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.
Tuesday, 8 September 2009
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.
McDonough on Finucane
Click here to listen to PE's Terry McDonough on Sunday's Marian Finucane show, talking about NAMA and other things economic.
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.
Sunday, 6 September 2009
Social Justice Ireland launched
Slí Eile: Social Justice Ireland has been launched. See its new website.
Past lessons, future policy
Michael Taft: With the news that the increase in unemployment is slowing down (though the range of missing numbers suggest that emigration may be rising at a considerable rate), let’s take a historical look at the last time Ireland emerged out of a recession with a high rate of unemployment. If unemployment tops out at between 14 percent and 16 percent over the next 18 months, how long will it take for unemployment to start falling?
In 1988 (the first year the internationally accepted ILO measurement was used) unemployment stood at 16.3 percent. By 1993 – with the Celtic Tiger growth ready to appear – unemployment remained stubbornly high at 15.7 percent, with the actual number of unemployed marginally higher than in 1988.
During this same period, annual GDP grew in volume terms by an average 4 percent. Employment, however, only grew by an annual average of 1.2 percent. Employment growth lagged considerably behind GDP growth.
The situation could have been much worse if we hadn’t benefitted from that ol’ standby – emigration. Between 1988 and 1993, over 100,000 had emigrated. Given that unemployment rose marginally in nominal terms during that period – from 217,000 to 220,000 – we can see what the effect would have been if people actually stayed in the land of their birth.
So, while GDP growth increased substantially, employment creation lagged behind and the only reason that the unemployment didn’t climb every higher was due to the economic safety valve of emigration. We should expect – and the IMF has warned everyone of this – that when GDP returns to growth sometime mid-to-late next year, unemployment may not start to deline for some time.
But there is one crucial factor we should be aware of during the late 1980s/early 1990s – something that is a bit of an embarrassment to the deflationists calling for massive public expenditure cuts; namely the role of the considerable stimulus expenditure engaged in by the government. During that period:
• Current expenditure increased by an average of 6.9 percent annually
• Capital expenditure increased by an average of 11.4 percent annually
In addition, during that period Ireland received another big stimulus in the form of European social and regional development funds. During the five-year period, this amounted €3.6 billion. This boosted public investment by 30 percent (in addition to the Government’s own public investment), and amounted to nearly 10 percent of our GNP in 1993.
Now compare that situation to what we are looking into over the next five years – severe cutbacks in current public expenditure coupled with a decimation of the capital budget. And all this without the benefit of EU investment funds.
Of course, we have to be careful in making comparisons between then and now. For instance, in the 1980s, the recession was relatively mild (GDP volume growth only contracted in one year). Agriculture played a more important role back then, while our export platform and infrastructural quality was relatively weak.
Still, a key issue which requires much more discussion is the role that increased public expenditure and investment played in eventually lowering unemployment, and its interaction with IDA policy, the devaluation and the emerging European single market. For while unemployment remained sluggishly high during the five year period we examined – starting in 1993, it fell quickly, from 15.7 percent to less than 7 percent in the following five year period.
Would this have happened without the massive stimulus the economy experienced? I would argue that it is doubtful. But what cannot be argued is the fact of that stimulus – something which the Dublin Consensus is in denial about.
In 1988 (the first year the internationally accepted ILO measurement was used) unemployment stood at 16.3 percent. By 1993 – with the Celtic Tiger growth ready to appear – unemployment remained stubbornly high at 15.7 percent, with the actual number of unemployed marginally higher than in 1988.
During this same period, annual GDP grew in volume terms by an average 4 percent. Employment, however, only grew by an annual average of 1.2 percent. Employment growth lagged considerably behind GDP growth.
The situation could have been much worse if we hadn’t benefitted from that ol’ standby – emigration. Between 1988 and 1993, over 100,000 had emigrated. Given that unemployment rose marginally in nominal terms during that period – from 217,000 to 220,000 – we can see what the effect would have been if people actually stayed in the land of their birth.
So, while GDP growth increased substantially, employment creation lagged behind and the only reason that the unemployment didn’t climb every higher was due to the economic safety valve of emigration. We should expect – and the IMF has warned everyone of this – that when GDP returns to growth sometime mid-to-late next year, unemployment may not start to deline for some time.
But there is one crucial factor we should be aware of during the late 1980s/early 1990s – something that is a bit of an embarrassment to the deflationists calling for massive public expenditure cuts; namely the role of the considerable stimulus expenditure engaged in by the government. During that period:
• Current expenditure increased by an average of 6.9 percent annually
• Capital expenditure increased by an average of 11.4 percent annually
In addition, during that period Ireland received another big stimulus in the form of European social and regional development funds. During the five-year period, this amounted €3.6 billion. This boosted public investment by 30 percent (in addition to the Government’s own public investment), and amounted to nearly 10 percent of our GNP in 1993.
Now compare that situation to what we are looking into over the next five years – severe cutbacks in current public expenditure coupled with a decimation of the capital budget. And all this without the benefit of EU investment funds.
Of course, we have to be careful in making comparisons between then and now. For instance, in the 1980s, the recession was relatively mild (GDP volume growth only contracted in one year). Agriculture played a more important role back then, while our export platform and infrastructural quality was relatively weak.
Still, a key issue which requires much more discussion is the role that increased public expenditure and investment played in eventually lowering unemployment, and its interaction with IDA policy, the devaluation and the emerging European single market. For while unemployment remained sluggishly high during the five year period we examined – starting in 1993, it fell quickly, from 15.7 percent to less than 7 percent in the following five year period.
Would this have happened without the massive stimulus the economy experienced? I would argue that it is doubtful. But what cannot be argued is the fact of that stimulus – something which the Dublin Consensus is in denial about.
Friday, 4 September 2009
Change in Japan
For the first time since the end of WWII, one of the world's largest economies is now an effective two-party system after voters decisively rejected the long-ruling Liberal Democrats in favour of the centre-left Democratic Party of Japan. The Democratic Party did particularly well among urban middle and working class voters who - in the words of the Irish Times earlier this week - were "fed up with the LDP’s traditional support for industrial interests and rural pork-barrelling larded by factionalism and corruption". The Financial Times analysis is particularly telling:
"The certainty of the fast-growth years and the exuberance of the bubbly 1980s have given way to greater introspection and recognition that the state may not always know best. That sense of self-dependency (or abandonment) has been exacerbated by the casualisation of a large part of the workforce. Nearly a third of workers are now part-time or on short-term contracts, a world away from the 1980s when most people felt secure in their jobs. Not only are these workers poorly paid. They are also vulnerable".
You can read the rest of David Pilling's column on the Japanese elections in Wednesday's Financial Times here (registration required).
"The certainty of the fast-growth years and the exuberance of the bubbly 1980s have given way to greater introspection and recognition that the state may not always know best. That sense of self-dependency (or abandonment) has been exacerbated by the casualisation of a large part of the workforce. Nearly a third of workers are now part-time or on short-term contracts, a world away from the 1980s when most people felt secure in their jobs. Not only are these workers poorly paid. They are also vulnerable".
You can read the rest of David Pilling's column on the Japanese elections in Wednesday's Financial Times here (registration required).
Jacobson on innovation
"Building Ireland’s Smart Economy calls for Ireland to become an innovation hub for Europe, attracting RD-intensive multinationals and innovative start-up businesses. It aims to do this by encouraging RD in companies, providing capital for new ventures and funding for research projects in universities. However, none of these things alone will engender the diffusion of creativity throughout society that is the bedrock of innovative economies. More attention may have to be paid to education at all levels, including in the national schools". That's the conclusion David Jacobson comes to in this piece for today's Irish Times Innovation supplement.
Thursday, 3 September 2009
OECD forecast
Paul Sweeney: The OECD has just released an economic forecast which, in the light of the economic news over the past two years is quite positive. As Ireland will need other countries to do the "heavy lifting" as John Fitzgerald of the ESRI nicely puts it, this is good news.
There is no mention of Ireland in this report, which is on the world economy and which gives some positive pointers. But Ireland has had the deepest collapse in economic growth of all countries, and we will lag in our recovery. Further, with investment of precious taxpayers’ money in MANA/NAMA (MANA from heaven [your pocket] for the builders, speculators and bad bankers), we will delay our recovery somewhat.
Here are some of the points made by the OECD: “Given the positive economic news and based on incoming high-frequency indicators, OECD short-term forecasting models point to an earlier recovery than envisaged a few months ago.”
It says that falls in the cost of money market funding, a narrowing of corporate bond spreads, a rebound in equity markets and a moderation in the tightening of bank lending standards mean a marked improvement in financial conditions. BUT, “bank lending continues to decline and concerns about the health of the banking system remain.”
It sees “the housing markets in the United Kingdom and the United States show some signs of stabilisation,” which is not much use here.
It says that in the big developing economies, which were not directly affected by the meltdown in financial markets, “the recovery in economic activity that began earlier this year is gaining momentum.” China, for example, had GDP growth of over 14 per cent in Q2 of this year.
We will hope that the rise continues and that economists have learnt some lessons from the crisis about markets, regulation and the role of the state.
There is no mention of Ireland in this report, which is on the world economy and which gives some positive pointers. But Ireland has had the deepest collapse in economic growth of all countries, and we will lag in our recovery. Further, with investment of precious taxpayers’ money in MANA/NAMA (MANA from heaven [your pocket] for the builders, speculators and bad bankers), we will delay our recovery somewhat.
Here are some of the points made by the OECD: “Given the positive economic news and based on incoming high-frequency indicators, OECD short-term forecasting models point to an earlier recovery than envisaged a few months ago.”
It says that falls in the cost of money market funding, a narrowing of corporate bond spreads, a rebound in equity markets and a moderation in the tightening of bank lending standards mean a marked improvement in financial conditions. BUT, “bank lending continues to decline and concerns about the health of the banking system remain.”
It sees “the housing markets in the United Kingdom and the United States show some signs of stabilisation,” which is not much use here.
It says that in the big developing economies, which were not directly affected by the meltdown in financial markets, “the recovery in economic activity that began earlier this year is gaining momentum.” China, for example, had GDP growth of over 14 per cent in Q2 of this year.
We will hope that the rise continues and that economists have learnt some lessons from the crisis about markets, regulation and the role of the state.
Evidence of public desire for alternative economics
Nat O'Connor: Today's Irish Times/TNS mrbi poll can be interpreted as showing public desire for progressive alternatives to the political and economic consensus.
"Reflecting perhaps the public’s frustration with the established parties, today’s poll confirms a drift towards the left in Irish politics. ...
"Support for Labour, Sinn Féin and Independents/Others combined is now higher than at any time since the Irish Times/TNS mrbi series of polls began in 1982."
"Reflecting perhaps the public’s frustration with the established parties, today’s poll confirms a drift towards the left in Irish politics. ...
"Support for Labour, Sinn Féin and Independents/Others combined is now higher than at any time since the Irish Times/TNS mrbi series of polls began in 1982."
Wednesday, 2 September 2009
McWilliams on NAMA
Slí Eile: David McWilliams has been relatively quiet in recent months (another book on the way!). His latest thoughts on NAMA in today's Irish Independent here are worth a read. The following too is worth highlighting:
Think about it, in the boom we couldn't build infrastructure at a decent price because the price of land was artificially inflated. So the people transferred billions of euros to landowners and developers to allow us to build bridges, schools and roads on hugely expensive land. In effect, this was a tax on the average person to subsidise the very rich.
Now the opposite is the case. We can subsidise the poor by taking the land back now. But instead of seizing the opportunity to buy this land for the State's use for the next generation, we are being asked to put the interests of the corrupt, greedy and plainly stupid bankers over the interests of the average citizen.
Brian Lenihan's fairy godmothers
An Saoi: The tax returns for August throw up a few surprises, with the main shock coming from Corporation Tax. Instead of the budgeted €226M net yield, the Revenue collected a massive €533M, an additional €307M. God only knows the source of this largesse, but it would require €2,456M in additional profits to give you this type of tax liability. One or more foreign fairies were needed to produce it from nowhere. We can only hope that some of Mr. Obama’s newly hired transfer pricing specialists don’t decide that it is really their money, and ask for it back - or at least not for a few years.
Most of the other figures continue to reflect a domestic economy in crisis. Customs figures confirm that imports are anaemic, and the Excise figures (including of course VRT), while marginally ahead of forecasts, are well below 2008 and reflect a depressed local economy. Capital Acquisitions Tax, CGT & Stamp Duties remain well below target, as would be expected. However, I suspect there may be a large amount of CAT unpaid caught up in unsold assets.
The most worrying numbers are for VAT and Income Tax. VAT may fall below €10,000M, or close to 2003 levels. Reduced spending and falling prices will both hit hard at VAT levels and further cuts in Government expenditure and the spending power of employees will drag the yield further in 2010. Income Tax is falling significantly below target, despite Budget increases. Payments by the directly assessed in October and November are unlikely to be close to target, and it is possible that a large part of last year’s preliminary tax may be refunded when returns are filed
It appears Corporation Tax may well exceed forecasts, despite possibly a net negative contribution from indigenous companies. September is a key month for Corporation Tax as companies with a December year end filing their returns and the March year end companies submitting their pre-preliminary tax payment. Last September saw €520M paid and while the target for this year is just €365M, it is hard to see it being reached. However, one never knows!
After the July figures, I suggested that the likely tax figure for the year would be in the region of €31,145M. I will stick by this figure for the present, but the Corporation Tax figures are amazing.
Most of the other figures continue to reflect a domestic economy in crisis. Customs figures confirm that imports are anaemic, and the Excise figures (including of course VRT), while marginally ahead of forecasts, are well below 2008 and reflect a depressed local economy. Capital Acquisitions Tax, CGT & Stamp Duties remain well below target, as would be expected. However, I suspect there may be a large amount of CAT unpaid caught up in unsold assets.
The most worrying numbers are for VAT and Income Tax. VAT may fall below €10,000M, or close to 2003 levels. Reduced spending and falling prices will both hit hard at VAT levels and further cuts in Government expenditure and the spending power of employees will drag the yield further in 2010. Income Tax is falling significantly below target, despite Budget increases. Payments by the directly assessed in October and November are unlikely to be close to target, and it is possible that a large part of last year’s preliminary tax may be refunded when returns are filed
It appears Corporation Tax may well exceed forecasts, despite possibly a net negative contribution from indigenous companies. September is a key month for Corporation Tax as companies with a December year end filing their returns and the March year end companies submitting their pre-preliminary tax payment. Last September saw €520M paid and while the target for this year is just €365M, it is hard to see it being reached. However, one never knows!
After the July figures, I suggested that the likely tax figure for the year would be in the region of €31,145M. I will stick by this figure for the present, but the Corporation Tax figures are amazing.
NAMA is still not very transparent
Nat O'Connor: Brian Lenihan on NAMA: “...there has been very little criticism on the vast bulk of the legislation. In areas such as transparency and accountability, I am open to suggestions on amendments from the opposition. The bulk of the controversy has focused on two sections of what is a very long bill - and they are the sections dealing with the valuation procedures.”
Not to say there are no valid alternatives, but given that NAMA is Government policy and is likely to go ahead, barring a General Election or other major upset in the meantime, are there indeed no criticisms of the other details of the draft legislation?
I'm working off this copy of the draft proposals.
Rather than produce a massive list, I'm going to focus on additions that would assist transparency and accountability.
One obvious measure would be if NAMA were included under the Freedom of Information Acts. This would ensure that individuals directly affected by NAMA have a right of access to documentation relevant to their cases. It would also allow the public to have access to the background material that informed NAMA's decision making. Inclusion under the FOI Acts would be a useful guarantee of openness, and the confidentiality exemptions in that legislation would protect individual and commercial privacy. Of course, FOI is not enough of a guarantee of openness on its own as the legislation has been weakened so much, but it would be a symbolic step in the right direction, if the Minister is really seeking to increase transparency and accountability.
Another area for openess is around the fact that the Minister will have the right to issue Guidelines or Directions to NAMA (sections 13 and 14). It is important for transparency that these should be public documents as soon as they are issued.
NAMA will be obliged to provide a Committee of the Oireachtas with "such information as it requires" (section 51), but the Government generally retains a majority vote on all these committees. It would be much better if some mechanism ensured that Opposition parties on a committee could call for information that they deem necessary to perform their duty of holding NAMA (and the Government) to account.
The Minister is to have the power to require NAMA "to report to him or her, at any time and in any format that the Minister directs, on any matter," (section 49). And all such reports will automatically be "deemed to be confidential information". Would this confidentiality clause prevent the Minister from disclosing one or more of these reports? Or limit his/her ability to answer questions to the Oireachtas? This clause could be deleted and the information would still be protected by the confidentiality provisions in the Constitution, Official Secrets Act, Freedom of Information Acts and Data Protection Act.
Of further concern is the fact that the NAMA Bill proposes to introduce new confidentiality provisions and offences (sections 171 and 7 respectively). Ireland has more than sufficient information law to regulate such matters. These provisions suggest a worrying concern for secrecy and are discouraging, despite the Minister's claim that he is open to suggestions for how to make the operation of NAMA more transparent.
Not to say there are no valid alternatives, but given that NAMA is Government policy and is likely to go ahead, barring a General Election or other major upset in the meantime, are there indeed no criticisms of the other details of the draft legislation?
I'm working off this copy of the draft proposals.
Rather than produce a massive list, I'm going to focus on additions that would assist transparency and accountability.
One obvious measure would be if NAMA were included under the Freedom of Information Acts. This would ensure that individuals directly affected by NAMA have a right of access to documentation relevant to their cases. It would also allow the public to have access to the background material that informed NAMA's decision making. Inclusion under the FOI Acts would be a useful guarantee of openness, and the confidentiality exemptions in that legislation would protect individual and commercial privacy. Of course, FOI is not enough of a guarantee of openness on its own as the legislation has been weakened so much, but it would be a symbolic step in the right direction, if the Minister is really seeking to increase transparency and accountability.
Another area for openess is around the fact that the Minister will have the right to issue Guidelines or Directions to NAMA (sections 13 and 14). It is important for transparency that these should be public documents as soon as they are issued.
NAMA will be obliged to provide a Committee of the Oireachtas with "such information as it requires" (section 51), but the Government generally retains a majority vote on all these committees. It would be much better if some mechanism ensured that Opposition parties on a committee could call for information that they deem necessary to perform their duty of holding NAMA (and the Government) to account.
The Minister is to have the power to require NAMA "to report to him or her, at any time and in any format that the Minister directs, on any matter," (section 49). And all such reports will automatically be "deemed to be confidential information". Would this confidentiality clause prevent the Minister from disclosing one or more of these reports? Or limit his/her ability to answer questions to the Oireachtas? This clause could be deleted and the information would still be protected by the confidentiality provisions in the Constitution, Official Secrets Act, Freedom of Information Acts and Data Protection Act.
Of further concern is the fact that the NAMA Bill proposes to introduce new confidentiality provisions and offences (sections 171 and 7 respectively). Ireland has more than sufficient information law to regulate such matters. These provisions suggest a worrying concern for secrecy and are discouraging, despite the Minister's claim that he is open to suggestions for how to make the operation of NAMA more transparent.
More on NAMA
Today's Irish Times has two takes on NAMA: Vincent Browne asks "why, if nobody else is willing to take a risk on Irish property, is the country as a whole being bludgeoned into doing so, via NAMA?", and - writing from a rather different ideological perspective - Sean Barrett says that "Ireland needs to lose its property bubble fixation. We need lower property prices across the board for houses, shops, hotels, factories and land for decades to come to restore and retain our competitiveness [...] We do not need NAMA". Comments?
Tuesday, 1 September 2009
NAMA: If you want to play 'Solve the Irish Banking Crisis', there are several games in town
Terry McDonough: It has been repeatedly asserted over the last few days that NAMA is the only game in town. Below is a list and description of the games currently being played. I would appreciate any corrections from readers of this blog.
“Good Bank” proposal.
The government takes over the deposits of the banks. These are liabilities. In exchange for taking the liabilities the government also assumes the best performing assets of the banks. This creates a clean bank with deposit obligations backed by performing assets. The government then invests in this bank to top up required capital. The bad assets are left with the shareholders and bond holders to work out in the “legacy” bank.
The advantage of this is that it doesn’t cost the government anything, as the bad assets are not bought and the capitalization of the banks confers ownership of a valuable asset, the clean bank. The losses are left to the shareholders and the bond holders.
A complication with this is the government has guaranteed the bond holders until September, 2010. This can be dealt with in several ways. The legacy bank can be required to manage its assets so as to meet all obligations falling due prior to September 2010. The government can withdraw the guarantee. This is not the same as defaulting on sovereign debt but does undermine government credibility. It could be done more easily by a new government. The Fine Gael proposal avoids this by setting up a clean bank from scratch now, and only splitting the private banks into government owned clean banks and bad privately owned legacy banks after the guarantee expires in 2010.
Upsides: Taxpayers leap free. The good bank under government control can decide to extend credit. Shareholders and bond holders take the hit.
Downsides: Bond holders take the hit and the bond markets are mad at Ireland.
Response to downside arguments: Since the Irish government is no longer responsible for the bad debts of the banking system, it is more solvent and better able to borrow on the bond markets. The bond investors are businessmen. They don’t hold grudges. In fact, they respect taking the tough decisions in the national interest.
This solution is often presented as temporary, as the clean bank can be sold eventually perhaps at a profit for the government. The clean bank could also be run into the future, emphasizing public priorities like local business and green investment. Credit is necessary and should be run as a public utility, rather than a gambling den as it is periodically under private control.
Nationalising the banks
This involves purchasing the bank stock by the government. This leaves the government in ownership of both the good and the bad assets of the banks. The government would probably then separate the nationalized banks into clean and “bad bank” divisions and further capitalize the clean division.
Upsides: Taxpayers pay less. If banks are judged valueless on balance, taxpayers pay nothing. Shareholders take the hit. Taxpayers get good as well as bad assets. Government can dictate that banks begin lending again.
Downsides: Bondholders now owed money by state institutions. Paying back bondholders can create substantial losses for the state. It has been argued that lenders in the future will not lend to a state bank. This is historically unsupported.
Like the “good bank” proposal, the nationalized state banks can either be sold off later or retained to provide credit outside the private bank cycle of boom and bust.
NAMA with bad assets purchased at current market prices
NAMA buys bad assets at current market prices. Banks forced to write down their losses. Government recapitalizes banks. Government ends up with majority ownership of banks.
Upsides: Taxpayers do not lose money in creating “bad bank.” Ownership shares could be used to mandate the restart of lending.
Downsides: Bondholders still owed money by clean bank, now majority-owned by government. This could mean substantial losses for the government in the future.
NAMA with Honohan amendment
NAMA pays roughly the market price for the bad assets. In addition, the banks receive shares in NAMA which entitle them to the profits if NAMA makes money after paying back the government. As with the above purchase of bad assets at market prices, the government is required to recapitalize the banks by taking substantial shares.
Upsides and downsides as above, with the added downside that if the bad assets perform better than the market expects the additional money goes to the banks rather than the taxpayer.
NAMA
NAMA acquires bad assets at some markup above market rates. The government then recapitalizes the banks but buys fewer shares because the banks now have capital received from the overpayment for the bad assets.
Upsides: Banks now cleansed of bad assets, but this advantage is shared by all of the above proposals.
Downsides: Government pays the same as under the above modified NAMA proposals for the bad assets and the bank recapitalization, but owns a smaller share in the banks. There is no guarantee that the banks will begin to lend again. Shares in the banks leave the government exposed to losses through payment of the bondholders.
Comment
The “Good Bank” option is clearly superior in that it is the only one which relieves the taxpayer from responsibility for compensating bond holders for losses. It also creates a government controlled bank which can be instructed to begin lending.
“Good Bank” proposal.
The government takes over the deposits of the banks. These are liabilities. In exchange for taking the liabilities the government also assumes the best performing assets of the banks. This creates a clean bank with deposit obligations backed by performing assets. The government then invests in this bank to top up required capital. The bad assets are left with the shareholders and bond holders to work out in the “legacy” bank.
The advantage of this is that it doesn’t cost the government anything, as the bad assets are not bought and the capitalization of the banks confers ownership of a valuable asset, the clean bank. The losses are left to the shareholders and the bond holders.
A complication with this is the government has guaranteed the bond holders until September, 2010. This can be dealt with in several ways. The legacy bank can be required to manage its assets so as to meet all obligations falling due prior to September 2010. The government can withdraw the guarantee. This is not the same as defaulting on sovereign debt but does undermine government credibility. It could be done more easily by a new government. The Fine Gael proposal avoids this by setting up a clean bank from scratch now, and only splitting the private banks into government owned clean banks and bad privately owned legacy banks after the guarantee expires in 2010.
Upsides: Taxpayers leap free. The good bank under government control can decide to extend credit. Shareholders and bond holders take the hit.
Downsides: Bond holders take the hit and the bond markets are mad at Ireland.
Response to downside arguments: Since the Irish government is no longer responsible for the bad debts of the banking system, it is more solvent and better able to borrow on the bond markets. The bond investors are businessmen. They don’t hold grudges. In fact, they respect taking the tough decisions in the national interest.
This solution is often presented as temporary, as the clean bank can be sold eventually perhaps at a profit for the government. The clean bank could also be run into the future, emphasizing public priorities like local business and green investment. Credit is necessary and should be run as a public utility, rather than a gambling den as it is periodically under private control.
Nationalising the banks
This involves purchasing the bank stock by the government. This leaves the government in ownership of both the good and the bad assets of the banks. The government would probably then separate the nationalized banks into clean and “bad bank” divisions and further capitalize the clean division.
Upsides: Taxpayers pay less. If banks are judged valueless on balance, taxpayers pay nothing. Shareholders take the hit. Taxpayers get good as well as bad assets. Government can dictate that banks begin lending again.
Downsides: Bondholders now owed money by state institutions. Paying back bondholders can create substantial losses for the state. It has been argued that lenders in the future will not lend to a state bank. This is historically unsupported.
Like the “good bank” proposal, the nationalized state banks can either be sold off later or retained to provide credit outside the private bank cycle of boom and bust.
NAMA with bad assets purchased at current market prices
NAMA buys bad assets at current market prices. Banks forced to write down their losses. Government recapitalizes banks. Government ends up with majority ownership of banks.
Upsides: Taxpayers do not lose money in creating “bad bank.” Ownership shares could be used to mandate the restart of lending.
Downsides: Bondholders still owed money by clean bank, now majority-owned by government. This could mean substantial losses for the government in the future.
NAMA with Honohan amendment
NAMA pays roughly the market price for the bad assets. In addition, the banks receive shares in NAMA which entitle them to the profits if NAMA makes money after paying back the government. As with the above purchase of bad assets at market prices, the government is required to recapitalize the banks by taking substantial shares.
Upsides and downsides as above, with the added downside that if the bad assets perform better than the market expects the additional money goes to the banks rather than the taxpayer.
NAMA
NAMA acquires bad assets at some markup above market rates. The government then recapitalizes the banks but buys fewer shares because the banks now have capital received from the overpayment for the bad assets.
Upsides: Banks now cleansed of bad assets, but this advantage is shared by all of the above proposals.
Downsides: Government pays the same as under the above modified NAMA proposals for the bad assets and the bank recapitalization, but owns a smaller share in the banks. There is no guarantee that the banks will begin to lend again. Shares in the banks leave the government exposed to losses through payment of the bondholders.
Comment
The “Good Bank” option is clearly superior in that it is the only one which relieves the taxpayer from responsibility for compensating bond holders for losses. It also creates a government controlled bank which can be instructed to begin lending.
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