clues:

• Employment creation and upskilling are given number one priority

• Fairness determines the adjustment in the tax base and rates

• ‘structural adjustments’

More specifically, the document proposes a range of measures, including labour market activation, a new NDP and a top-up of €1b to the National Training Fund (from bank fees for the Guarantee scheme), pre-school education roll-out with a reversal of some recent cuts in public spending (such as, for example, special education). Costings are given, but the underlying specifics are not spelt out.

Where would the adjustment of €2.8b in a full-year come from? The bulk of it would come from tax increases – capital, tax relief reductions, carbon taxes, excise taxes, higher top tax rate, targetting of tax exiles. Some estimates are given for each proposal. Good stuff as far as it goes. By contrast Fine Gael does not go near the 41 and 20 tax rates. FG is calling for 15,000 voluntary redundancies in the public service (it is not clear how this would save money in the short-term).

Courageously (for Labour) the document addresses a number of thorny public sector issues including insider labour market practices and restrictions (regarding recruitment, mobility and promotion), as well as the issue of the widening spread of pay over time (pointing out that top civil servants earn over 10 times what is earned by a lower-paid worker in the public sector compared to a ratio of 6:1 twenty years ago). Labour comes down, clearly, on the side of reducing the public sector pay bill. If this is to be done – within the context of maintaining social services – there are only two options:

• Reduce average pay and/or

• Reduce numbers employed.

The first option, above, can be loaded on public sector workers above a certain threshold. The document estimates that a cap of €200,000 per year on top-level salaries in the public sector would yield a saving of €100m (this must be an error or typo?). If that were true, this saving would pay for a cervical cancer vaccine for all teenage girls five times over, plus a Cystic Fibrosis Treatment Centre.

Reducing numbers would be fraught since, to begin with, by OECD country standards Ireland has a lower proportion of workers employed public sector.

Like Sinn Féin and Fine Gael (‘Rebuilding Ireland a NewEra for the Irish Economy’), Labour is calling for some type of semi-state bank tasked with lending. In this case, Labour is proposing a National Development Bank to 'fund infrastructure projects'. As with CORI, Labour calls for a discontinuation of a wide range of tax reliefs (including relief on trade union subscriptions which would save €11m per year). Tax reliefs, shelters and 'non-standardisation' of reliefs are really a type of 'low-hanging fruit', and it beggars belief that the Government has not accelerated reform here instead of referring to a time-wasting wait on the Commission on Taxation to report (although it doesn't beggar belief when you consider how, for example, the private pensions lobby is upping the case against reform – see Attacks on Pension Relief short-sighted and reckless)

But, does Labour chart a way forward in terms of a fundamental shift in the balance of economic and social power along with the distribution of income and wealth? It seems to me that a coherent, well-thought-out strategy must identify:

1. immediate costed, realistic steps to address - as best as possile – the five 'crises' referred to by NESC

2. a medium-term strategy to re-build the economy and society, and greatly strengthen the quality and level of public services; and

3. a long-term strategy to realise a new society based on principles of equality, solidarity and community.

The school report might say this plan has good potential but that 'the student needs to work harder'.

Preparing low and middle income earners for higher income tax

Peter Connell: In last Fridays’s Irish Times Colm Keena, in an article entitled ‘Income data understate contribution of lower and middle-income earners’, published a table showing income and income tax distribution for Irish earners in 2008. It makes for fascinating reading, particularly in the context of the forthcoming emergency budget and advice emanating from many economists to address the issue of many income earners paying little or no income tax. Such is the apparent generosity of the Irish state, we are told, that a worker on a salary of over €45,000, married with two children, is a net beneficiary of the State. As an aside, and to remind us of happier times – at least for the Progressive Democrats-, Michael McDowell’s election literature made great play of this fact just two short years ago during the 2007 general election campaign.

So, the public discourse on this issue appears to be preparing us for significant increases in income tax for low and middle income earners on April 7th. Sean Ardagh TD, commenting on Irish Economy, is perhaps giving us a preview of what we may expect when he states – ‘The political/ideological desire to have all people with an income paying tax and contributing to the general exchequer coffers has merit. When we apply for services we are entitled to, it is satisfying for us to be able to know and to say that we have paid our taxes when we had an income and what we seek is an entitlement, not a handout.’ Just how much satisfaction workers on €35,000 to €40,000 will derive from paying more income tax after April 7th is difficult to guess.

To return to Colm Kenna’s table, the data presented refutes the often quoted statistic that 50% of all income tax comes from earners with incomes of more than €100,000. The corollary of presenting this statistic as fact would appear to be that the Irish income tax system is highly progressive and that high earners are making more than their fair contribution to the national coffers. However, it turns out that the statistic is based on Revenue cases with many couples being treated as a single case. If the data is disaggregated into individual income earners a different picture emerges with those earning over €100,000 contributing 31% of all income tax. The data also reveals that those earning low to middle income incomes in the range €30,000 to €50,000 contribute 28% of all income tax despite earning only 30% of all taxable income.

This certainly does not sit with the received wisdom that seems to inform much of the debate on taxation leading into the April 7th budget.

Responding to the crisis

It can be hard to see beyond the impending budget and the rising crescendo of voices clamouring for cutting our way out of the present gathering economic storm. Conservative commentators and economists have a very simple recipe roughly summed up as:

• cut wages

• cut public spending

• slash borrowing quickly

• sell off public assets

• rescue the banks and the bankers

These responses pass for orthodoxy and have a stamp of authority when recycled through the media – especially particular Sunday journals. This calls for a rounded, balanced and socially fair response. One such response is coming from CORI – the Conference of Religious in Ireland. It takes a similar line on many issues to that of ICTU – especially in regard to tax reform.

An interesting feature of both contributions is the way in which they point, not only to necessary immediate responses to the current crises, but to the need for a fundamental shift in the economic and political philosophy underlying public policy and thinking. The culture of individualism, greed, anxiety and market dominance over human values needs to be critiqued. An alternative needs to be envisioned and practical steps undertaken now. Just as the fall of the Berlin wall marked the end of communism in Europe, the calamitous turn of events with loss of jobs, production, capital values and confidence, marks a new chapter in history and could yet signal a dramatic collapse in the dominance of neo-liberalism. The coming two to three years will be decisive. Truly we are living in extraordinary times and one in which political economy must rise to the challenge with clear principles and clear options and policy solutions for public debate.

Starting with the Budget in Ireland on April 7^th, what are the areas of public spending and taxation that need to be changed now? The National Economic and Social Council has identified five inter-linking crises. ICTU has issued its 'ten point plan'. CORI, in its Briefing Paper, has based its policy approach on 8 key points.

I'll be examining each of these approaches in subsequent posts - but meanwhile perhaps people would like to comment?

Who’s for some expansionary fiscal contraction?

Peter Connell: The mini-budget that we can look forward to in three weeks time will, I’m sure we’ll be told, ‘constitute a necessary first step on the road to economic recovery’. It will ‘position the economy to take advantage of the global upturn when it happens’. Apparently, the budget will ‘give us a renewed confidence in our ability to see out the recession’ and encourage us to go out and spend for Ireland. But wait, isn’t it also supposed to extract €4 billion out of the economy in the form of taxes rises and public expenditure cuts? And this is on top of the €2 billion in cuts already in place. So how will this piece of magic work? You take €6 billion out of people’s pockets but, somehow, they’ll feel more confident about the future and start spending their money.

The answer is – it’s all down to expansionary fiscal contraction. The theory is that cuts in public spending will lead citizens to believe that taxes will also fall and, on that basis, private spending will increase. In the current Irish context, given that there is a commitment to raise taxes, the most we can say is that consumers will belief that taxes will rise less than they might otherwise do if public spending were not cut. Some economists argue that expansionary fiscal contraction helps to explain the turn around in the Irish economy after 1987 when net government borrowing fell as a percentage of GDP from 10.4% in 1983-86 to 4.2% in 1987-90. Average GDP growth rose from 1.9% in the first period to 5.7% in 1987-90. QED. Well, maybe not. It’s now generally accepted the post 1987 recovery had a lot to do with external factors including falling international interest rates and an upturn in the global economy.

The point is that we need to be as clear as possible about the impact of a combined €6 billion cut in public expenditure and rise in taxation. Has anyone done the sums yet on the impact on government revenue? On how many businesses will be forced to close that otherwise might survive? On the damage that will be inflicted on the productive capacity of the economy? To what extent will the provisions of the mini budget deepen the real crisis which is in the real economy? The government appears to have made an absolute commitment to keep the deficit in 2009 below 10% of GDP, hence the mini budget. Across much of the media the need to stick to this figure is accepted without question. Given the likely impact of that budget in three weeks time on all our futures the public discourse needs to move to another level.