Michael Taft: Michael Hennigan over at Finfacts is worried that Irish taxation will reach high Danish levels by 2014. He shouldn’t be (though if that’s what it takes to reach Danish levels of unemployment estimated to be 3.5 percent in 2014, some people might think it worth the price). Ireland is a low-tax economy and will stay that way under current policy. Unfortunately.
Michael highlights the latest Eurostat figures on taxation which shows that in 2008 Danish taxation (Government revenue) stood at 48.2 percent of GDP; Ireland stood at 29.3 percent. So fears would seem premature.
But like so many, Michael claims that Ireland has to use GNP, not GDP:
‘In calculating the Irish tax burden here, we use GNP as a denominator because the main differential with GDP, the profits of the dominant multinational sector, are excluded.’
This debate over GDP and GNP can become almost scholastic (to get really obsessive on this point we could claim that GNI is the better denominator – GNP plus EU transfers). First, the ‘differential’ results from a number of outflows – profits, outward investment from indigenous companies, interest payments, remittances, etc. If we are to compare like-with-like we would have to disaggregate all that for both Ireland and Denmark and then compare the more narrow ‘profits’ category.
Second, GDP is a measure of economic activity in a particular country. If workers and managers generate profits here, why should this be excluded because of their final destination? Would we exclude such profits if they were sent out of the country for philanthropic reasons (to build schools in sub-Saharan Africa)? Or if the owners, a la Keynes, buried the profits in a big hole outside Athlone to be dug up some time in the future – or maybe never?
There is one reason to modify GDP and all measurements dependent on that – the phenomenon of importing profits generated in other jurisdictions for the purposes of taking advantage of our low-tax rate. This is money created somewhere else, not here; it ends up in our GDP through complicated channels; and like Father Ted’s ‘it’s-resting-in-our-accounts’, it is exported after tax. However, does anyone really imagine that any Government will give carte blanche to our data agencies to measure that and adjust the GDP accordingly? Or provide a mirror ‘real-life GDP’ measurement?
We don’t have to answer all these questions or engage in contestable extrapolations. There is another simple measurement that cuts across all these: namely; the amount of tax (Government) revenue per capita. When we use this (the IMF database in US dollars) we find a not-unexpected result for 2008:
Denmark: $34,398
Ireland: $20,562
Well, we were a long ways off from Denmark in 2008. And, if the IMF projections hold, we’ll be a long ways off in 2014:
Denmark: $32,268
Ireland: $17,477
Indeed, we’ll be falling further behind Denmark.
Of course, this particular factoid – like so many others – has to be treated carefully. Irish tax levels, at least at the household level, is rising, so why should the above show it’s actually falling by 2014? Because the economy will be weaker in 2014 (over 11 percent below current GDP levels in 2008). Weak economies generate weak tax revenue. For instance, tax rates, etc. could remain the same but tax revenue would rise if we had the same level of employment as Denmark. So when comparing tax levels, one has to take account of a range of factors – not just tax rates.
All this to say that using one particular metric can tell us all sorts of things – but can’t provide the whole picture. To this end, I’m not making privileged claims for the Government revenue per capita measurement I used. One should factor in purchasing power parities, the working population, the number of enterprises, etc.
But let’s get a grip.
According to the OECD Tax and Benefits database, the average Danish income earner paid 39.7 percent of his/her gross income in tax; the average Irish income earner paid 22.4 percent.
The corporate tax rate in Denmark is 25 percent; in Ireland, 12.5 percent.
The main VAT rate in Denmark is 25 percent; in Ireland, 21 percent (though the new Government will raise this to 23 percent). But Denmark has few reductions or exemptions from this main rate; in particular, food is subject to 25 percent, in Ireland, it is zero-rated.
So Michael shouldn’t worry. We are way, way off from Danish levels of taxation. The low-tax model is safe.
Showing posts with label commission on taxation. Show all posts
Showing posts with label commission on taxation. Show all posts
Wednesday, 9 March 2011
Monday, 7 December 2009
Congress tax menu
While a number of papers and submissions have been analyed in the media and elsewhere during the past few weeks, one paper seems to have escaped journalists' attention.
Last week ICTU published a list of 'Areas where taxes can and should be raised in the Budget' - essentially, a menu of taxes which could be levied in Wednesdays 2010 Budget. ICTU estimates that these taxes could raise over €2 billion in total.
Among their recommentations is the suggestion that more be raised from those who currently pay least, by raising the minimum effective rate on those who utilise the tax "incentive" schemes schemes. ICTU suggests that the minimum effective tax rate be raised from 20% to 35%, and that the threshold be reduced to those earning over €100,000 utilising these schemes but that the scheme be applied to pensions too.
The document is available for download here.
Last week ICTU published a list of 'Areas where taxes can and should be raised in the Budget' - essentially, a menu of taxes which could be levied in Wednesdays 2010 Budget. ICTU estimates that these taxes could raise over €2 billion in total.
Among their recommentations is the suggestion that more be raised from those who currently pay least, by raising the minimum effective rate on those who utilise the tax "incentive" schemes schemes. ICTU suggests that the minimum effective tax rate be raised from 20% to 35%, and that the threshold be reduced to those earning over €100,000 utilising these schemes but that the scheme be applied to pensions too.
The document is available for download here.
Friday, 4 December 2009
Tax Breaks
Nat O'Connor: TASC has estimated that tax breaks ('tax expenditure' to use the technical term) on personal income tax and corporation tax will cost €7.4 billion in 2009 in lost revenue. Tax breaks benefit the better off, whereas social welfare cuts will increase the number of people at risk of poverty. TASC argues that the Minister for Finance should cut tax breaks. You can read TASC's full submission here.
In this blog post I want to explore our (the broad public's) complicity in our tax break regime and what we can do next to make it economically and socially beneficial.
The OECD's Economic Surveys: Ireland reports that in 2005 (which is the latest full data) tax expenditure on personal income tax in Ireland cost three times as much as the average of 22 other EU countries. Tax expenditures on corporation tax costs seven times as much. In total, in 2005, tax expenditure cost €10.7 billion (not including personal credits).
Some questions:
1. What's the problem?
2. How did this happen?
3. What do we do about it?
Some answers:
1. There are three problems. Firstly, economic inefficiency. Secondly, inequality. Thirdly, the resulting non-progressive tax system.
An example of economic inefficiency was shown by the Goodbody and Indecon reports on property- and area-based tax breaks published as annexes to Budget 2006. They showed considerable deadweight - that is, people benefiting from tax breaks for investments that probably would have happened even without the tax breaks. This inefficiency was accepted by Government and these tax breaks are being discontinued.
An example of inequality is that high earners have disproportionately benefitted from pension relief (see this recent post).
The non-progressive tax system results because better off households can use more tax breaks. There is probably an income/wealth threshold after which it is cost-effective to pay a tax advisor, which in turn opens up more possibilities to avoid tax. Hence, we have a theoretically progressive tax system, with a higher rate for higher earners, but the reality of income tax paid is more like a curve. Low earners pay little of their salaries in income tax, middle earners pay a higher proportion, but higher earners pay a lower proportion.
Both the inefficiency and the inequality stem - in part - from a lack of caps and limits being placed on tax breaks. Whether or not you think that tax breaks are a valid and useful tool for Governments to use to encourange economic activity, it seems that successive governments were inexpert in designing and implementing tax break schemes. They may not have been concerned about equality, but is there evidence to show that successive Ministers for Finance signed off on tax breaks that would deeply harm the economy in order to benefit a small number of wealthy people?
2. There are probably a number of suggestion for why tax breaks grew in number and cost. Paul Sweeney, for example, has suggested they were seen as "costless" by some ministers. They certainly dovetailed with a low tax ideology. Maybe in the past ministers found it easier to persuade their colleagues to grant tax breaks, rather than increase departmental budgets.
It has been suggested that tax breaks permitted State supports to enterprise that would have been more difficult or forbidden under EU rules.
Many specific tax breaks are a response to the demands of specific sectors, such as construction, farming, mining, fund management, etc.
Tax breaks were also introduced to achieve parity with tax concessions or spending in other sectors. So more tax breaks were created to even out markets that had been distorted by other tax breaks. One cannot escape the classic image of someone sawing off the ends of table legs with increasing fervour in order to correct a relatively minor original imbalance.
3. The remaining problem is that many households, on low and middle incomes, benefit from tax breaks. Although this is nothing like the extent to which high net worth individuals have benefitted, an immediate cut of tax breaks (such as mortgage interest tax relief) would represent hundreds of euro per month taken out of many households' net incomes. The prices people paid for their homes were in turn inflated by the distorting effect of mortgage interest tax relief in the housing market, so cutting the tax break immediately would be a double blow. Nevertheless, we really do need to make major cuts in tax breaks.
One immediate solution is for the Government to impose strict caps and limits on the full range of tax breaks - including the many tax relieving measures that the Commission on Taxation identifies as part of the benchmark tax system. Strict caps will means that low to middle income households will not suddenly face a few hundred euro less in their net incomes (which is significant). Higher income households will benefit less. Over the following few years, more and more tax breaks can be cut completely, to lessen the shock to any particular part of the economy (except tax advisors).
Tightening up on tax breaks should also be more efficient than increasing income tax, as the amount of tax actually paid is much more effected by breaks than rates.
In this blog post I want to explore our (the broad public's) complicity in our tax break regime and what we can do next to make it economically and socially beneficial.
The OECD's Economic Surveys: Ireland reports that in 2005 (which is the latest full data) tax expenditure on personal income tax in Ireland cost three times as much as the average of 22 other EU countries. Tax expenditures on corporation tax costs seven times as much. In total, in 2005, tax expenditure cost €10.7 billion (not including personal credits).
Some questions:
1. What's the problem?
2. How did this happen?
3. What do we do about it?
Some answers:
1. There are three problems. Firstly, economic inefficiency. Secondly, inequality. Thirdly, the resulting non-progressive tax system.
An example of economic inefficiency was shown by the Goodbody and Indecon reports on property- and area-based tax breaks published as annexes to Budget 2006. They showed considerable deadweight - that is, people benefiting from tax breaks for investments that probably would have happened even without the tax breaks. This inefficiency was accepted by Government and these tax breaks are being discontinued.
An example of inequality is that high earners have disproportionately benefitted from pension relief (see this recent post).
The non-progressive tax system results because better off households can use more tax breaks. There is probably an income/wealth threshold after which it is cost-effective to pay a tax advisor, which in turn opens up more possibilities to avoid tax. Hence, we have a theoretically progressive tax system, with a higher rate for higher earners, but the reality of income tax paid is more like a curve. Low earners pay little of their salaries in income tax, middle earners pay a higher proportion, but higher earners pay a lower proportion.
Both the inefficiency and the inequality stem - in part - from a lack of caps and limits being placed on tax breaks. Whether or not you think that tax breaks are a valid and useful tool for Governments to use to encourange economic activity, it seems that successive governments were inexpert in designing and implementing tax break schemes. They may not have been concerned about equality, but is there evidence to show that successive Ministers for Finance signed off on tax breaks that would deeply harm the economy in order to benefit a small number of wealthy people?
2. There are probably a number of suggestion for why tax breaks grew in number and cost. Paul Sweeney, for example, has suggested they were seen as "costless" by some ministers. They certainly dovetailed with a low tax ideology. Maybe in the past ministers found it easier to persuade their colleagues to grant tax breaks, rather than increase departmental budgets.
It has been suggested that tax breaks permitted State supports to enterprise that would have been more difficult or forbidden under EU rules.
Many specific tax breaks are a response to the demands of specific sectors, such as construction, farming, mining, fund management, etc.
Tax breaks were also introduced to achieve parity with tax concessions or spending in other sectors. So more tax breaks were created to even out markets that had been distorted by other tax breaks. One cannot escape the classic image of someone sawing off the ends of table legs with increasing fervour in order to correct a relatively minor original imbalance.
3. The remaining problem is that many households, on low and middle incomes, benefit from tax breaks. Although this is nothing like the extent to which high net worth individuals have benefitted, an immediate cut of tax breaks (such as mortgage interest tax relief) would represent hundreds of euro per month taken out of many households' net incomes. The prices people paid for their homes were in turn inflated by the distorting effect of mortgage interest tax relief in the housing market, so cutting the tax break immediately would be a double blow. Nevertheless, we really do need to make major cuts in tax breaks.
One immediate solution is for the Government to impose strict caps and limits on the full range of tax breaks - including the many tax relieving measures that the Commission on Taxation identifies as part of the benchmark tax system. Strict caps will means that low to middle income households will not suddenly face a few hundred euro less in their net incomes (which is significant). Higher income households will benefit less. Over the following few years, more and more tax breaks can be cut completely, to lessen the shock to any particular part of the economy (except tax advisors).
Tightening up on tax breaks should also be more efficient than increasing income tax, as the amount of tax actually paid is much more effected by breaks than rates.
Wednesday, 28 October 2009
Controversies over speed of fiscal adjustment
Slí Eile: A recent paper by John Fitzgerald of the ESRI (‘Fiscal Policy for Recovery’) indicates the scale of challenge facing public finances in Ireland. His medicine, while conforming to the standard prescription, is greatly more nuanced than the Slash and Burn school of McCarthy/Department of Finance). He outlines six principal Conclusions as follows:
Standard Dublin Consensus Conclusions:
Wages are too high and need to be cut by ‘7% over 3 years’ (in the public and private sectors)
Capital investment should be focussed on producing ‘the maximum impact on the productive capacity of the economy’ but not primarily as generating jobs in the short-run (implicitly the inevitability of continuing high levels of unemployment is accepted pending a larger-scale resumption of outward migration?)
Frontload public spending cuts but in a way that increases efficiency ‘with a minimum impact on services’. ‘Cuts in expenditure now, with an agreed reform package, may well be the only way to achieve long-term reform’. (Fitzgerald rules out a Keynesian stimulus as the scope for borrowing is too constrained by the depth of pro-cyclical squander in the 97-07 period. He also acknowledges that cutting spending and wages will be deflationary and will postpone recovery in 2010 but believes that TINA).
Reform the welfare system to avoid creating ‘poverty traps’ or disincentives to returning to work (when such eventually becomes possible). (This can only mean lower welfare vis-a-vis wages)
Non-Standard Conclusions:
Taxes as a % of GNP should be raised to 45% over a number of years (with an ESRI preference for property and carbon taxes and some shifting in employer PRSI towards employees)
Tax child benefit but no generalised cuts in welfare rates.
Nearly all of the above runs directly contrary to the position taken by the ICTU (see ‘There is Still a Better, Fairer Way’) and by various progressive commentators (see for example
notesonthefront.typepad.com). In essence the disagreement centers on:
* The deflationary impact of pay cuts in general (as against the claim that such cuts will price us back into export markets and boost investor confidence and expectations).
* The need to prioritise job retention and creation through an investment package (as distinct from a lower capital spend suggested by Fitzgerald of around 4% of GNP)
* Prolonging the period of fiscal adjustment (as against a short, sharp snap before the economy bounces back in 2011 or 2012 – hopefully !)
* Defending all families – especially poorer families – in terms of welfare payments and living standards (as against withdrawing net payments to some households and reducing the ‘replacement rate’)
* Raising taxes towards 40-45% more quickly than that envisaged by Fitzgerald.
Fitzgerald makes two further points which should not be overlooked:
Indeed it was remarkable.
On this last point I must concur 110%.
Standard Dublin Consensus Conclusions:
Wages are too high and need to be cut by ‘7% over 3 years’ (in the public and private sectors)
Capital investment should be focussed on producing ‘the maximum impact on the productive capacity of the economy’ but not primarily as generating jobs in the short-run (implicitly the inevitability of continuing high levels of unemployment is accepted pending a larger-scale resumption of outward migration?)
Frontload public spending cuts but in a way that increases efficiency ‘with a minimum impact on services’. ‘Cuts in expenditure now, with an agreed reform package, may well be the only way to achieve long-term reform’. (Fitzgerald rules out a Keynesian stimulus as the scope for borrowing is too constrained by the depth of pro-cyclical squander in the 97-07 period. He also acknowledges that cutting spending and wages will be deflationary and will postpone recovery in 2010 but believes that TINA).
Reform the welfare system to avoid creating ‘poverty traps’ or disincentives to returning to work (when such eventually becomes possible). (This can only mean lower welfare vis-a-vis wages)
Non-Standard Conclusions:
Taxes as a % of GNP should be raised to 45% over a number of years (with an ESRI preference for property and carbon taxes and some shifting in employer PRSI towards employees)
Tax child benefit but no generalised cuts in welfare rates.
Nearly all of the above runs directly contrary to the position taken by the ICTU (see ‘There is Still a Better, Fairer Way’) and by various progressive commentators (see for example
notesonthefront.typepad.com). In essence the disagreement centers on:
* The deflationary impact of pay cuts in general (as against the claim that such cuts will price us back into export markets and boost investor confidence and expectations).
* The need to prioritise job retention and creation through an investment package (as distinct from a lower capital spend suggested by Fitzgerald of around 4% of GNP)
* Prolonging the period of fiscal adjustment (as against a short, sharp snap before the economy bounces back in 2011 or 2012 – hopefully !)
* Defending all families – especially poorer families – in terms of welfare payments and living standards (as against withdrawing net payments to some households and reducing the ‘replacement rate’)
* Raising taxes towards 40-45% more quickly than that envisaged by Fitzgerald.
Fitzgerald makes two further points which should not be overlooked:
My own view is that the 7% public service pay cut in March has made a significant dent in the difference between public and private differentials, while still leaving a substantial public sector premium. The tacit acceptance by the public sector of these cuts was quite a remarkable recognition of the crisis which the economy faces.
Indeed it was remarkable.
Before we can determine the appropriate path of fiscal policy over the next five years we must first decide on what is the long run level of public services that we want. Then the tax level will have to be set at an appropriate level to fund that level of services.
On this last point I must concur 110%.
Friday, 25 September 2009
Brendan Hayes on why he didn't sign the Taxation Commission report
"Low taxes, inequality in the provision of health and education, a growing income gap and sub-optimum economic growth: these are not separate, unrelated issues, but are inextricably connected and bound up together". You can read the rest of Brendan Hayes' article explaining why he declined to sign the Commission on Taxation Report here.
Tuesday, 8 September 2009
The values underlying the Commission on Taxation
Slí Eile: The Commission on Taxation (CoT) Report is another winter blockbuster following the Summer Bord Snip. A pattern has been witnessed - outsourcing of 'hard choices' to some special Group (but clearly heavily orientated with an ideological terms of reference) followed by months and months of anxious waiting, leading up to a series of early leaks to prepare the people. By the time the tome eventually appears the 'wow' factor is greatly diminished. Then we are into talk of a 'menu of options' for further consideration.
Just options, except that some options are getting early dismissal such as taxes on property. The very notion of taxing capital, land, property, wealth of any sort is anathema, and any proposal to extend existing taxes in these areas runs straight into a political and economic interest group wall. This was as true in the 1970s as it is today. The 'old reliables' used to be the pint, the cigs and petrol. Now it is focussed more than ever on taxing incomes - especially incomes that can be measured, assessed and levied.
There are many positive aspects to the CoT Report in my view, not least:
o The move in thinking towards taxing bads such as polluting consumption and production and not just goods like employment and income
o The move towards more property-related and local level taxes (where we are well out of line internationally); and
o The move towards closing some of the more obscene tax breaks and inequitable tax reliefs for those paying tax at above the standard rate.
Still, there is much that is left untouched. The scale of likely additional taxes is limited and the tax-neutral objective means that there will be some losers and some winners.
The very real danger is that this government - any Government - will pick and cite those parts of the package that fits most easily while neglecting the larger issues such as equity and sustainability.
The purpose of taxation should be seen as a threefold mandate:
o To fund public spending on key services and goods;
o To redistribute income and wealth; and
o To influence behaviour in a socially positive way (incentives/disincentives for different types of work, consumption, investment).
These purposes should reflect a philosophy based on:
o Equality of opportunity and condition;
o Solidarity with those who are poor, sick, very young, very old etc;
o Capacity of enterprises to innovate, compete and provide employment at home and abroad;
o Freedom to participate in society as an equal citizen with rights and responsibilities; and
o Service of the common good where collective effort is required in the provision of public goods.
Neo-liberals have to concede that even Adam Smith reserved certain roles to Government including defence and schooling.
Just options, except that some options are getting early dismissal such as taxes on property. The very notion of taxing capital, land, property, wealth of any sort is anathema, and any proposal to extend existing taxes in these areas runs straight into a political and economic interest group wall. This was as true in the 1970s as it is today. The 'old reliables' used to be the pint, the cigs and petrol. Now it is focussed more than ever on taxing incomes - especially incomes that can be measured, assessed and levied.
There are many positive aspects to the CoT Report in my view, not least:
o The move in thinking towards taxing bads such as polluting consumption and production and not just goods like employment and income
o The move towards more property-related and local level taxes (where we are well out of line internationally); and
o The move towards closing some of the more obscene tax breaks and inequitable tax reliefs for those paying tax at above the standard rate.
Still, there is much that is left untouched. The scale of likely additional taxes is limited and the tax-neutral objective means that there will be some losers and some winners.
The very real danger is that this government - any Government - will pick and cite those parts of the package that fits most easily while neglecting the larger issues such as equity and sustainability.
The purpose of taxation should be seen as a threefold mandate:
o To fund public spending on key services and goods;
o To redistribute income and wealth; and
o To influence behaviour in a socially positive way (incentives/disincentives for different types of work, consumption, investment).
These purposes should reflect a philosophy based on:
o Equality of opportunity and condition;
o Solidarity with those who are poor, sick, very young, very old etc;
o Capacity of enterprises to innovate, compete and provide employment at home and abroad;
o Freedom to participate in society as an equal citizen with rights and responsibilities; and
o Service of the common good where collective effort is required in the provision of public goods.
Neo-liberals have to concede that even Adam Smith reserved certain roles to Government including defence and schooling.
Read the fine print
Michael Taft: There will be any number of posts and articles on different aspects of the Commission on Taxation Report. Here I’d like to address the issue of progressivity and the annual property tax.
First, the Commission’s proposed Annual Property Tax (APT) is not a tax as such. It only attaches itself to house property, not to property and wealth in general. For low and average income earners, a house constitutes their main or only major asset. For those on high incomes, their house constitutes a smaller proportion of their total assets. This limitation undermines the progressivity of a property tax from the outset.
Second, over 55 percent of APT revenue would, according to the Commission data, come from houses with a valuation of less than €300,000. This is where the broad range of low and average income earners live. This is not an ‘extending of the tax base’ – it is a layering of one more tax on groups already reeling from the increased income and health levies.
Third, using Commission, Revenue Commissioners’ and the EU Survey of Income and Living Conditions data, we can construct the average household’s disposable income (approximately €52,000 updated for 2008) living in an average value house (the mid-point of Band B and Band C). The APT would take between 1.2 percent and 2.2 percent of disposable income.
For income groups above €200,000 per year living in a house valued at €2,000,000 and €3,000,000, the APT tax take would be less – 1.4 percent to 2.1 percent.
Of course, these are back-of-the-envelope calculations and can’t incorporate regional differences and other income differences – but it shows that that APT would struggle to be progressive. And another thing must be borne in mind – while these calculations are done on the basis of total disposable income, if one were to calculate real-life disposable income (after housing costs, food, utilities, transport to work, child-related costs) – clearly APT would affect low and average income earners more.
Fourth, the Commission may be a bit optimistic about the tax take an APT would yield. They estimated between 10 percent and 25 percent of households of different bands would obtain a waiver from the tax by virtue of being on the Live Register. However, there are other categories that would probably get a waiver as well – pensioners including widows’ pensions, those on disability and invalidity benefit/pension and Carers’ benefit/ allowances. If these largely low-income groups were also granted a waiver, that would double the amount of the tax base excluded under the proposed APT.
That would mean that the yield from the tax would be between €600 million and €750 million. And one more twist – the ESRI’s simulation shows that the net yield from a house property tax would be 81 percent of the estimated gross yield. Now subtract the yield from stamp duties (which the Commission wants abolished upon introduction of the APT) and administration and enforcement costs and there is the potential that the APT could bring in less than €400 million.
So: a property tax that attaches itself to only one property asset, with low and average income earners paying the majority of the tax and potentially a higher percentage of their income than those on higher incomes; setting up a new administration; risking a further reduction in domestic demand with all the consequences that that entails – all for the sake of relatively small change in fiscal terms.
The one question that comes to mind is: who would bother?
First, the Commission’s proposed Annual Property Tax (APT) is not a tax as such. It only attaches itself to house property, not to property and wealth in general. For low and average income earners, a house constitutes their main or only major asset. For those on high incomes, their house constitutes a smaller proportion of their total assets. This limitation undermines the progressivity of a property tax from the outset.
Second, over 55 percent of APT revenue would, according to the Commission data, come from houses with a valuation of less than €300,000. This is where the broad range of low and average income earners live. This is not an ‘extending of the tax base’ – it is a layering of one more tax on groups already reeling from the increased income and health levies.
Third, using Commission, Revenue Commissioners’ and the EU Survey of Income and Living Conditions data, we can construct the average household’s disposable income (approximately €52,000 updated for 2008) living in an average value house (the mid-point of Band B and Band C). The APT would take between 1.2 percent and 2.2 percent of disposable income.
For income groups above €200,000 per year living in a house valued at €2,000,000 and €3,000,000, the APT tax take would be less – 1.4 percent to 2.1 percent.
Of course, these are back-of-the-envelope calculations and can’t incorporate regional differences and other income differences – but it shows that that APT would struggle to be progressive. And another thing must be borne in mind – while these calculations are done on the basis of total disposable income, if one were to calculate real-life disposable income (after housing costs, food, utilities, transport to work, child-related costs) – clearly APT would affect low and average income earners more.
Fourth, the Commission may be a bit optimistic about the tax take an APT would yield. They estimated between 10 percent and 25 percent of households of different bands would obtain a waiver from the tax by virtue of being on the Live Register. However, there are other categories that would probably get a waiver as well – pensioners including widows’ pensions, those on disability and invalidity benefit/pension and Carers’ benefit/ allowances. If these largely low-income groups were also granted a waiver, that would double the amount of the tax base excluded under the proposed APT.
That would mean that the yield from the tax would be between €600 million and €750 million. And one more twist – the ESRI’s simulation shows that the net yield from a house property tax would be 81 percent of the estimated gross yield. Now subtract the yield from stamp duties (which the Commission wants abolished upon introduction of the APT) and administration and enforcement costs and there is the potential that the APT could bring in less than €400 million.
So: a property tax that attaches itself to only one property asset, with low and average income earners paying the majority of the tax and potentially a higher percentage of their income than those on higher incomes; setting up a new administration; risking a further reduction in domestic demand with all the consequences that that entails – all for the sake of relatively small change in fiscal terms.
The one question that comes to mind is: who would bother?
Will some local authorities go bankrupt in 2010?
Nat O'Connor: It has been suggested today that property tax will not be introduced any time soon: “Ministers believe that the introduction of a property tax would prove politically impossible in the current climate”.
It may be political suicide for the Government to introduce property tax, but if they don’t do so, they had better have a Plan B for the funding of local government.
The Tax Commission "envisage that the annual property tax will be an important component in the future financing of local government".
There is a broad range of things that local authorities do, and we have a tendency to take them for granted: drinking water, sewerage, waste collection, road maintenance, social housing, recreation, and much more. Some of their functions, like planning, can have a massive impact on the social and economic fabric of the area.
Since the introduction of the Local Government Fund in 1999, the system of funding for these services has not worked. Every year there is a large gap between what local authorities can raise in revenue and what they need to spend in order to fulfil their roles and functions. An Indecon report in 2005 made the huge gap (estimated to be up to €1.5 billion by 2010) abundantly clear and called for more mechanisms to raise local revenue.
In 2009, the Minister of the Environment, Heritage and Local Government signed off on over €935 million in discretionary General Purpose Grants to local authorities to “meet the gap between the cost to them of providing a reasonable level of day-to-day services and the income they obtain from other sources”. It is important to realise that this discretionary grant is on top of any planned, regular Government grants given to local authorities to carry out various functions (such as the capital for building social housing). In other words, the Minister has been plugging the local funding gap every year since the current funding system was introduced.
It is highly likely that as the state runs out of money, one of the first casualties will be the General Purpose Grant. This means a general degradation of municipal services and local areas. It could also mean increased pressure on commercial rate payers, who continue to be unhappy that they are heavily leaned on by local authorities for revenue, in the absence of other local taxation.
The Government failed to act on local government funding during the boom years and it has only itself to blame if the funding mechanism for local authorities does not work.
In Ireland, all politics really is local politics. So a failure to address local government funding as part of the current crisis will come back to haunt the central government.
It may be political suicide for the Government to introduce property tax, but if they don’t do so, they had better have a Plan B for the funding of local government.
The Tax Commission "envisage that the annual property tax will be an important component in the future financing of local government".
There is a broad range of things that local authorities do, and we have a tendency to take them for granted: drinking water, sewerage, waste collection, road maintenance, social housing, recreation, and much more. Some of their functions, like planning, can have a massive impact on the social and economic fabric of the area.
Since the introduction of the Local Government Fund in 1999, the system of funding for these services has not worked. Every year there is a large gap between what local authorities can raise in revenue and what they need to spend in order to fulfil their roles and functions. An Indecon report in 2005 made the huge gap (estimated to be up to €1.5 billion by 2010) abundantly clear and called for more mechanisms to raise local revenue.
In 2009, the Minister of the Environment, Heritage and Local Government signed off on over €935 million in discretionary General Purpose Grants to local authorities to “meet the gap between the cost to them of providing a reasonable level of day-to-day services and the income they obtain from other sources”. It is important to realise that this discretionary grant is on top of any planned, regular Government grants given to local authorities to carry out various functions (such as the capital for building social housing). In other words, the Minister has been plugging the local funding gap every year since the current funding system was introduced.
It is highly likely that as the state runs out of money, one of the first casualties will be the General Purpose Grant. This means a general degradation of municipal services and local areas. It could also mean increased pressure on commercial rate payers, who continue to be unhappy that they are heavily leaned on by local authorities for revenue, in the absence of other local taxation.
The Government failed to act on local government funding during the boom years and it has only itself to blame if the funding mechanism for local authorities does not work.
In Ireland, all politics really is local politics. So a failure to address local government funding as part of the current crisis will come back to haunt the central government.
Commission on Taxation Report Another Indicator of Political Crisis
Colm O'Doherty: It would be naive to think that a Commission on Taxation composed of political insiders and handcuffed to the taxation equivalent of the status quo – keeping the overall tax burden low - would reverse the regressive taxation policies which have played such a big part in destabilizing our economy. My limited perusal of Part 1 of the Commission on Taxation Report – Executive Summary and List of Recommendations - gives me no reason to doubt my own instincts on the direction taken by the commission. The taxation policies recommended here are based on the presumption that “lower tax rates on a broad base are better than higher rates on a narrow base" because "having a broad tax base allows tax revenue to be raised from a wider range of sources and enables rates of tax to be kept low”(Commission On Taxation, 2009;2).
Broadening out the tax base means taxing those on social welfare, taxing child benefit, a water tax, a property tax and a fossil fuel (carbon) tax. Broadly speaking, these recommendations strongly reinforce existing levels of income inequality. These are essentially “social taxes” – taxes on individuals' participation in society - and they bear as heavily on those with average or below average incomes as they do on the wealthy. Their re-distributive impact will be in line with existing arrangements, i.e transferring income from the least well off to the better off. Complying with its “light touch, hands of the wealthy" imperative, the Report prioritises economic rather than social integration. Social integration is a function of the labour market. As a social policy instrument the Report favours the free movement of capital (low corporation tax) and promotes the interests of the economic elite (no wealth taxes). It is at its core a market–making, not a market-correcting social policy.
In short, it is further evidence of a government in deep denial of the reality it has unleashed on the majority of its citizens. So where does the retreat of the state from the function – promoting the wellbeing of its citizens- on which it claims its legitimacy leave us? This Report further erodes the social foundations of social solidarity and adds to our ongoing political crisis.
Broadening out the tax base means taxing those on social welfare, taxing child benefit, a water tax, a property tax and a fossil fuel (carbon) tax. Broadly speaking, these recommendations strongly reinforce existing levels of income inequality. These are essentially “social taxes” – taxes on individuals' participation in society - and they bear as heavily on those with average or below average incomes as they do on the wealthy. Their re-distributive impact will be in line with existing arrangements, i.e transferring income from the least well off to the better off. Complying with its “light touch, hands of the wealthy" imperative, the Report prioritises economic rather than social integration. Social integration is a function of the labour market. As a social policy instrument the Report favours the free movement of capital (low corporation tax) and promotes the interests of the economic elite (no wealth taxes). It is at its core a market–making, not a market-correcting social policy.
In short, it is further evidence of a government in deep denial of the reality it has unleashed on the majority of its citizens. So where does the retreat of the state from the function – promoting the wellbeing of its citizens- on which it claims its legitimacy leave us? This Report further erodes the social foundations of social solidarity and adds to our ongoing political crisis.
Monday, 7 September 2009
Pro-business bias reflects Commission's flawed terms of reference
Paul Sweeney: This report has some excellent analyses and many useful recommendations which will be of use to a progressive government in the future.
However, the report is a child of the economic thinking which brought this once successful economy to its knees. Low direct taxes, high spending taxes, combined with de-regulation and privatisation, pro-cyclically have been abandoned by politician worldwide. Even deeply conservative Irish economists are talking endlessly of state intervention on a scale never envisaged by anyone. Their debate is not on the scale but on the technicalities of the taxpayers’ billions of euros in subsidies to the banks.
The core term of reference of keeping low taxes was out of date before the Commission commenced its work. The crash had already begun. It is regrettable that the Minster for Finance, Mr Lenihan, did not amend the terms of reference for the members and so move with the harsh new reality after the crash.
The emphasis of the report appears to be to impose substantial additional “burdens” (to use the Commission’s own pejorative and ideological description of tax) on citizens and to substantially reduce the “burden” on business. The lack of balance produced a zero-sum outcome. This is unnecessary.
This pro-business bias reflects the Commission’s flawed terms of reference and its composition. The Commission did not reflect civil society. It was hand-picked by the Department of Finance to reflect a dominant view of business.
In stark contrast to the Irish Government’s narrow and biased Commission’s terms of reference, the Norwegian government, which is left of centre, appointed a Commission on Distribution of Wealth and Income. That Commission of experts was appointed to research and explain the increase of inequality, and also how the distribution of the resources and of wealth can be made more equitable by policy changes in the future. They submitted their report in April. It can be read here, by those who speak Norwegian!
And it is shorter too, being only 399 pages as against ours of 550!
While equity was one of our Commission’s terms of reference and is very important, it erred in the balance between equity and what it perceived to be of benefit to business.
The economy crashed because the Government, regulators, and the Departments of Finance and Enterprise thought that they were doing business favours by being pro-business at almost all costs. They did this during the domestic induced boom from 2001 by de-regulation/no regulation, privatisation, massive tax breaks, subsidies, high taxes on consumption (which pushed up the overall price level and costs), and by pursuing pro-cyclical, demand-boosting economic policies. This lethal cocktail of bad economics brought this economy to its knees, where it rests.
Low taxes means low public services. In the real boom of the 1990s, it was possible to have low taxes and increased public spending. When the economy over-heated, Government should have stopped cutting taxes. It did not. It gave even more tax subsidies to the wealthy and to property and business, without assessing their impact on equity and the economy. That was the time for real tax reform.
That many, though, not all, tax expenditures are to be terminated, is welcome in the report. But the recommendation to maintain low direct taxes on incomes and on business profits in a fiscal crisis (in accordance with Minister Lenihan’s unamended terms of reference) at a time when taxes are being, and will continue to be, raised, may mean maintaining regressive tax policies.
Irish business already enjoys a) one of the lowest rates of company tax in the developed world; b) the lowest social contributions in the world; c) many tax subsidies to further reduce the low business taxes; and d) an array of state agencies (e.g. IDA, SFadco, Udaras, Forfas, BIM, Teagas, SFI, FAS etc), largely devoted to pursuing the business agenda, paid, not by the beneficiaries, but by taxpayers.
Ireland has the lowest tax wedge in the developed world. This is shown dramatically on graph 7.3 on page 184 in the report. Yet the report is concerned with keeping income taxes low. (Income taxes are generally much more progressive than consumption taxes). It devotes little analysis to consumption taxes. This year, taxes on consumption will raise €137 for every €100 raised in income taxes. Income taxes are much more progressive than taxes on spending. Consumption taxes, now so high, do not take into consideration ability to pay. The report gave but a few pages to consideration of these big taxes. This is regrettable.
The balance of this report is skewed against social equity. It should be redressed by increasing the tax contribution from business by eliminating most tax expenditure for that sector. Instead, there are many new tax breaks for business. They are not uncosted. Why? These costings should be FOI’d.
It is extraordinary that the term Transfer Pricing Fixing did not appear once in a major 550 page report on taxation. This is where MNC shift or transfer their taxes to tax havens or low tax countries, by manipulating internal pricing (see Irish Times today 7th September on Shering Plough). Ireland has been a great beneficiary of TFP, as firms shift profits here, to avail of our low company taxes. However, this is at some cost of our fellow Member states in Europe and the USA. It is artificial and cannot last. One would expect at least a discussion of the implications of the termination of TFP from a body supposedly representing civil society.
The large tax revenue impact of transfer-pricing by MNCs in boosting Irish Corporation tax revenue can be determined from the profit levels and inflated trade data of some sectors. Many independent economists have remarked on the skewed output in some sector in Irish trade and other data. The subject is taboo in Official Ireland.” That this “independent” Commission did not use the term Transfer Pricing in its report on the very subject of taxation is telling!
Still there are many interesting sections and recommendations in the report. The analyses of the Commission are interesting and contribute positively to our knowledge of this complex subject.
However, the report is a child of the economic thinking which brought this once successful economy to its knees. Low direct taxes, high spending taxes, combined with de-regulation and privatisation, pro-cyclically have been abandoned by politician worldwide. Even deeply conservative Irish economists are talking endlessly of state intervention on a scale never envisaged by anyone. Their debate is not on the scale but on the technicalities of the taxpayers’ billions of euros in subsidies to the banks.
The core term of reference of keeping low taxes was out of date before the Commission commenced its work. The crash had already begun. It is regrettable that the Minster for Finance, Mr Lenihan, did not amend the terms of reference for the members and so move with the harsh new reality after the crash.
The emphasis of the report appears to be to impose substantial additional “burdens” (to use the Commission’s own pejorative and ideological description of tax) on citizens and to substantially reduce the “burden” on business. The lack of balance produced a zero-sum outcome. This is unnecessary.
This pro-business bias reflects the Commission’s flawed terms of reference and its composition. The Commission did not reflect civil society. It was hand-picked by the Department of Finance to reflect a dominant view of business.
In stark contrast to the Irish Government’s narrow and biased Commission’s terms of reference, the Norwegian government, which is left of centre, appointed a Commission on Distribution of Wealth and Income. That Commission of experts was appointed to research and explain the increase of inequality, and also how the distribution of the resources and of wealth can be made more equitable by policy changes in the future. They submitted their report in April. It can be read here, by those who speak Norwegian!
And it is shorter too, being only 399 pages as against ours of 550!
While equity was one of our Commission’s terms of reference and is very important, it erred in the balance between equity and what it perceived to be of benefit to business.
The economy crashed because the Government, regulators, and the Departments of Finance and Enterprise thought that they were doing business favours by being pro-business at almost all costs. They did this during the domestic induced boom from 2001 by de-regulation/no regulation, privatisation, massive tax breaks, subsidies, high taxes on consumption (which pushed up the overall price level and costs), and by pursuing pro-cyclical, demand-boosting economic policies. This lethal cocktail of bad economics brought this economy to its knees, where it rests.
Low taxes means low public services. In the real boom of the 1990s, it was possible to have low taxes and increased public spending. When the economy over-heated, Government should have stopped cutting taxes. It did not. It gave even more tax subsidies to the wealthy and to property and business, without assessing their impact on equity and the economy. That was the time for real tax reform.
That many, though, not all, tax expenditures are to be terminated, is welcome in the report. But the recommendation to maintain low direct taxes on incomes and on business profits in a fiscal crisis (in accordance with Minister Lenihan’s unamended terms of reference) at a time when taxes are being, and will continue to be, raised, may mean maintaining regressive tax policies.
Irish business already enjoys a) one of the lowest rates of company tax in the developed world; b) the lowest social contributions in the world; c) many tax subsidies to further reduce the low business taxes; and d) an array of state agencies (e.g. IDA, SFadco, Udaras, Forfas, BIM, Teagas, SFI, FAS etc), largely devoted to pursuing the business agenda, paid, not by the beneficiaries, but by taxpayers.
Ireland has the lowest tax wedge in the developed world. This is shown dramatically on graph 7.3 on page 184 in the report. Yet the report is concerned with keeping income taxes low. (Income taxes are generally much more progressive than consumption taxes). It devotes little analysis to consumption taxes. This year, taxes on consumption will raise €137 for every €100 raised in income taxes. Income taxes are much more progressive than taxes on spending. Consumption taxes, now so high, do not take into consideration ability to pay. The report gave but a few pages to consideration of these big taxes. This is regrettable.
The balance of this report is skewed against social equity. It should be redressed by increasing the tax contribution from business by eliminating most tax expenditure for that sector. Instead, there are many new tax breaks for business. They are not uncosted. Why? These costings should be FOI’d.
It is extraordinary that the term Transfer Pricing Fixing did not appear once in a major 550 page report on taxation. This is where MNC shift or transfer their taxes to tax havens or low tax countries, by manipulating internal pricing (see Irish Times today 7th September on Shering Plough). Ireland has been a great beneficiary of TFP, as firms shift profits here, to avail of our low company taxes. However, this is at some cost of our fellow Member states in Europe and the USA. It is artificial and cannot last. One would expect at least a discussion of the implications of the termination of TFP from a body supposedly representing civil society.
The large tax revenue impact of transfer-pricing by MNCs in boosting Irish Corporation tax revenue can be determined from the profit levels and inflated trade data of some sectors. Many independent economists have remarked on the skewed output in some sector in Irish trade and other data. The subject is taboo in Official Ireland.” That this “independent” Commission did not use the term Transfer Pricing in its report on the very subject of taxation is telling!
Still there are many interesting sections and recommendations in the report. The analyses of the Commission are interesting and contribute positively to our knowledge of this complex subject.
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?
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?
How can we afford such a low tax take?
Slí Eile: Like the Curates Egg, the Commission on Taxation Report has many excellent parts. The starting point of any analysis of this 500 pages plus report should be the following three questions:
1 What level of public services is required and feasible in 21st Century Ireland at our current level of wealth and income?
2 How can such a service be best provided, organised and funded?
3 What role has taxation in its various forms in providing such a level of service?
If one starts from the premises of keeping the ‘burden of tax’ as low as possible one is assuming – effectively – that the State is a necessary evil in providing services that should best be provided by the market or individuals and families themselves but have to be left to the State because of failure at lower levels.
So, there are big issues at stake here and the stage has been well set, already, in the Terms of Reference of the Commission – before any recession.
Before addressing these three questions in future posts and going through the entire Commission Report lets deal, today, with one simple question:
Are we a high tax country? Here are some extracts from a recent EU Commission analysis of taxation.
‘….the overall tax ratio, i.e. the sum of taxes and social security contributions in the 27 Member States (EU-27) amounted to 39.8 % of GDP (in the weighted average); this value is about 12 percentage points above those recorded in the United States and Japan.’ The ‘old’ 15 EU Member States generally have the highest tax rates as % of GDP.'
The new accession countries have taken the economically liberal approach. Only in Denmark, Ireland and the United Kingdom are personal income taxes a relatively large part of the total charges paid on labour income.
Before the recession hit, using the latest available EU data sources, total taxes (including social security) came to 31.2% of GDP in 2007 in Ireland. The EU (unweighted) average was 37.5%.
So, at 31.2%, Ireland was about 2 percentage points down on the 1995 figure and over 6 percentage points down on the EU27 average. The total tax take in Ireland reached a low point in 2002 (possibly connected to tenure of a certain Minister of Finance).
It is instructive to note that the only EU27 countries below this level of revenue were Latvia, Lithuania, Slovakia and Romania. OK you might be now objecting to the use of GDP instead of GNP. If, instead, you divide total revenue in 2007 by GNP you get 36.7%. Not that far from the EU average? The cardinal mistake made by proponents of GNP-based calculations when comparing tax take internationally is that they forget to mention Corporation Taxes on profits earned by multi-national companies where. Either you take away such taxes from the numerator (and arrive at a figure somewhat lower than 36.7%) or (my preferred method) use GDP only since that is the total value of production in the jurisdiction before taxes are levied on income, here, and before any part of that income is repatriated.
By the way the ‘burden’ in 2007 was particularly high in Denmark at 48.7% of GDP more or less exactly what it was in 1995. but, then Denmark has a high level of public service provision. We get what we pay for.
1 What level of public services is required and feasible in 21st Century Ireland at our current level of wealth and income?
2 How can such a service be best provided, organised and funded?
3 What role has taxation in its various forms in providing such a level of service?
If one starts from the premises of keeping the ‘burden of tax’ as low as possible one is assuming – effectively – that the State is a necessary evil in providing services that should best be provided by the market or individuals and families themselves but have to be left to the State because of failure at lower levels.
So, there are big issues at stake here and the stage has been well set, already, in the Terms of Reference of the Commission – before any recession.
Before addressing these three questions in future posts and going through the entire Commission Report lets deal, today, with one simple question:
Are we a high tax country? Here are some extracts from a recent EU Commission analysis of taxation.
‘….the overall tax ratio, i.e. the sum of taxes and social security contributions in the 27 Member States (EU-27) amounted to 39.8 % of GDP (in the weighted average); this value is about 12 percentage points above those recorded in the United States and Japan.’ The ‘old’ 15 EU Member States generally have the highest tax rates as % of GDP.'
The new accession countries have taken the economically liberal approach. Only in Denmark, Ireland and the United Kingdom are personal income taxes a relatively large part of the total charges paid on labour income.
Before the recession hit, using the latest available EU data sources, total taxes (including social security) came to 31.2% of GDP in 2007 in Ireland. The EU (unweighted) average was 37.5%.
So, at 31.2%, Ireland was about 2 percentage points down on the 1995 figure and over 6 percentage points down on the EU27 average. The total tax take in Ireland reached a low point in 2002 (possibly connected to tenure of a certain Minister of Finance).
It is instructive to note that the only EU27 countries below this level of revenue were Latvia, Lithuania, Slovakia and Romania. OK you might be now objecting to the use of GDP instead of GNP. If, instead, you divide total revenue in 2007 by GNP you get 36.7%. Not that far from the EU average? The cardinal mistake made by proponents of GNP-based calculations when comparing tax take internationally is that they forget to mention Corporation Taxes on profits earned by multi-national companies where. Either you take away such taxes from the numerator (and arrive at a figure somewhat lower than 36.7%) or (my preferred method) use GDP only since that is the total value of production in the jurisdiction before taxes are levied on income, here, and before any part of that income is repatriated.
By the way the ‘burden’ in 2007 was particularly high in Denmark at 48.7% of GDP more or less exactly what it was in 1995. but, then Denmark has a high level of public service provision. We get what we pay for.
Wednesday, 29 July 2009
Guest post by Eoin O Broin: Time to raise taxes
Eoin O Broin: The Commission on Taxation is due to complete its work later this week.
Established in February 2008, its remit was to ‘review the structure, efficiency and appropriateness of the Irish taxation system’. Its report is expected to help the government set the framework for tax reform for the coming decade.
Its terms of reference included a commitment to ‘keep the overall tax burden low’ and a ‘guarantee that the 12.5% corporation tax rate will remain’.
Sources close to the Commission indicate that, while the report will go some way to simplifying the notoriously complex system currently in place, it will keep its word on maintaining a low tax take.
If this proves to be the case, should we welcome the report? Absolutely not!
One of the great myths of our time is that low-tax economies are more competitive. There is no evidence to support this claim.
A quick look at the World Competitiveness Scoreboard for any recent year demonstrates that there are more high tax countries in the top ten than there are low tax countries. In particular Norway, Sweden and Finland always feature prominently as amongst the world most competitive economies, despite their relatively high tax takes.
The real determinants of competitiveness are science, technology, education and affordable health and childcare all of which require investment by the state.
And where does the state get the cash to invest? It gets it from taxation of course.
And here’s our problem. Ireland has one of the lowest tax takes of any the EU’s 27 member states. In 2007, the total tax revenue as a percentage of GDP was 31%. Only Latvia, Slovakia, Lithuania and Romania took less.
At the other end of the scale, world leaders in competitiveness such as Sweden, Denmark and Finland had tax revenues from 44% to 51% of GDP.
You don’t have to be an economist to conclude that if you have Latvian levels of taxation you can't have Scandinavian levels of investment in job creation or public services.
In the same year, Ireland had the third lowest level of government expenditure as a percentage of GDP in the EU at 34% of GDP. Only Lithuania and Estonia fared worse. Again, at the top end of the spectrum, the Scandinavian countries ranged from 49% to 54%.
There is also a clear link between a country’s total tax take and the levels of inequality. The larger a country's tax take, the more money it has to invest in various forms of social protection and wealth redistribution. In 2008, Ireland spent 18% of GDP on social protections compared to Sweden’s 32%.
So what does all of this tell us?
If you want greater competitiveness and less inequality, you need to have enough money to invest in research and development, education, job creation, public services and social protection.
If you don’t, then your economy will be weak and your society crippled with inequality.
It is time to make start making the argument to raise taxes, for the good of the economy and the good of society. If the report from the Commission on Taxation fails to do this, then it should be thrown in the bin.
Eoin O Broin is the Chairperson of Dublin Sinn Fein, a member of the party's Ard Comhairle and author of Sinn Fein and the Politics of Left Republicanism (Pluto 2009)
Established in February 2008, its remit was to ‘review the structure, efficiency and appropriateness of the Irish taxation system’. Its report is expected to help the government set the framework for tax reform for the coming decade.
Its terms of reference included a commitment to ‘keep the overall tax burden low’ and a ‘guarantee that the 12.5% corporation tax rate will remain’.
Sources close to the Commission indicate that, while the report will go some way to simplifying the notoriously complex system currently in place, it will keep its word on maintaining a low tax take.
If this proves to be the case, should we welcome the report? Absolutely not!
One of the great myths of our time is that low-tax economies are more competitive. There is no evidence to support this claim.
A quick look at the World Competitiveness Scoreboard for any recent year demonstrates that there are more high tax countries in the top ten than there are low tax countries. In particular Norway, Sweden and Finland always feature prominently as amongst the world most competitive economies, despite their relatively high tax takes.
The real determinants of competitiveness are science, technology, education and affordable health and childcare all of which require investment by the state.
And where does the state get the cash to invest? It gets it from taxation of course.
And here’s our problem. Ireland has one of the lowest tax takes of any the EU’s 27 member states. In 2007, the total tax revenue as a percentage of GDP was 31%. Only Latvia, Slovakia, Lithuania and Romania took less.
At the other end of the scale, world leaders in competitiveness such as Sweden, Denmark and Finland had tax revenues from 44% to 51% of GDP.
You don’t have to be an economist to conclude that if you have Latvian levels of taxation you can't have Scandinavian levels of investment in job creation or public services.
In the same year, Ireland had the third lowest level of government expenditure as a percentage of GDP in the EU at 34% of GDP. Only Lithuania and Estonia fared worse. Again, at the top end of the spectrum, the Scandinavian countries ranged from 49% to 54%.
There is also a clear link between a country’s total tax take and the levels of inequality. The larger a country's tax take, the more money it has to invest in various forms of social protection and wealth redistribution. In 2008, Ireland spent 18% of GDP on social protections compared to Sweden’s 32%.
So what does all of this tell us?
If you want greater competitiveness and less inequality, you need to have enough money to invest in research and development, education, job creation, public services and social protection.
If you don’t, then your economy will be weak and your society crippled with inequality.
It is time to make start making the argument to raise taxes, for the good of the economy and the good of society. If the report from the Commission on Taxation fails to do this, then it should be thrown in the bin.
Eoin O Broin is the Chairperson of Dublin Sinn Fein, a member of the party's Ard Comhairle and author of Sinn Fein and the Politics of Left Republicanism (Pluto 2009)
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