Nat O'Connor: A technical, evidence-based analysis has led to the calculation of a Living Wage for Ireland of €11.45 per hour. This is based on a single person working full-time (defined as 39 hours/week). The calculation is based on detailed data from the Vincentian Partnership for Social Justice's budgeting.ie work, which describes each item required for a person to have a Minimum Essential Standard of Living or MESL.
The MESL standard is based on focus groups done with people living on low incomes, to agree a minimum standard of living, sufficient to meet someone's needs (not wants). It is not a poverty standard, but a minimum for a dignified life. Once the standard of living is agreed, researchers from the Vincentian Partnership for Social Justice look annually at the cheapest possible goods and services available in the market.
The categories of cost can be seen in the summary of the Living Wage (page 2). Some commentators have suggested that €11.45/hour (€446/week or just over €23,000/year) is 'too high' or includes unreasonable 'needs'. Let's look at that.
It might be argued that more frugal living is possible than described by the Living Wage. Well, core expenditure can be seen in detail here for the example of an Urban dwelling adult living alone. (Other detailed budgets can be seen here).
For a single man living alone in an urban area, a Living Wage will allow €57 per week for food along the following lines. Grocery shopping in a chain supermarket (typically a German discounter) including fresh fruit and vegetables for a healthy diet and a limited quantity of luxuries. For example, there is sufficient budget to allow three eggs per week, two litres of milk per week, one packet of biscuits per week, one jar of instant coffee every six weeks, one jar of jam every eight weeks, and so on. The budget does allow for one Deli lunch per week (€5.60), one Chinese takeaway every four weeks (€11.20) and a Sunday lunch out every six weeks (€10.00).
In terms of clothing, the Living Wage allows just over €10.00 per week. For a man (pages 9-11 of the same document), this would typically include: six pairs of socks/year, a pair of slippers every three years, a heavy jacket (€45) every year, a casual shirt every year (€15), a suit every three years (€144), a pair of shoes/year (€30), and so on. Obviously, these are the cheapest available goods. If someone wants a more expensive piece of clothing, he or she will have to make it last longer.
There is similar detail available for personal care items (e.g. shaving cream) and health care (e.g. dental visits). Energy bills are expected to be covered by €9.99/week. The household goods section is instructive. The scenario assumes that a single male lives in furnished rental accommodation and so does not own any furniture. A basic television is owned (€119.95) and is expected to last for ten years, likewise a toaster, iron, and so on. A wooden spoon (€1.99) is expected to last twenty years.
The television licence (€160/year) is an expensive cost, at over €3/week. No allowance is made for cable or satellite television. (By the way, 411 people were jailed last year for non-payment of the TV licence)
This budget allows someone to send 20 Christmas cards and four other greeting cards per year, with a total allowance of 30 stamps (55 cents each). The cost of stamps was calculated before the recent nearly 10 per cent rise in the cost of a stamp, to 60 cent - which means yet another €1.50 will have to be squeezed out of an annual budget that is already insufficient. This follows a pattern of publicly-regulated costs going up, such as Dublin Bus fares up 15-25 per cent in 2013.
Some commentators have criticised the allowance of spending for 'social inclusion'. Let's explore that. Under communications, the budget allows for a basic mobile phone (€59.99) and €5 of credit per week. It allows for a laptop (€479) meant to last for five years - i.e. costing €1.84/week. A printer is allowed for (€59.99/ten years), as well as 500 sheets of A4 paper every year (€4.99).
A person on this basic budget has €2 per week to make a donation to charity and is assumed to save €5 per week.
An annual holiday is included, which is illustrated as a week-long trip to Galway from Dublin, with seven nights accommodation (€25/night) and €299 in spending money.
Purchase of one newspaper per week is allowed for (€2.20) and a DVD rental four times a year (€4.60). A trip to the cinema is allowed for every two months (€8.50). Two swims a month are allowed for (€5 each) as well as a weekly football match (€5/week for 9 months/year).
There is a €15/week allowance for socialising/entertainment. This might allow three or four pints of beer per week, or a cup of tea/coffee every day.
The LivingWage.ie website has a new note outlining the allowances for social inclusion and participation under the Living Wage calculation, available here.
There is much more detail in the background data and reports, all available for scrutiny. While there may be quibbles about line items, what any serious examination of the data will show is that the Living Wage is based on a very modest, simple lifestyle. There is very little room for emergencies or special occasions. And the Living Wage is not meant to describe a poverty line, but it is a description of what the focus group participants believe is the minimum required for a dignified life, underneath which no one should be expected to fall. If anything, the Living Wage is too frugal - and of course the reality is that many people on such an income could still experience material deprivation. Not everyone lives beside a supermarket and disability or the needs of extended family members can put further pressure on people's budgets.
The details of the budgets merits serious attention, for many reasons.
It makes it clear that many people in Ireland go without many essential goods and services. This is bad for them, but it is also bad for local shops and immoral for Irish society because such deprivation would be unnecessary if national income was distributed more fairly.
It shows that every small increase in costs under public control or regulation matters - including energy, postage, telecoms and public transport, as well as the effect of VAT and other indirect taxes on prices in the market.
Raising people's incomes up to an evidence-based Living Wage would boost local spending power and benefit many small enterprises across Ireland. It would boost VAT income for the state and lower pressure on supplemental and special needs social welfare payments.
Like with the minimum wage, businesses that genuinely cannot afford to pay a Living Wage could be dealt with on a case-by-case basis. The Living Wage also provides an evidence base to interrogate why some goods and services are more expensive in Ireland than elsewhere, and what could be done to boost competition or regulate costs to lower the cost of living.
At the heart of the Living Wage argument is the proposition that everyone who works full-time should be entitled to a very basic, minimum standard of living sufficient to for a dignified life. But even the modest suggestion of paying at least €11.45 per hour won't happen unless people and organisations demand it.
Tuesday, 8 July 2014
Corporation Tax and the Risk of an "Untenable Fiscal Situation"
Nat O'Connor: Interest observation reported in The Irish Times by international law firm Cadwalader.
“The country’s tax regime is coming under increasing scrutiny by the EU for the aggressive tax planning strategies undertaken by foreign multinationals, a practice termed ‘brass-plating,’” said Cadwalader. ...
The law firm said that beyond the risk of reputational damage, senior Irish officials noted that the trend of inversions may place Ireland in “an untenable fiscal situation” where the gain in tax revenue from redomiciled corporations is more than offset by the accompanying increase in the nominal gross national product used to calculate Ireland’s contributions to the EU budget.
“The resounding concern is that Ireland bears the brunt of the reputational and economic impact of inversions but reaps little of the job creation, substantive investment, economic growth or other tangible benefits typically afford by traditional foreign direct investment,” said Cadwalader in the note.
“The country’s tax regime is coming under increasing scrutiny by the EU for the aggressive tax planning strategies undertaken by foreign multinationals, a practice termed ‘brass-plating,’” said Cadwalader. ...
The law firm said that beyond the risk of reputational damage, senior Irish officials noted that the trend of inversions may place Ireland in “an untenable fiscal situation” where the gain in tax revenue from redomiciled corporations is more than offset by the accompanying increase in the nominal gross national product used to calculate Ireland’s contributions to the EU budget.
“The resounding concern is that Ireland bears the brunt of the reputational and economic impact of inversions but reaps little of the job creation, substantive investment, economic growth or other tangible benefits typically afford by traditional foreign direct investment,” said Cadwalader in the note.
Wednesday, 2 July 2014
Property Tax and Local Government Funding
Nat O'Connor: Taxation is the price of civilised society - and that includes taxes to pay for many basic local services, including planning, roads, housing, parks, playgrounds, street lighting, waste management, libraries, cultural activities and much more.
As such, a story in the Irish Times about four Dublin TDs seeking to protect Dublin City's share of local property tax is not just about Dublin, but it is about creating a rational system so that people all over Ireland can have accountability for how much tax they pay and what they get for it in terms of local services. This basic exchange of taxes for services is at the heart of democracy and civic republicanism, for example captured in the French revolutionary Déclaration des Droits de l'Homme et du Citoyen 1789, Article 14: "All citizens have the right to ascertain, by themselves, or through their representatives, the need for a public tax, to consent to it freely, to watch over its use, and to determine its proportion, basis, collection and duration."
The issue being raised by the TDs is a classic case of Government giving with one hand, while taking away with the other. Dublin City may be given 80% of the property tax raised within its borders, but will lose other grants due to this "windfall".
Dublin City has an income of €802.7 million for 2014, down from an income of €825.5 million in 2012. The 2012 income was composed of income from commercial rates (€341.3m), goods and services (€222.7m), money from other local authorities (€96.3m), grants (€89.7m) the Local Government Fund - including motor tax and property tax (€53.9m), the pension levy (€17.7m) and transfer from reserves (€3.9m). See page 31 in the full statement of Dublin City's 2012 finances here (PDF). More information about Dublin City's funding is here (web).
According to Revenue, Dublin City provided €39.7 million in local property tax in 2013, which should double in 2014 (first full year) to roughly €80 million. Eighty per cent of €80 million is €64 million.
Apparently, Dublin only got €2 millon from property tax in 2013, so the windfall is around €62 million - or a 7.7% increase in the city's total income.
There is a further argument that Dublin is the engine of the Irish economy and needs further funds to invest to reinforce this role, which will benefit the wider country. (See this official report: Funding The Dublin City Region). A 7.7% increase in income, coming on the back of years of cuts to local authority funding and a fall in various other income lines due to the economic downturn, is not actually a massive windfall. Local businesses would doubtless argue that it is an opportunity to reduce commercial rates, not least to help get boarded-up shops back into business.
For information, the Department of the Environment's 2013 report on funding for all local authorities is here (PDF).
As I argued previously (here), there are perverse consequences of the electioneering around cutting local property tax. If Dublin implements a 15% LPT cut, even the 15% reduction in the fifth of Dublin City's LPT income to be shared around the country could take millions out of the Local Government Fund, which will really hurt smaller authorities.
At the same time, if Dublin loses a share of the Local Government Fund revenue in exchange for the LPT 'windfall', what that really means is that Motor Tax paid in Dublin won't be spent in Dublin, which undermines another 'local tax'.
Ultimately, local government funding is under the control of the Minister for the Environment, Community and Local Government, whose Department holds the purse strings for grants as well as the Local Government Fund. Unless and until local authorities are 100% independently funded, there will always be a risk that a Minister of one political party or from another county will be tempted to reduce funding for local authorities governed by different parties.
Unfortunately, most of the political energy at the local elections was directed at lowering local property tax. Hopefully, some politicians at local and national level will take up the challenge of advocating for 100% independent funding at local level, so that citizens can choose the level of services they want and are willing to pay for.
As such, a story in the Irish Times about four Dublin TDs seeking to protect Dublin City's share of local property tax is not just about Dublin, but it is about creating a rational system so that people all over Ireland can have accountability for how much tax they pay and what they get for it in terms of local services. This basic exchange of taxes for services is at the heart of democracy and civic republicanism, for example captured in the French revolutionary Déclaration des Droits de l'Homme et du Citoyen 1789, Article 14: "All citizens have the right to ascertain, by themselves, or through their representatives, the need for a public tax, to consent to it freely, to watch over its use, and to determine its proportion, basis, collection and duration."
The issue being raised by the TDs is a classic case of Government giving with one hand, while taking away with the other. Dublin City may be given 80% of the property tax raised within its borders, but will lose other grants due to this "windfall".
Dublin City has an income of €802.7 million for 2014, down from an income of €825.5 million in 2012. The 2012 income was composed of income from commercial rates (€341.3m), goods and services (€222.7m), money from other local authorities (€96.3m), grants (€89.7m) the Local Government Fund - including motor tax and property tax (€53.9m), the pension levy (€17.7m) and transfer from reserves (€3.9m). See page 31 in the full statement of Dublin City's 2012 finances here (PDF). More information about Dublin City's funding is here (web).
According to Revenue, Dublin City provided €39.7 million in local property tax in 2013, which should double in 2014 (first full year) to roughly €80 million. Eighty per cent of €80 million is €64 million.
Apparently, Dublin only got €2 millon from property tax in 2013, so the windfall is around €62 million - or a 7.7% increase in the city's total income.
There is a further argument that Dublin is the engine of the Irish economy and needs further funds to invest to reinforce this role, which will benefit the wider country. (See this official report: Funding The Dublin City Region). A 7.7% increase in income, coming on the back of years of cuts to local authority funding and a fall in various other income lines due to the economic downturn, is not actually a massive windfall. Local businesses would doubtless argue that it is an opportunity to reduce commercial rates, not least to help get boarded-up shops back into business.
For information, the Department of the Environment's 2013 report on funding for all local authorities is here (PDF).
As I argued previously (here), there are perverse consequences of the electioneering around cutting local property tax. If Dublin implements a 15% LPT cut, even the 15% reduction in the fifth of Dublin City's LPT income to be shared around the country could take millions out of the Local Government Fund, which will really hurt smaller authorities.
At the same time, if Dublin loses a share of the Local Government Fund revenue in exchange for the LPT 'windfall', what that really means is that Motor Tax paid in Dublin won't be spent in Dublin, which undermines another 'local tax'.
Ultimately, local government funding is under the control of the Minister for the Environment, Community and Local Government, whose Department holds the purse strings for grants as well as the Local Government Fund. Unless and until local authorities are 100% independently funded, there will always be a risk that a Minister of one political party or from another county will be tempted to reduce funding for local authorities governed by different parties.
Unfortunately, most of the political energy at the local elections was directed at lowering local property tax. Hopefully, some politicians at local and national level will take up the challenge of advocating for 100% independent funding at local level, so that citizens can choose the level of services they want and are willing to pay for.
Monday, 30 June 2014
McWage: Why we will all be working in fast-food restaurants into our eighties
Paul Sweeney: This article by Douglas Coupland writing in the Financial Times deserves attention (click for full article on FT.com). He writes as follows:
One observation I’ve often heard from European friends, and visitors to North America, is, “It’s as if every single person in your culture has worked at one or more restaurants in their life.” I’d never thought of it before but they’re right … I can’t think of anyone in my orbits who hasn’t waited tables or bussed or dish-washed or cooked for some stretch. For Europeans visiting Canada or the States, remember that restaurant memories are a great conversation starter with most North Americans; everyone has their tales of psychotic bosses, Christmas morning shifts and après-work partying excess.
Working in a restaurant when you’re young doesn’t necessarily mean minimum wage (though it usually does) and, for many people, minimum wage is a stage-of-life thing that we all work through and gaze back on with rose-tinted glasses. When I put the word McJob in my 1991 novel Generation X, I wanted a word to describe what I saw as “a low-paying, low-prestige dead-end job that requires few skills and offers very little chance of intracompany advancement”. It made sense then, and it makes sense now. Back in the early 1990s I began to see the start of a process that’s currently in full swing: the defunding and/or elimination of the mechanisms by which we once created and maintained a healthy middle class. What was once a stage of life is now turning into, well, all of life.
[...]
McDonald’s campaigned for years and ultimately failed to have the definition of the word McJob revised in the Oxford English Dictionary, in 2006 even renting a big screen in Piccadilly Circus to put forth its viewpoint. The saga of this process is a fun read on Wikipedia but, given the accelerating shrinkage of the middle class, it all seems like a frivolous corporate bonbon from a nearly vanished era. Discussions of a minimum wage in 2014 seem to have a nasty bite. As I’ve said before, we’re all going to be working at McDonald’s into our eighties (not all, of course, on the minimum wage) but the relentless parade of numbers that are making this clear to us is starting to frighten people to the core. It’s really happening.
I guess the thing that bugs me about current minimum wage discussions is that the minimum wage has gone from being a drop-dead minimum salary that, if nothing else, protected the young, the weak and the less able from being exploited (and the moment people can exploit others, they will, and we all know it), into a mantra to the effect that if you can’t get by on a minimum wage – rent, food, transport, life – then tough luck sucker; you don’t deserve anything at all – and it’s all your fault – and by the way, you’ve forfeited your voice and participation in your culture.
The minimum wage is now used as a shield behind which politicians can deflect any social criticism that might be central to people who need a minimum wage – student life and education, most social and medical services, artistic and creative life and whatever else you can think of – and basically say, “Well, look, we gave you a minimum wage, didn’t we? So what’s your problem now? If you can’t stretch your minimum wage into food, shelter, lodging, medical, dental, education, then I guess it just sucks to be you.”
Minimum wage has gone from being a device created to protect the worst of power and labour imbalances to a fiscal panacea that allows its wielders to gut valuable social infrastructure while smiling beneath the cheesiest of haloes. I was 28 when I wrote Generation X but the last time I was officially an employee anywhere was in August 1989 – so, technically, I’ve been unemployed for the past 25 years. But about once a month I get this recurring dream where I suddenly realise that I’m unemployed, broke, living in a basement suite and desperately need a job – and so my mind automatically goes to having to work in a fast-food restaurant, and the sensation is terrifying because how on earth is anyone going to be able to live on what you make there? And then I wake up and say, “Phew. I’ve still got a few decades left before manning the French-fry computer. Dang, life is good.”
Douglas Coupland’s most recent novel, ‘Worst. Person. Ever.’, is published by William Heinemann. Twitter: @dougcoupland
(click for full article on FT.com)
One observation I’ve often heard from European friends, and visitors to North America, is, “It’s as if every single person in your culture has worked at one or more restaurants in their life.” I’d never thought of it before but they’re right … I can’t think of anyone in my orbits who hasn’t waited tables or bussed or dish-washed or cooked for some stretch. For Europeans visiting Canada or the States, remember that restaurant memories are a great conversation starter with most North Americans; everyone has their tales of psychotic bosses, Christmas morning shifts and après-work partying excess.
Working in a restaurant when you’re young doesn’t necessarily mean minimum wage (though it usually does) and, for many people, minimum wage is a stage-of-life thing that we all work through and gaze back on with rose-tinted glasses. When I put the word McJob in my 1991 novel Generation X, I wanted a word to describe what I saw as “a low-paying, low-prestige dead-end job that requires few skills and offers very little chance of intracompany advancement”. It made sense then, and it makes sense now. Back in the early 1990s I began to see the start of a process that’s currently in full swing: the defunding and/or elimination of the mechanisms by which we once created and maintained a healthy middle class. What was once a stage of life is now turning into, well, all of life.
[...]
McDonald’s campaigned for years and ultimately failed to have the definition of the word McJob revised in the Oxford English Dictionary, in 2006 even renting a big screen in Piccadilly Circus to put forth its viewpoint. The saga of this process is a fun read on Wikipedia but, given the accelerating shrinkage of the middle class, it all seems like a frivolous corporate bonbon from a nearly vanished era. Discussions of a minimum wage in 2014 seem to have a nasty bite. As I’ve said before, we’re all going to be working at McDonald’s into our eighties (not all, of course, on the minimum wage) but the relentless parade of numbers that are making this clear to us is starting to frighten people to the core. It’s really happening.
I guess the thing that bugs me about current minimum wage discussions is that the minimum wage has gone from being a drop-dead minimum salary that, if nothing else, protected the young, the weak and the less able from being exploited (and the moment people can exploit others, they will, and we all know it), into a mantra to the effect that if you can’t get by on a minimum wage – rent, food, transport, life – then tough luck sucker; you don’t deserve anything at all – and it’s all your fault – and by the way, you’ve forfeited your voice and participation in your culture.
The minimum wage is now used as a shield behind which politicians can deflect any social criticism that might be central to people who need a minimum wage – student life and education, most social and medical services, artistic and creative life and whatever else you can think of – and basically say, “Well, look, we gave you a minimum wage, didn’t we? So what’s your problem now? If you can’t stretch your minimum wage into food, shelter, lodging, medical, dental, education, then I guess it just sucks to be you.”
Minimum wage has gone from being a device created to protect the worst of power and labour imbalances to a fiscal panacea that allows its wielders to gut valuable social infrastructure while smiling beneath the cheesiest of haloes. I was 28 when I wrote Generation X but the last time I was officially an employee anywhere was in August 1989 – so, technically, I’ve been unemployed for the past 25 years. But about once a month I get this recurring dream where I suddenly realise that I’m unemployed, broke, living in a basement suite and desperately need a job – and so my mind automatically goes to having to work in a fast-food restaurant, and the sensation is terrifying because how on earth is anyone going to be able to live on what you make there? And then I wake up and say, “Phew. I’ve still got a few decades left before manning the French-fry computer. Dang, life is good.”
Douglas Coupland’s most recent novel, ‘Worst. Person. Ever.’, is published by William Heinemann. Twitter: @dougcoupland
(click for full article on FT.com)
Thursday, 26 June 2014
Innovation and jobs through public investment
Cormac Staunton: Ireland’s National Digital Research Centre (NDRC) has been ranked in the top 2.5 per cent of incubators; 19th worldwide and 7th in Europe, the highest placement for an Irish incubator. Incubators provide entrepreneurial support for start-up and early stage companies in particular sectors.
NDRC chief executive Ben Hurley said the endorsement provided further confirmation of the central place the centre maintains in the global ‘innovation ecosystem’.
NDRC describes itself as an early stage investor in innovation, making ventures happen by investing in start-ups and improving the environment in which ventures can grow. The NDRC began operations in 2007. Each year they work with approximately 1,000 individuals and invest into between 30 and 40 early stage technology ventures.
It is important to point out that this organisation is almost entirely government-funded and has registered charitable status. In 2012, it received Government subvention income of €4.3m (other income included EU Grant income of €325,319, and syndicated investment income of €10,000). Its main costs are research investment and fund management (€3.6m). Of its total costs, about 40% (approx. €1.8m of €4.5m) are staff costs for 23 staff.
By the end of 2013, the portfolio of start-up ventures supported by NDRC had secured €40m in commercial follow-on investment. The cumulative numbers of jobs created grew more than fivefold to a total of 250 by end 2012. Preliminary projections for 2013 suggest that this will grow further by well over 20% in 2013.
When ‘ripple impacts’ of digital jobs are considered, the NDRC estimates that the true value to the economy is up to 4.3 times the net digital jobs created. That would assume 1,075 jobs as a result of NDRC’s activities.
Without government funding, it is unlikely that an organisation like this would exist. It is a classic example of government investment ‘priming the pump’ for innovation and job creation, which contradicts the argument that the private sector alone can create jobs.
Investment (public and private) in Ireland has fallen from a high of 27% of GDP in 2006 to just over 10% in 2012, which was the lowest in the EU, and almost half of the EU average of 18%.
Cutting taxes is not going to close this gap. But as the NDRC shows, well targeted public investment has the ability to “crowd in” private investment to stimulate jobs, innovation and growth.
Links:
Irish Times Report 26th June 2014
NDRC Annual Report 2012
NDRC chief executive Ben Hurley said the endorsement provided further confirmation of the central place the centre maintains in the global ‘innovation ecosystem’.
NDRC describes itself as an early stage investor in innovation, making ventures happen by investing in start-ups and improving the environment in which ventures can grow. The NDRC began operations in 2007. Each year they work with approximately 1,000 individuals and invest into between 30 and 40 early stage technology ventures.
It is important to point out that this organisation is almost entirely government-funded and has registered charitable status. In 2012, it received Government subvention income of €4.3m (other income included EU Grant income of €325,319, and syndicated investment income of €10,000). Its main costs are research investment and fund management (€3.6m). Of its total costs, about 40% (approx. €1.8m of €4.5m) are staff costs for 23 staff.
By the end of 2013, the portfolio of start-up ventures supported by NDRC had secured €40m in commercial follow-on investment. The cumulative numbers of jobs created grew more than fivefold to a total of 250 by end 2012. Preliminary projections for 2013 suggest that this will grow further by well over 20% in 2013.
When ‘ripple impacts’ of digital jobs are considered, the NDRC estimates that the true value to the economy is up to 4.3 times the net digital jobs created. That would assume 1,075 jobs as a result of NDRC’s activities.
Without government funding, it is unlikely that an organisation like this would exist. It is a classic example of government investment ‘priming the pump’ for innovation and job creation, which contradicts the argument that the private sector alone can create jobs.
Investment (public and private) in Ireland has fallen from a high of 27% of GDP in 2006 to just over 10% in 2012, which was the lowest in the EU, and almost half of the EU average of 18%.
Cutting taxes is not going to close this gap. But as the NDRC shows, well targeted public investment has the ability to “crowd in” private investment to stimulate jobs, innovation and growth.
Links:
Irish Times Report 26th June 2014
NDRC Annual Report 2012
Monday, 23 June 2014
What Now for Economic Inequality in Ireland?
Nat O'Connor: Last week, economist Thomas Piketty wowed a packed auditorium in Croke Park, with over 600 people in attendance to hear his analysis of economic inequality. But one key message from the TASC conference was that the debate must be carried forward from here.
As the Central Bank Governor, Professor Patrick Honohan, noted in his response to Thomas Piketty, the topic of income and wealth inequality is "a topic neglected to a surprising degree in most analysis of economic statistics." The Governor also noted "I appreciate the matter-of-fact concern with inequality - especially wealth inequality: I differ from those commentators who do not see the obvious policy relevance of these matters." (Professor Honohan's full remarks are here)
In terms of any policy response to economic inequality, there are three major 'equalisers' that need to be taken into account.
Firstly, good jobs are the primary equaliser for many people. A well-paying job is how many people provide themselves and their families with a dignified life. However, Ireland's economy has failed to generate enough jobs - and too many jobs are low paid, where even with full-time employment people are living in a precarious situation or in material deprivation.
The second great equaliser is redistribution of income through the combination of the tax, social insurance and social transfer systems. This system is progressive where higher earners pay more in income tax and PRSI (albeit regressive in terms of VAT and other indirect taxes, where people on lower incomes pay proportionately more). Social transfers like the state pension, Child Benefit, Rent Supplement, disability allowance, carers' allowance and other welfare payments play an important role in reducing poverty. However, too much attention is paid to the progressivity of the income tax system. While this is a good thing, it is too often seen in isolation from the whole system, which has weaknesses in comparison to other EU countries.
Thirdly, a decisive factor in the equality of 'quality of life' is public services. There are too many demands on people's net incomes in Ireland compared to other EU countries - even the UK. As a result, many people are unable to meet the cost of essential goods and services, which in Ireland include extremely high housing costs, health insurance, the world's most expensive childcare, transport and more. Nonetheless, the value of public services is that education provides opportunities for many people and public health services do mitigate risk for many people - although the length of waiting times rightly causes anxiety for those who cannot afford insurance as it is less the quality of service but the delays that are the greatest risk for those people solely reliant on the public provision of health care.
It is in public services that the weakness of Ireland's tax system is apparent. At only three-quarters of the EU average level of tax and social insurance, is it not surprising that Ireland's services do not provide to the same extent that public services do in many Western European welfare states. As a result of this 'low tax triangle' (low taxes, low service provision and higher out-of-pocket costs), Irish people have to spend more of their net income on services than they do in other countries.
The policy challenge in addressing economic inequality is how to move on all three points of the triangle at the same time: provide more far-reaching services or new services, lower people's cost of living, while of necessity raising taxation to pay for this.
In concrete terms, more far-reaching services might equate to health or education services that are simply free-at-the-point-of-use rather than coming with a slew of up-front fees, prescription charges, school book charges, etc. New services might include state-subsidised childcare or affordable rental housing for the mass market.
It requires detailed cost-benefit analysis to show whether or not expanded or new public services could reduce the cost of living for enough people to make the case for increased taxation persuasive. But the lack of exploration of this possibility is a major gap in the policy debate.
This gap in the debate is problematic because it is precisely through progressive taxation funding of public services that many European countries reduce economic inequality to an extent that Ireland does not. Taxation is not primarily about redistribution of income. In Ireland, social transfers account for less than a third of all spending. What is required of public services is distribution of opportunity, distribution of jobs and collective sharing of risk by all of society.
The counter-argument to this claims that taxes are too high and people want higher net incomes. But the tax debate leading up to Budget 2015 has been (to date) framed in the media as about the 41% higher rate of income tax. However, as TASC has demonstrated, only a third of income tax payers pay anything at this rate - and only a sixth of adults would benefit from any changes to it.
As such, the debate is currently a spurious argument about boosting economic activity through a tax change that will only benefit higher earners - not the large majority of people in Ireland.
The Economist illustrates effective tax rates on a 100,000 USD salary in a diagram here. Ireland's rate of tax and social insurance actually paid on this income level is around 35% (i.e. the middle of the chart - near Brazil and India, but below Germany or France) - and it would be far lower if Ireland's extremely low employer's PRSI was taken into account. What is really being suggested in the focus on the higher tax rate of 41% (52% when PRSI and USC are included) is that Ireland should be more like the UK or USA, countries where people on high salaries pay less income tax - and where overall economic inequality is higher than Ireland.
The progressive counter-argument always requires more evidence than populist anti-tax rhetoric. This is the argument that stronger public services and social transfers would improve the quality of life for more people - even if they had lower net income due to higher tax and social insurance to pay for those services. Moreover, more equal economies often do better. Higher social transfers means more money circulating in local economies. And stronger public services also both directly boost GDP and also can lay the foundations for stronger performance in the private sector (e.g. greater public investment in infrastructure, such as IBEC is currently calling for).
Given the strong evidence that more equal countries do better, and given the low level of Ireland's overall tax and social insurance, the balance of probability favours maintaining or increasing taxation in Budget 2015 - not reducing it. This is necessary to fund public services, social transfers and public investment, which in turn are vital to tackle economic inequality.
As the Central Bank Governor, Professor Patrick Honohan, noted in his response to Thomas Piketty, the topic of income and wealth inequality is "a topic neglected to a surprising degree in most analysis of economic statistics." The Governor also noted "I appreciate the matter-of-fact concern with inequality - especially wealth inequality: I differ from those commentators who do not see the obvious policy relevance of these matters." (Professor Honohan's full remarks are here)
In terms of any policy response to economic inequality, there are three major 'equalisers' that need to be taken into account.
Firstly, good jobs are the primary equaliser for many people. A well-paying job is how many people provide themselves and their families with a dignified life. However, Ireland's economy has failed to generate enough jobs - and too many jobs are low paid, where even with full-time employment people are living in a precarious situation or in material deprivation.
The second great equaliser is redistribution of income through the combination of the tax, social insurance and social transfer systems. This system is progressive where higher earners pay more in income tax and PRSI (albeit regressive in terms of VAT and other indirect taxes, where people on lower incomes pay proportionately more). Social transfers like the state pension, Child Benefit, Rent Supplement, disability allowance, carers' allowance and other welfare payments play an important role in reducing poverty. However, too much attention is paid to the progressivity of the income tax system. While this is a good thing, it is too often seen in isolation from the whole system, which has weaknesses in comparison to other EU countries.
Thirdly, a decisive factor in the equality of 'quality of life' is public services. There are too many demands on people's net incomes in Ireland compared to other EU countries - even the UK. As a result, many people are unable to meet the cost of essential goods and services, which in Ireland include extremely high housing costs, health insurance, the world's most expensive childcare, transport and more. Nonetheless, the value of public services is that education provides opportunities for many people and public health services do mitigate risk for many people - although the length of waiting times rightly causes anxiety for those who cannot afford insurance as it is less the quality of service but the delays that are the greatest risk for those people solely reliant on the public provision of health care.
It is in public services that the weakness of Ireland's tax system is apparent. At only three-quarters of the EU average level of tax and social insurance, is it not surprising that Ireland's services do not provide to the same extent that public services do in many Western European welfare states. As a result of this 'low tax triangle' (low taxes, low service provision and higher out-of-pocket costs), Irish people have to spend more of their net income on services than they do in other countries.
The policy challenge in addressing economic inequality is how to move on all three points of the triangle at the same time: provide more far-reaching services or new services, lower people's cost of living, while of necessity raising taxation to pay for this.
In concrete terms, more far-reaching services might equate to health or education services that are simply free-at-the-point-of-use rather than coming with a slew of up-front fees, prescription charges, school book charges, etc. New services might include state-subsidised childcare or affordable rental housing for the mass market.
It requires detailed cost-benefit analysis to show whether or not expanded or new public services could reduce the cost of living for enough people to make the case for increased taxation persuasive. But the lack of exploration of this possibility is a major gap in the policy debate.
This gap in the debate is problematic because it is precisely through progressive taxation funding of public services that many European countries reduce economic inequality to an extent that Ireland does not. Taxation is not primarily about redistribution of income. In Ireland, social transfers account for less than a third of all spending. What is required of public services is distribution of opportunity, distribution of jobs and collective sharing of risk by all of society.
The counter-argument to this claims that taxes are too high and people want higher net incomes. But the tax debate leading up to Budget 2015 has been (to date) framed in the media as about the 41% higher rate of income tax. However, as TASC has demonstrated, only a third of income tax payers pay anything at this rate - and only a sixth of adults would benefit from any changes to it.
As such, the debate is currently a spurious argument about boosting economic activity through a tax change that will only benefit higher earners - not the large majority of people in Ireland.
The Economist illustrates effective tax rates on a 100,000 USD salary in a diagram here. Ireland's rate of tax and social insurance actually paid on this income level is around 35% (i.e. the middle of the chart - near Brazil and India, but below Germany or France) - and it would be far lower if Ireland's extremely low employer's PRSI was taken into account. What is really being suggested in the focus on the higher tax rate of 41% (52% when PRSI and USC are included) is that Ireland should be more like the UK or USA, countries where people on high salaries pay less income tax - and where overall economic inequality is higher than Ireland.
The progressive counter-argument always requires more evidence than populist anti-tax rhetoric. This is the argument that stronger public services and social transfers would improve the quality of life for more people - even if they had lower net income due to higher tax and social insurance to pay for those services. Moreover, more equal economies often do better. Higher social transfers means more money circulating in local economies. And stronger public services also both directly boost GDP and also can lay the foundations for stronger performance in the private sector (e.g. greater public investment in infrastructure, such as IBEC is currently calling for).
Given the strong evidence that more equal countries do better, and given the low level of Ireland's overall tax and social insurance, the balance of probability favours maintaining or increasing taxation in Budget 2015 - not reducing it. This is necessary to fund public services, social transfers and public investment, which in turn are vital to tackle economic inequality.
Wednesday, 18 June 2014
Ireland's Corporation Tax Residency Rules Under Scrutiny
According to Professor Jim Stewart of TCD, Ireland’s industrial policy is too tax-dependent and he suggested that policymakers were overly influenced by tax professionals who work for the major accounting firms that devise the tax strategies of the multinationals.
Up to €40 billion, or almost half, of the annual profits made by Irish-registered companies fall outside the corporate tax net because so many multinational subsidiaries here declare they are tax resident elsewhere. (read more in this Irish Times report).
Up to €40 billion, or almost half, of the annual profits made by Irish-registered companies fall outside the corporate tax net because so many multinational subsidiaries here declare they are tax resident elsewhere. (read more in this Irish Times report).
Monday, 16 June 2014
Thomas Piketty and Ireland's Property Tax
Nat O'Connor: The Irish Times had a major article on Thomas Piketty on Saturday (click here) They also had an interesting angle on Ireland's property tax, with Professor Piketty suggesting it should be altered.
This gets us into one of the interesting issues raised by Piketty, which is how we define wealth or 'capital' - that being the key word in Piketty's tome, Capital in the Twenty-First Century. Piketty bundles together all assets - financial, housing, etc. - into aggregate wealth. And he allows the inclusion of negative numbers in this equation, in the form of debt.
One of Piketty's policy proposals to tackle rising inequality is the introduction of wealth tax. He says: “For the same tax revenue that you will get from a proportional property tax, I would transfer it to a progressive tax on net wealth, meaning real estate property value plus financial assets, minus debt, minus mortgage and other financial debt." As a result, he suggests that Ireland should re-calculate the residential property tax based on net value rather than nominal value.
But by extending property tax to include all property (i.e. making it into a comprehensive wealth tax), Piketty argues that "it would serve an important democratic purpose in bringing greater transparency to the distribution of wealth, allowing citizens and public representatives to make more informed decisions."
Crucially, better data on wealth would enable policy-makers to determine whether or not the wider economy and society is being served by wealth concentration, in terms of a jobs dividend. If not, wealth taxation could be adjusted until a better balance is struck.
A joint TASC-NERI paper exploring the potential of a wealth tax for Ireland can be read here
This gets us into one of the interesting issues raised by Piketty, which is how we define wealth or 'capital' - that being the key word in Piketty's tome, Capital in the Twenty-First Century. Piketty bundles together all assets - financial, housing, etc. - into aggregate wealth. And he allows the inclusion of negative numbers in this equation, in the form of debt.
One of Piketty's policy proposals to tackle rising inequality is the introduction of wealth tax. He says: “For the same tax revenue that you will get from a proportional property tax, I would transfer it to a progressive tax on net wealth, meaning real estate property value plus financial assets, minus debt, minus mortgage and other financial debt." As a result, he suggests that Ireland should re-calculate the residential property tax based on net value rather than nominal value.
But by extending property tax to include all property (i.e. making it into a comprehensive wealth tax), Piketty argues that "it would serve an important democratic purpose in bringing greater transparency to the distribution of wealth, allowing citizens and public representatives to make more informed decisions."
Crucially, better data on wealth would enable policy-makers to determine whether or not the wider economy and society is being served by wealth concentration, in terms of a jobs dividend. If not, wealth taxation could be adjusted until a better balance is struck.
A joint TASC-NERI paper exploring the potential of a wealth tax for Ireland can be read here
Thursday, 12 June 2014
IBEC's proposed tax cuts and Ireland's 'Low Tax Triangle'
Nat O'Connor: The business lobby group IBEC is advocating cuts to the higher rate of income tax. Such cuts would only benefit one third of income tax payers, and one sixth of adults in Ireland. The Taoiseach is reportedly sympathetic to this viewpoint, and Minister Noonan has focused on the higher rate of income tax for any cut in Budget 2015 (Irish Independent).
TASC has just published a six-page summary of how much tax people actually pay out of their incomes, in order to inject the facts about income tax into the debate.
The risk for most people is that if the tax cut lobbyists are successful, there will be cuts aimed at the 41% rate, which will benefit only the better-off in society - yet public services and social transfers will be cut again to fund those tax cuts.
In Ireland, most of us pay far less than the 52% 'marginal' tax rates (made up of income tax, USC and PRSI) and we pay much less tax and social insurance than most other Europeans, because our system has more tax credits, tax reliefs, etc. But there is no doubt that many people like the idea of a tax cut because they are under such pressure to meet their needs from their take-home pay.
IBEC has characterised the tax increases in recent years as "penal austerity taxes". Yet, they are ignoring the fact that the tax base was hollowed out during the boom, and tax take collapsed by a third between 2008 and 2010. There is a need to bring in new taxes to replace the unsustainable reliance on property-based tax from stamp duty, as well as income tax and VAT that was ultimately linked to the property bubble. If the Government further reduces taxation in Budget 2015, existing public services will become unsustainable and the national debt could become unstable. As it is, Ireland is still not generating enough tax and social insurance to pay for services.
IBEC's press release argues: "Cut income tax: The tax burden is too high and tax on work is way out of line internationally. The entry point to the higher marginal tax rate should be increased, and the marginal rate reduced below 50%. This will put more money into the pockets of Irish consumers, and ultimately benefit the Exchequer though greater economic activity and tax revenue."
On all points IBEC is wrong:
"The tax burden is too high" - Ireland total tax and social insurance take is three-quarters of the EU average.
"tax on work is way out of line internationally" - As shown in the OECD's latest taxing wages report, the 'tax wedge' on average workers in Ireland is the lowest among EU members of the OECD, and the second-lowest in the whole OECD for single people. This is largely because employer's PRSI is so very low in Ireland.
TASC has just published a six-page summary of how much tax people actually pay out of their incomes, in order to inject the facts about income tax into the debate.
The risk for most people is that if the tax cut lobbyists are successful, there will be cuts aimed at the 41% rate, which will benefit only the better-off in society - yet public services and social transfers will be cut again to fund those tax cuts.
In Ireland, most of us pay far less than the 52% 'marginal' tax rates (made up of income tax, USC and PRSI) and we pay much less tax and social insurance than most other Europeans, because our system has more tax credits, tax reliefs, etc. But there is no doubt that many people like the idea of a tax cut because they are under such pressure to meet their needs from their take-home pay.
IBEC has characterised the tax increases in recent years as "penal austerity taxes". Yet, they are ignoring the fact that the tax base was hollowed out during the boom, and tax take collapsed by a third between 2008 and 2010. There is a need to bring in new taxes to replace the unsustainable reliance on property-based tax from stamp duty, as well as income tax and VAT that was ultimately linked to the property bubble. If the Government further reduces taxation in Budget 2015, existing public services will become unsustainable and the national debt could become unstable. As it is, Ireland is still not generating enough tax and social insurance to pay for services.
IBEC's press release argues: "Cut income tax: The tax burden is too high and tax on work is way out of line internationally. The entry point to the higher marginal tax rate should be increased, and the marginal rate reduced below 50%. This will put more money into the pockets of Irish consumers, and ultimately benefit the Exchequer though greater economic activity and tax revenue."
On all points IBEC is wrong:
"The tax burden is too high" - Ireland total tax and social insurance take is three-quarters of the EU average.
"tax on work is way out of line internationally" - As shown in the OECD's latest taxing wages report, the 'tax wedge' on average workers in Ireland is the lowest among EU members of the OECD, and the second-lowest in the whole OECD for single people. This is largely because employer's PRSI is so very low in Ireland.
"The entry point to the higher marginal tax rate should be increased and the marginal rate reduced below 50%" - Why? Ireland's system grants generous levels of tax credits to everyone, while other countries don't. Rates or bands don't matter. What does matter is effective levels of tax paid and in this regard Ireland is much lower than other EU countries (as shown by the OECD and in TASC's analysis).
"This will put more money into the pockets of Irish consumers, and ultimately benefit the Exchequer though greater economic activity and tax revenue" - This is unlikely. Firstly, IBEC's proposal is to give cuts only to the sixth of adults with the highest incomes rather than lower income people who are more likely to spend all of their income in the local economy. Secondly, the ESRI has just demonstrated that higher earners are more likely to pay down debt, not spend in the economy. Even if they did spend, they are more likely to spend on imports or foreign travel - with no benefit to Ireland's economy. Thirdly, many people will have to put their hands in their pockets to pay for services that will be cut if tax revenue falls - so an extra €200/year would quickly be taken back through school costs, medical costs, etc. In sum, there will be little or no boost to economic activity and the loss of tax revenue will simply result in a loss of services. Simultaneously, GDP will contract to the extent that Government spending, investment and social transfer are cut. So the net effect of tax cuts in Ireland's context is far more likely to be a shrunk economy (lower GDP).
One way to understand the issue is to see a triangle connecting low taxes, low services and high 'out of pocket' costs for goods and services that would be provided publicly and paid for collectively in many other European other societies.
If Ireland is to provide better public services and higher levels of social welfare in future, it is necessary to address all three parts of the triangle at the same time.
There is a need to examine cost of living - food, rent/mortgages, childcare, energy, transport and more. This does not need to cost the public finances much. Stronger regulation and enforcement of competition rules to break cartels and oligopolies could make a significant difference, but that would require political will to stand up to businesses not engaged in fair and open competition.
Taking some costs away from individuals and families in favour of public service provision could also be a game-changer. For example, most European countries subsidise childcare to a much greater extent than Ireland. Equally, affordable rental housing is much more frequently available from towns and cities across Europe. Any move to open up new areas of public provision (or subsidy) would have to be funded with new taxes. But it's a question of cost-benefit analysis. Would most people be better off if all of society helped pay for child care, so that they could work in other occupations (growing the economy and paying tax too)? Would most people benefit if the state stepped in to provide cheaper rental housing for a category of workers who will never become home owners? The answer is probably yes.
Tax and social insurance is therefore not a question of 'cuts good, tax bad' - but needs to be part of a conversation about public services, best value for most citizens in the balance of collective services versus individual costs, and working out how to pay for public services sustainably and equitably.
TASC's latest policy brief provides a factual basis to do just that.
One way to understand the issue is to see a triangle connecting low taxes, low services and high 'out of pocket' costs for goods and services that would be provided publicly and paid for collectively in many other European other societies.
If Ireland is to provide better public services and higher levels of social welfare in future, it is necessary to address all three parts of the triangle at the same time.
There is a need to examine cost of living - food, rent/mortgages, childcare, energy, transport and more. This does not need to cost the public finances much. Stronger regulation and enforcement of competition rules to break cartels and oligopolies could make a significant difference, but that would require political will to stand up to businesses not engaged in fair and open competition.
Taking some costs away from individuals and families in favour of public service provision could also be a game-changer. For example, most European countries subsidise childcare to a much greater extent than Ireland. Equally, affordable rental housing is much more frequently available from towns and cities across Europe. Any move to open up new areas of public provision (or subsidy) would have to be funded with new taxes. But it's a question of cost-benefit analysis. Would most people be better off if all of society helped pay for child care, so that they could work in other occupations (growing the economy and paying tax too)? Would most people benefit if the state stepped in to provide cheaper rental housing for a category of workers who will never become home owners? The answer is probably yes.
Tax and social insurance is therefore not a question of 'cuts good, tax bad' - but needs to be part of a conversation about public services, best value for most citizens in the balance of collective services versus individual costs, and working out how to pay for public services sustainably and equitably.
TASC's latest policy brief provides a factual basis to do just that.
Wednesday, 4 June 2014
Want growth and jobs? First tackle inequality.
Cormac Staunton: A recent article by Ben Olinsky at the Center for American Progress brings together a number of key findings to show how greater economic equality can be a key driver of economic growth.
In Ireland this is often considered counter-intuitive because we experienced rapid growth alongside rising inequality from the late 1980’s. However, as the paper makes clear, Ireland (along with South Korea) was very much an outlier in this respect.
As Ireland now struggles for growth in the post-crisis period, there are a number of questions highlighted by the paper that are also important for us to consider:
The evidence from the three papers analysed by Olinsky is that economic policies that rely on “trickle-down” theories and the resulting inequality are bad for the economy. It is a reminder for us in Ireland that our reliance on these theories of growth is out-dated, counter-productive and in some cases harmful.
The paper identifies a number of explicit linkages between inequality and economic inefficiency, which lead to reduced growth and greater economic instability. Investment growth, productivity growth, employment growth, middle-class income growth, national fiscal health, and overall economic growth are all shown to be weaker or have declined under trickle-down policies.
The paper suggests a number of policies to combat inequality and to strengthen those on low incomes through a progressive economic agenda, which would in turn have a positive impact on the economy.
The message for Ireland is clear: we should focus on growing the economy from the “middle out” or the “bottom up” instead of from the top down.
Five reasons why inequality is bad for the economy
1. Increasing inequality is bad for growth
It is often assumed that tax cuts for those on high incomes, while deepening inequality, will lead to economic growth. However, empirical evidence does not back this up. For example in the US, in 1981 the marginal tax rate for the highest income bracket in the US was 70 per cent, but that fell to just 28 per cent by 1989. Taxes on high incomes were further cut in early 2000s. Yet economic growth in the US was greater after the tax increases of 1993 than in the periods after income tax cuts in the 1980s and early 2000s.
2. Inequality is bad for investment
Inequality leads to a lack of resources for public investment, which can have longer term costs. For example, when children lack sufficient access to educational resources and after-school activities such as art and music, they become less-effective ‘inputs’ into the economy, thus depressing the rate of growth.
There is also a strong correlation showing that as the size of government shrinks, inequality increases. In a cross country study, nearly 60 per cent of the variation in inequality was accounted for by size of government. This then creates a perpetuating cycle of spending cuts, low investment and increasing inequality.
3. Inequality affects consumption
Income inequality promotes inefficient patterns of consumption in a number of ways. Firstly, where individuals feel pressured to consume more than is efficient as a sign of social status, such as overly large and expensive housing, this wastes resources that could be used for productive investments.
Secondly, because of rising inequality, middle- and low-income families are forced to borrow to sustain their standards of living. This creates excessive middle-class debt, generating instability in financial markets, lower economic growth, and the potential for a market crash.
On the other side, the marginal propensity to consume is lowest amongst those on highest incomes. Redistributing income away from the top and to the middle and the bottom will generate increased consumer spending and thus stimulate the economy, a particularly important mechanism in periods of recession and weak growth.
4. Inequality reduces risk-taking
A core component of a healthy labour market, which is necessary for a strong economy, is the ability for individuals to start their own businesses. Job insecurity and a lowering of the social ‘safety net’ can reduce the incentives for risk-taking entrepreneurial behaviour. Social programmes can give aspiring entrepreneurs the security that is necessary to take risks for ventures that could be beneficial to economic growth.
5. Inequality produces inefficient labour markets
A well-functioning economy needs a healthy labour market that allows workers to find jobs that take advantage of their unique skills and experiences. However, with rising inequality many workers may be reluctant to change occupation or sector because they are worried about ending up worse off.
Policies designed to combat inequality lead to a more efficient labour market. A more progressive tax system and increased access to social services and transfers tend to encourage labour-market mobility and afford individuals, particularly those on low incomes, the possibility of changing occupations and sectors.
Increasing economic equality means that workers take jobs that best utilize their skills, suggesting a further link between fighting inequality and growing the economy.
The paper by Ben Olinsky and links to all the papers quoted is available here.
Cormac Staunton is TASC's Policy Analyst. You can follow him on Twitter @Cormac_Staunton
In Ireland this is often considered counter-intuitive because we experienced rapid growth alongside rising inequality from the late 1980’s. However, as the paper makes clear, Ireland (along with South Korea) was very much an outlier in this respect.
As Ireland now struggles for growth in the post-crisis period, there are a number of questions highlighted by the paper that are also important for us to consider:
- Should we raise or lower taxes on high incomes?
- Should we cut spending or make strategic investments in education, research, and infrastructure?
- Should we raise or lower the minimum wage?
- Should we effectively regulate financial markets or allow the free market to sort it out?
The evidence from the three papers analysed by Olinsky is that economic policies that rely on “trickle-down” theories and the resulting inequality are bad for the economy. It is a reminder for us in Ireland that our reliance on these theories of growth is out-dated, counter-productive and in some cases harmful.
The paper identifies a number of explicit linkages between inequality and economic inefficiency, which lead to reduced growth and greater economic instability. Investment growth, productivity growth, employment growth, middle-class income growth, national fiscal health, and overall economic growth are all shown to be weaker or have declined under trickle-down policies.
The paper suggests a number of policies to combat inequality and to strengthen those on low incomes through a progressive economic agenda, which would in turn have a positive impact on the economy.
The message for Ireland is clear: we should focus on growing the economy from the “middle out” or the “bottom up” instead of from the top down.
Five reasons why inequality is bad for the economy
1. Increasing inequality is bad for growth
It is often assumed that tax cuts for those on high incomes, while deepening inequality, will lead to economic growth. However, empirical evidence does not back this up. For example in the US, in 1981 the marginal tax rate for the highest income bracket in the US was 70 per cent, but that fell to just 28 per cent by 1989. Taxes on high incomes were further cut in early 2000s. Yet economic growth in the US was greater after the tax increases of 1993 than in the periods after income tax cuts in the 1980s and early 2000s.
2. Inequality is bad for investment
Inequality leads to a lack of resources for public investment, which can have longer term costs. For example, when children lack sufficient access to educational resources and after-school activities such as art and music, they become less-effective ‘inputs’ into the economy, thus depressing the rate of growth.
There is also a strong correlation showing that as the size of government shrinks, inequality increases. In a cross country study, nearly 60 per cent of the variation in inequality was accounted for by size of government. This then creates a perpetuating cycle of spending cuts, low investment and increasing inequality.
3. Inequality affects consumption
Income inequality promotes inefficient patterns of consumption in a number of ways. Firstly, where individuals feel pressured to consume more than is efficient as a sign of social status, such as overly large and expensive housing, this wastes resources that could be used for productive investments.
Secondly, because of rising inequality, middle- and low-income families are forced to borrow to sustain their standards of living. This creates excessive middle-class debt, generating instability in financial markets, lower economic growth, and the potential for a market crash.
On the other side, the marginal propensity to consume is lowest amongst those on highest incomes. Redistributing income away from the top and to the middle and the bottom will generate increased consumer spending and thus stimulate the economy, a particularly important mechanism in periods of recession and weak growth.
4. Inequality reduces risk-taking
A core component of a healthy labour market, which is necessary for a strong economy, is the ability for individuals to start their own businesses. Job insecurity and a lowering of the social ‘safety net’ can reduce the incentives for risk-taking entrepreneurial behaviour. Social programmes can give aspiring entrepreneurs the security that is necessary to take risks for ventures that could be beneficial to economic growth.
5. Inequality produces inefficient labour markets
A well-functioning economy needs a healthy labour market that allows workers to find jobs that take advantage of their unique skills and experiences. However, with rising inequality many workers may be reluctant to change occupation or sector because they are worried about ending up worse off.
Policies designed to combat inequality lead to a more efficient labour market. A more progressive tax system and increased access to social services and transfers tend to encourage labour-market mobility and afford individuals, particularly those on low incomes, the possibility of changing occupations and sectors.
Increasing economic equality means that workers take jobs that best utilize their skills, suggesting a further link between fighting inequality and growing the economy.
The paper by Ben Olinsky and links to all the papers quoted is available here.
Cormac Staunton is TASC's Policy Analyst. You can follow him on Twitter @Cormac_Staunton
TASC Conference Programme Now Available
The TASC 2014 Conference Programme is now available here.
20th June 2014, Croke Park Conference Centre.
Keynote address by Thomas Piketty, author of Capital in the Twenty-First Century, with a response by Patrick Honohan, Governor of the Central Bank.
20th June 2014, Croke Park Conference Centre.
Keynote address by Thomas Piketty, author of Capital in the Twenty-First Century, with a response by Patrick Honohan, Governor of the Central Bank.
Thursday, 29 May 2014
News Reports of Tax Cuts are Deeply Flawed
Nat O'Connor: Reporting of taxation issues is very flawed in Ireland. From before Christmas, we had reports like: "Income tax may be cut in the next budget for 'certain groups'" (Irish Times). All the way up to early May, the news media carried stories like: "Middle and low-income families have been promised tax cuts by Finance Minister Michael Noonan in his strongest comments yet ahead of October's Budget." (Irish Independent)
The local and European elections took place on Friday 23rd May, and the tune changed: "Minister for Finance Michael Noonan has said Ireland has limited room to ease Budget cuts of €2 billion to be outlined later this year." (RTÉ news)
Change of spin is not unusual for politicians. Even if a Minister is simply getting on with his or her work, the back office PR team will seek to make the best out of news items to manage expectations while maximising support for their party.
Yet, there are grounds to question the quality of reporting on the topic of taxation. Speaking at a TASC lunchtime seminar about the social market economy model, Dr Dieter Benecke noted that one of the key requirements was that journalists are well-trained in economics and can pose serious questions of policymakers. Similarly, at a recent TASC Nordic Models seminar, a number of Nordic speakers reinforced the point that a strong media is vital to the operation of their systems.
What is required includes investment by media organisations in investigative journalism, data journalism and in the tedious detail of public administration - as well as sufficient staff well-training in economics and public finances.
The problem - and the above links are only a few of many examples - is that every word the Minister utters is seized upon as a hint about the next Budget. Or the Minister's words are built up in a way that feeds expectations among voters for a tax cut or some other concession.
However, the sad reality is that the economic damage done to Ireland is far from healed. On the contrary, the tax system is hollowed out by tax breaks and social insurance is incredibly weak in European terms; personal and business debt is high and its sustainability is too often unresolved; prices - not least housing - are again moving above what's affordable; banks are still dysfunctional; public services are starved of cash and creaking at the seams; poverty and deprivation are rising; and real wages stagnate and joblessness continues to be far too high. Yes, some parts of the economy are going well - there are hundreds of thousands of people with 'good jobs' and high pay. But the vast majority, millions of people in Ireland, live a very different reality. That's the message from the European and local elections.
Economists such as the ESRI's John Fitz Gerald and UL's Stephen Kinsella concur that a €2 billion budget adjustment is likely in October (RTÉ news). There is - as the Minister most recently said - "limited room" for tax cuts.
Whose job is it to provide the public with clear data on taxation and public spending? The civil service have been providing the same kind of Exchequer Returns and Public Spending Estimates for decades. They appear to limit their public role to providing the documents and figures, requiring users (e.g. politicians and their staff, business and academic economists - and citizens) to develop the requisite knowledge and expertise to use this data. Recently, small improvements have been made through the provision of data in Finance and PER's online databases.
On the media side, most of the focus seems to be on reportage and opinion rather than analysis of either the true state of Ireland's tax system or the economic and social implications of tax cuts and the lost public service to fund those cuts. For another point of view, see TASC's Defence of Taxation.
The local and European elections took place on Friday 23rd May, and the tune changed: "Minister for Finance Michael Noonan has said Ireland has limited room to ease Budget cuts of €2 billion to be outlined later this year." (RTÉ news)
Change of spin is not unusual for politicians. Even if a Minister is simply getting on with his or her work, the back office PR team will seek to make the best out of news items to manage expectations while maximising support for their party.
Yet, there are grounds to question the quality of reporting on the topic of taxation. Speaking at a TASC lunchtime seminar about the social market economy model, Dr Dieter Benecke noted that one of the key requirements was that journalists are well-trained in economics and can pose serious questions of policymakers. Similarly, at a recent TASC Nordic Models seminar, a number of Nordic speakers reinforced the point that a strong media is vital to the operation of their systems.
What is required includes investment by media organisations in investigative journalism, data journalism and in the tedious detail of public administration - as well as sufficient staff well-training in economics and public finances.
The problem - and the above links are only a few of many examples - is that every word the Minister utters is seized upon as a hint about the next Budget. Or the Minister's words are built up in a way that feeds expectations among voters for a tax cut or some other concession.
However, the sad reality is that the economic damage done to Ireland is far from healed. On the contrary, the tax system is hollowed out by tax breaks and social insurance is incredibly weak in European terms; personal and business debt is high and its sustainability is too often unresolved; prices - not least housing - are again moving above what's affordable; banks are still dysfunctional; public services are starved of cash and creaking at the seams; poverty and deprivation are rising; and real wages stagnate and joblessness continues to be far too high. Yes, some parts of the economy are going well - there are hundreds of thousands of people with 'good jobs' and high pay. But the vast majority, millions of people in Ireland, live a very different reality. That's the message from the European and local elections.
Economists such as the ESRI's John Fitz Gerald and UL's Stephen Kinsella concur that a €2 billion budget adjustment is likely in October (RTÉ news). There is - as the Minister most recently said - "limited room" for tax cuts.
Whose job is it to provide the public with clear data on taxation and public spending? The civil service have been providing the same kind of Exchequer Returns and Public Spending Estimates for decades. They appear to limit their public role to providing the documents and figures, requiring users (e.g. politicians and their staff, business and academic economists - and citizens) to develop the requisite knowledge and expertise to use this data. Recently, small improvements have been made through the provision of data in Finance and PER's online databases.
On the media side, most of the focus seems to be on reportage and opinion rather than analysis of either the true state of Ireland's tax system or the economic and social implications of tax cuts and the lost public service to fund those cuts. For another point of view, see TASC's Defence of Taxation.
The Secretive TTIP Agreement Threatens Democratic Regulation of European Economies
What follows is a statement which was unanimously adopted at the Congress of the Nordic Transport Workers’ Federation in Malmoe, Sweden, last week:
The EU and the USA are currently negotiating – in secrecy – a new treaty called the "Transatlantic Trade and Investment Partnership" (TTIP). It is being made out as a trade treaty, but it is much more far-reaching than a regulation of trade between the EU and the USA. While we realize that balanced and politically regulated trade is important for the development of our economies and our societies, the on-going negotiations between the EU and the USA represent challenges and threats which dramatically can change power relations in our societies in favour of multinational companies and other strong economic interests.
Since trade tariffs between the USA and the EU already are very low, these are not the main concern of the TTIP negotiations. The main focus is rather on other types of so-called "trade barriers", and it is particularly the interests of big multinational companies which form the premises of the negotiations.
Central among the so-called "trade barriers" we find national legislation and regulations which are introduced in order to protect trade union and social rights, the right to enter into and maintain national collective agreements, consumer rights, public health, food security, the environment and a number of other essential values in our societies.
A TTIP agreement can, in other words, end up as a comprehensive project of deregulation, where rights which the trade union and labour movement and other popular movements have achieved after decades of hard struggle, can be weakened or abolished through a binding agreement between the EU and the USA. For example, powerful economic interests are now putting enormous pressure on the negotiators, in order to "harmonise" standards between the USA and the EU. Knowing that the US, particularly regarding trade union and social rights, have much weaker protection than what we have achieved in our countries, there are many reasons to fear the result of such a harmonisation.
These negotiations also aim to introduce a so-called investor-state dispute settlement mechanism. This means that companies will be given the right to sue states, if they think that new laws or regulations can reduce future return on investments – including claiming compensation for possible loss of future profits. There are already many examples of states which have been sentenced to pay such compensation when they have accepted investment treaties with such clauses. In the next round, this can frighten politicians from adopting necessary laws in the future, since they can fear compensation claims from companies.
The Congress of the Nordic Transport Workers’ Federation therefore demands:
1. That the negotiations of a TTIP agreement must be fully open and transparent, so that the population both in the EU and the USA can hold their politicians accountable for the results.
2. That no investor-state dispute settlement mechanism is accepted into the agreement.
3. That a possible agreement does not contribute to weaken laws and regulations which protect the environment, public health, trade union and social rights, the right to enter into and maintain national collective agreements, food security, consumer rights – or to prevent further development of such legislation. These must be subject to democratic processes – in the EU as well as in the member states.
See also Norway's Campaign for the Welfare State.
The EU and the USA are currently negotiating – in secrecy – a new treaty called the "Transatlantic Trade and Investment Partnership" (TTIP). It is being made out as a trade treaty, but it is much more far-reaching than a regulation of trade between the EU and the USA. While we realize that balanced and politically regulated trade is important for the development of our economies and our societies, the on-going negotiations between the EU and the USA represent challenges and threats which dramatically can change power relations in our societies in favour of multinational companies and other strong economic interests.
Since trade tariffs between the USA and the EU already are very low, these are not the main concern of the TTIP negotiations. The main focus is rather on other types of so-called "trade barriers", and it is particularly the interests of big multinational companies which form the premises of the negotiations.
Central among the so-called "trade barriers" we find national legislation and regulations which are introduced in order to protect trade union and social rights, the right to enter into and maintain national collective agreements, consumer rights, public health, food security, the environment and a number of other essential values in our societies.
A TTIP agreement can, in other words, end up as a comprehensive project of deregulation, where rights which the trade union and labour movement and other popular movements have achieved after decades of hard struggle, can be weakened or abolished through a binding agreement between the EU and the USA. For example, powerful economic interests are now putting enormous pressure on the negotiators, in order to "harmonise" standards between the USA and the EU. Knowing that the US, particularly regarding trade union and social rights, have much weaker protection than what we have achieved in our countries, there are many reasons to fear the result of such a harmonisation.
These negotiations also aim to introduce a so-called investor-state dispute settlement mechanism. This means that companies will be given the right to sue states, if they think that new laws or regulations can reduce future return on investments – including claiming compensation for possible loss of future profits. There are already many examples of states which have been sentenced to pay such compensation when they have accepted investment treaties with such clauses. In the next round, this can frighten politicians from adopting necessary laws in the future, since they can fear compensation claims from companies.
The Congress of the Nordic Transport Workers’ Federation therefore demands:
1. That the negotiations of a TTIP agreement must be fully open and transparent, so that the population both in the EU and the USA can hold their politicians accountable for the results.
2. That no investor-state dispute settlement mechanism is accepted into the agreement.
3. That a possible agreement does not contribute to weaken laws and regulations which protect the environment, public health, trade union and social rights, the right to enter into and maintain national collective agreements, food security, consumer rights – or to prevent further development of such legislation. These must be subject to democratic processes – in the EU as well as in the member states.
See also Norway's Campaign for the Welfare State.
Monday, 26 May 2014
Thomas Piketty in The Financial Times and Tax Transparency
Nat O'Connor: It's an old stereotype that you can tell who are the serious left-wing economists by whether or not they read The Financial Times. The point being that only those who understand what 'the other side' is saying can hope to critique it. Well, this works both ways and it is no surprise that the FT's economics editor, Chris Giles, has been reading Thomas Piketty's Capitalism in the Twenty-First Century and has had a poke at it.
Specifically, Giles criticises the data on income and wealth inequality upon which Piketty's critique of capitalism as we know it is based.
Note: if you are not a subscriber, you need to sign up for a free FT account, which allows you to read a small number of articles per month.
Giles's critique is here (and also here) with a much longer blog version too that goes into some detail.
However, the strength of Piketty's work is precisely the level of detail that he has amassed and made publicly available online. Piketty and colleagues have built up The World Top Incomes Database from tax data from numerous countries, and they continue to refine and expand this data source - with the aim of including more countries and including new sections on wealth inequality alongside income.
Piketty himself dismissed the FT critique, in a letter published by the FT here. And other academic economists have supported him (Washington Post).
This is not to say that Piketty's data is perfect. However, as others have said, there is plenty of alternative supporting data that reinforces the central tenet that economic inequality has been rising inexorably in recent decades. What should be noted is that it took a number of serious academics - including Piketty - several years of work to collate and organise public data on taxation that arguably should have been readily available in machine-readable formats for public consultation.
In Norway, tax returns are publicly available online (in Norwegian); including the names and addresses of people alongside their income, wealth and how much tax they paid. In Sweden, there is a similar system, although you have to apply to see the data and the person concerned is notified who has sought to check their records. This openness about distribution in the economy allows policymakers in those countries to respond more quickly and accurately to ensure balanced development and shared prosperity.
Culturally, many people in Ireland may not be ready for that level of transparency and honest discussion about money. But there is an onus on Revenue and other public bodies to publish clear, accurate information about income and wealth in as much detail as possible; even if anonymised. Only this way can citizens can see who is winning and losing from the current set of laws and practices that shape our economy and tax system, and make up their own minds whether the growth in economic inequality is an acceptable price to pay to maintain our current economic model.
For the curious, Revenue do publish annual statistical reports, and the latest income distribution report gives useful data for 2010. However, both the format (PDF) and the time-gap between the latest data and now makes these reports less useful than they could be. Some of this data is discussed in more detail in TASC's recent report: A Defence of Taxation
Specifically, Giles criticises the data on income and wealth inequality upon which Piketty's critique of capitalism as we know it is based.
Note: if you are not a subscriber, you need to sign up for a free FT account, which allows you to read a small number of articles per month.
Giles's critique is here (and also here) with a much longer blog version too that goes into some detail.
However, the strength of Piketty's work is precisely the level of detail that he has amassed and made publicly available online. Piketty and colleagues have built up The World Top Incomes Database from tax data from numerous countries, and they continue to refine and expand this data source - with the aim of including more countries and including new sections on wealth inequality alongside income.
Piketty himself dismissed the FT critique, in a letter published by the FT here. And other academic economists have supported him (Washington Post).
This is not to say that Piketty's data is perfect. However, as others have said, there is plenty of alternative supporting data that reinforces the central tenet that economic inequality has been rising inexorably in recent decades. What should be noted is that it took a number of serious academics - including Piketty - several years of work to collate and organise public data on taxation that arguably should have been readily available in machine-readable formats for public consultation.
In Norway, tax returns are publicly available online (in Norwegian); including the names and addresses of people alongside their income, wealth and how much tax they paid. In Sweden, there is a similar system, although you have to apply to see the data and the person concerned is notified who has sought to check their records. This openness about distribution in the economy allows policymakers in those countries to respond more quickly and accurately to ensure balanced development and shared prosperity.
Culturally, many people in Ireland may not be ready for that level of transparency and honest discussion about money. But there is an onus on Revenue and other public bodies to publish clear, accurate information about income and wealth in as much detail as possible; even if anonymised. Only this way can citizens can see who is winning and losing from the current set of laws and practices that shape our economy and tax system, and make up their own minds whether the growth in economic inequality is an acceptable price to pay to maintain our current economic model.
For the curious, Revenue do publish annual statistical reports, and the latest income distribution report gives useful data for 2010. However, both the format (PDF) and the time-gap between the latest data and now makes these reports less useful than they could be. Some of this data is discussed in more detail in TASC's recent report: A Defence of Taxation
Thursday, 22 May 2014
Most people won't benefit from any change to the 41% higher tax rate
Talk of cuts to the 41% higher rate of income tax ignores the fact that two-thirds of people paying income tax do not pay any tax at that rate. The main beneficiaries will be those on higher incomes, whereas everyone will lose from cuts to public services.
A new report launched today by TASC provides a detailed analysis of the Irish tax system. While some higher earners will benefit from tax cuts, everyone will lose from the resulting reduction of public services like health, education and social protection. Tax cuts will also reduce funds available for public investment in the economy, which has a vital role in sustainable economic recovery.
Main findings:
A new report launched today by TASC provides a detailed analysis of the Irish tax system. While some higher earners will benefit from tax cuts, everyone will lose from the resulting reduction of public services like health, education and social protection. Tax cuts will also reduce funds available for public investment in the economy, which has a vital role in sustainable economic recovery.
Main findings:
- A single person on €40,000, despite paying some tax at the "higher rate”, actually pays less than 10% income tax. On an income of €275,000, actual income tax paid is only 30%.
- If PRSI and USC are included - for a "marginal tax rate" of 52% - in fact a single person on €40,000 only really pays 15.5% of their gross income.
- Two-thirds (65%) of people who pay income tax do not pay anything at the higher rate.
- Only five per cent of people who pay income tax actually pay the higher rate of tax on more than half of their gross income.
- Everyone is a taxpayer, and families on the lowest incomes pay more than a quarter of their income in consumption taxes like VAT and excise.
- The public cost of tax reliefs and tax breaks, which greatly benefit the highest earners, is equal to more than a quarter of all taxes raised. This is far above the European average, and the cost of tax breaks has increased despite the economic downturn.
Tuesday, 20 May 2014
Symposium at NUI Maynooth: "Can Social Investment Save Social Europe?"
On Thursday, 29th of May, a special seminar on Social Investment in Europe will be hosted by the Department of Sociology/ NIRSA, Political Economy and Work Cluster and the New Deals in the New Economy project. The seminar will run from 9.30 to 1.30 and will be followed by the launch of a new MA in Sociology (Work, Labour Markets and Employment) by Minister Joan Burton.
‘Social Investment’ focuses on investing in people’s skills and capacities and supporting them to participate fully in employment and social life (EU Commission). Does ‘social investment’ lead to a renewal or an erosion of the welfare state? Will ‘social investment’ support economic and social recovery?
The event will start at 9.30 with registration and coffee followed by the seminar at 10.00 in the Phoenix building on the North Campus in NUIM keynoted by Prof Anton Hemerijck, VU University Amsterdam and Prof Brian Nolan, UCD, and chaired by Prof. Seán Ó Riain.
Following a break for coffee there will be a roundtable discussion with: Rossella Ciccia (NUIM), Tom Healy (NERI) and Rory O’Donnell (NESC), chaired by Mary Murphy (NUIM).
See more at: http://www.nuim.ie/sociology/news/can-social-investment-save-social-europe
Please register for seminar by emailing newdeals@nuim.ie before May 26th, 2014
‘Social Investment’ focuses on investing in people’s skills and capacities and supporting them to participate fully in employment and social life (EU Commission). Does ‘social investment’ lead to a renewal or an erosion of the welfare state? Will ‘social investment’ support economic and social recovery?
The event will start at 9.30 with registration and coffee followed by the seminar at 10.00 in the Phoenix building on the North Campus in NUIM keynoted by Prof Anton Hemerijck, VU University Amsterdam and Prof Brian Nolan, UCD, and chaired by Prof. Seán Ó Riain.
Following a break for coffee there will be a roundtable discussion with: Rossella Ciccia (NUIM), Tom Healy (NERI) and Rory O’Donnell (NESC), chaired by Mary Murphy (NUIM).
See more at: http://www.nuim.ie/sociology/news/can-social-investment-save-social-europe
Please register for seminar by emailing newdeals@nuim.ie before May 26th, 2014
Thursday, 8 May 2014
Piketty and Inequality in Ireland
Cormac Staunton: Considerable attention is being given to Thomas Piketty’s influential work on economic inequality – “Capital in the 21st Century”. As Piketty’s book is discussed more and more, it is important to understand what his analysis means for Ireland, and not dismiss Ireland as a ‘special case’ to which his findings do not apply.
One of the great advantages of his work is that it is rooted in an enormous volume of data, which he has helpfully made available through the “World Top Incomes Database”. It can be accessed here.
The analysis includes data from Ireland (courtesy of Brian Nolan) which give us an insight into the changing nature of inequality over time, and can be used to compare Ireland with other countries. I've used the data to make four observations about inequality in Ireland – see below.
The IMF, the World Economic Forum, the White House and many others are paying more and more attention to the growing risks associated with economic inequality. Looking at the data for Ireland shows us that it is something policy makers in Ireland need to take seriously too.
1. Piketty’s findings about growing inequality, and its implications, are as applicable to Ireland as anywhere else.
While the levels might not be as dramatic as in other countries, we are witnessing the same phenomenon in Ireland of a steady rise in economic inequality, after a decline in the middle of the last century.
2. Inequality in Ireland grew as the country became more prosperous.
As the economy grew in Ireland from the early 1990’s, the share of all income earned by the top 1% in Ireland rose very quickly.
Over the same period, the proportion earned by 90% of the population fell.
3. The gap between the average income of the top 1% and average incomes of everyone else has also risen significantly.
The actual income (in euro terms) of the top 1% in Ireland has risen dramatically since the late 1980’s, while average earnings have risen much more slowly.
4. Despite the downturn, levels of inequality in Ireland have remained high.
The "World Top Incomes" data on Ireland only goes to 2009, and appear to show a reversing of the inequality trend after the crash. However data from the CSO Survey on Income and Living Conditions (SILC) show that 2009 was an unusual year. Since then, overall levels of inequality, as measured by the Gini coefficient, are once again on the rise. They are now back to almost the same levels as before the crisis, and are above the OECD and EU averages.
One of the great advantages of his work is that it is rooted in an enormous volume of data, which he has helpfully made available through the “World Top Incomes Database”. It can be accessed here.
The analysis includes data from Ireland (courtesy of Brian Nolan) which give us an insight into the changing nature of inequality over time, and can be used to compare Ireland with other countries. I've used the data to make four observations about inequality in Ireland – see below.
The IMF, the World Economic Forum, the White House and many others are paying more and more attention to the growing risks associated with economic inequality. Looking at the data for Ireland shows us that it is something policy makers in Ireland need to take seriously too.
1. Piketty’s findings about growing inequality, and its implications, are as applicable to Ireland as anywhere else.
While the levels might not be as dramatic as in other countries, we are witnessing the same phenomenon in Ireland of a steady rise in economic inequality, after a decline in the middle of the last century.
As the economy grew in Ireland from the early 1990’s, the share of all income earned by the top 1% in Ireland rose very quickly.
3. The gap between the average income of the top 1% and average incomes of everyone else has also risen significantly.
The actual income (in euro terms) of the top 1% in Ireland has risen dramatically since the late 1980’s, while average earnings have risen much more slowly.
4. Despite the downturn, levels of inequality in Ireland have remained high.
The "World Top Incomes" data on Ireland only goes to 2009, and appear to show a reversing of the inequality trend after the crash. However data from the CSO Survey on Income and Living Conditions (SILC) show that 2009 was an unusual year. Since then, overall levels of inequality, as measured by the Gini coefficient, are once again on the rise. They are now back to almost the same levels as before the crisis, and are above the OECD and EU averages.
Wednesday, 7 May 2014
An Equitable Solution for Water Charging (and Leaks)?
Nat O'Connor: We now have more detail about the Government's proposed model of water charging. Minister Phil Hogan called water charging "“one of the biggest decisions this government will ever make” (Journal.ie). But is it equitable?
One important issue for equity is the detail about when people must fix some of their own leaky pipes.
Water charging is a culture change and it will make more people aware of the cost of public services. But given the enormity of other Government decisions - like increasing VAT or cutting back on public services to a much greater extent - paying differently for water is not such a big deal. We already pay over €1 billion for water (through income tax, VAT, etc.) so paying via water charges is just a change in how we pay.
The deficit in the Government's finances is still enormous, around €12 billion, so if water charges weren't introduced, there would have to be other tax increases anyway. In that context, introducing water charges is a genuine example of real public service efficiency as the fact of charging people for water makes us less likely to waste it - thus saving us all public money that is currently spent on clean water that is leaking out of the system; much of it on private land. And we can only find the private leaks in the system by installing meters and introducing the reality of fix-or-pay for property owners who have not maintained their pipes. (In the long term this is probably good for these owners too, as leaking pipes are going to cause rot and rising damp, which could take tens of thousands off of the value of their property - so a nudge in the direction of repairs is no harm).
The issue of water affordability is a different question, which TASC has addressed through its equality-proofed proposals for Water Credits.
But the major cost of water charges in the early years is not going to be the charge for using water. Rather, it will be the property owners' costs to fix their pipes.
Minister Hogan's press release had this to say about the 'first leak fixed free' part of the water charging policy: "An additional €200 million over 2 years for Irish Water’s capital investment - to include a free first fix scheme, providing each household with a free fix of the first leak on a customer’s water supply pipe. Irish Water will be outlining its proposed capital programme, subject to CER approval, in the coming weeks."
The important words there are the "water supply pipe". This is, presumably, the section of pipe from the meter to the house that delivers the fresh cold water. But how far does it go before it becomes an 'internal' pipe? Will it go as far as the kitchen sink? Or to the water tank in the attic?
To achieve equity in the water charging system, we do not want public money being spent on digging up and putting back really expensive kitchen tiles, printed wallpaper or the like. Property ownership has its responsibilities as well as its rights. This will be the real equity test, as politically and economically more powerful, wealthier households may seek to access public money to fix their leaks, rather than taking personal responsibility and paying to fix their own pipes. And if interior fittings or even an expensive lawn or paving have to be replaced at public expense, you can bet that it will cost much more to fix the pipes belonging to wealthier households than those on lower incomes.
For people who are 'cash poor, asset rich' (such as pensioners on a fixed income who own their own home), there may need to be a scheme to fix the leaks and recoup the cost years later if the property is sold or from their estate upon decease. Local authorities should be well placed to deliver these repairs, but someone will need to finance it for the intervening years. However, the Local Property Tax law provides a deferred payment mechanism that could perhaps be used to carry and recoup such costs - although its punitive interest rate should be lowered.
Low income households will be in trouble if they cannot afford to fix leaks. Many people on the lowest incomes rent, rather than own property. So there will need to be measures to coerce landlords into fixing pipes, so their tenants are not faced with exorbitant water bills.
One important issue for equity is the detail about when people must fix some of their own leaky pipes.
Water charging is a culture change and it will make more people aware of the cost of public services. But given the enormity of other Government decisions - like increasing VAT or cutting back on public services to a much greater extent - paying differently for water is not such a big deal. We already pay over €1 billion for water (through income tax, VAT, etc.) so paying via water charges is just a change in how we pay.
The deficit in the Government's finances is still enormous, around €12 billion, so if water charges weren't introduced, there would have to be other tax increases anyway. In that context, introducing water charges is a genuine example of real public service efficiency as the fact of charging people for water makes us less likely to waste it - thus saving us all public money that is currently spent on clean water that is leaking out of the system; much of it on private land. And we can only find the private leaks in the system by installing meters and introducing the reality of fix-or-pay for property owners who have not maintained their pipes. (In the long term this is probably good for these owners too, as leaking pipes are going to cause rot and rising damp, which could take tens of thousands off of the value of their property - so a nudge in the direction of repairs is no harm).
The issue of water affordability is a different question, which TASC has addressed through its equality-proofed proposals for Water Credits.
But the major cost of water charges in the early years is not going to be the charge for using water. Rather, it will be the property owners' costs to fix their pipes.
Minister Hogan's press release had this to say about the 'first leak fixed free' part of the water charging policy: "An additional €200 million over 2 years for Irish Water’s capital investment - to include a free first fix scheme, providing each household with a free fix of the first leak on a customer’s water supply pipe. Irish Water will be outlining its proposed capital programme, subject to CER approval, in the coming weeks."
The important words there are the "water supply pipe". This is, presumably, the section of pipe from the meter to the house that delivers the fresh cold water. But how far does it go before it becomes an 'internal' pipe? Will it go as far as the kitchen sink? Or to the water tank in the attic?
To achieve equity in the water charging system, we do not want public money being spent on digging up and putting back really expensive kitchen tiles, printed wallpaper or the like. Property ownership has its responsibilities as well as its rights. This will be the real equity test, as politically and economically more powerful, wealthier households may seek to access public money to fix their leaks, rather than taking personal responsibility and paying to fix their own pipes. And if interior fittings or even an expensive lawn or paving have to be replaced at public expense, you can bet that it will cost much more to fix the pipes belonging to wealthier households than those on lower incomes.
For people who are 'cash poor, asset rich' (such as pensioners on a fixed income who own their own home), there may need to be a scheme to fix the leaks and recoup the cost years later if the property is sold or from their estate upon decease. Local authorities should be well placed to deliver these repairs, but someone will need to finance it for the intervening years. However, the Local Property Tax law provides a deferred payment mechanism that could perhaps be used to carry and recoup such costs - although its punitive interest rate should be lowered.
Low income households will be in trouble if they cannot afford to fix leaks. Many people on the lowest incomes rent, rather than own property. So there will need to be measures to coerce landlords into fixing pipes, so their tenants are not faced with exorbitant water bills.
Friday, 2 May 2014
Enough Said about the Wealthy in Ireland?
Nat O'Connor: A quote from The Irish Times (2 May 2014): "RTÉ's managing director of news and current affairs Kevin Bakhurst said one of the ways broadcast news was under pressure was through increased and costly legal challenges and threats. He said RTÉ was facing legal actions from “some well-known political figures”. While some actions were fair, others were “spurious, expensive and are a public game of who-blinks-first, with a major price tag attached on our side – and where we are dealing with public money.” He added there were “a small number of extremely wealthy and extremely litigious individuals who seek to use the courts to shut down any public debate or discussion of their affairs – which in most cases would be perfectly legitimate areas of exploration or discussion. I think probably enough said on that one.”
Given the rise of inequality in Ireland, it should be of major public concern when a senior manager in the national broadcaster talks about “a small number of extremely wealthy and extremely litigious individuals who seek to use the courts to shut down any public debate or discussion of their affairs – which in most cases would be perfectly legitimate areas of exploration or discussion.”
The "extremely wealthy" are obviously a small minority, and we don't have accurate data on their incomes and wealth, other than 'Rich Lists' or Top 100 lists published by newspapers or magazines. And it would be a mistake to simply assume everyone in the top 100 is included in Mr Bakhurst's statement.
But we do know about the rise in incomes of the top 0.5 per cent of tax units (individuals or households). Using the World Top Incomes Database, which is based on tax data, we know that the top 1 in 200 taxpayers in Ireland have incomes that average €500,000 - five times more than their average income of €100,000 (in today's money) in 1977.
We also know that this represents a greater share of all income, at 7.5 per cent, doubled from around 3.7 per cent in 1977.
Who are the one in 200 on this income level? Revenue figures for the number of income tax payers in 2011 shows over two million cases (2,0,88,443). One in 200 represents around 10,000 income tax payers (individuals or couples making a joint declaration). Actually many of them may not have incomes of €500,000 because people on even larger incomes will skew the data, but that is still a lot of households with incomes of several hundred thousand.
In more detail, Revenue reports 9,830 cases of income tax payers declaring more than €275,000. Between them they declared a total collective income of €5.1 billion, giving an average income of €522,062. Of course, hidden in the data a couple might make separate tax declarations of €250,000 each, yet not appear in this top income group.
As an aside, for anyone who is still worried about Ireland's legendary 52% marginal tax rate. These high income tax payers paid an average of 30.1% effective tax. (That's 0.1% above the new legal minimum of 30% for high earners. Someone's tax accountant/lawyer slipped up there).
But Mr Bakhurst is hardly talking about one in every 200 taxpayers. So the "extremely wealthy" presumably have much higher incomes. Unfortunately, we don't know anything as much about wealth - which allows people to pay capital gains tax rather than income tax, or to hold their personal wealth at arms length in companies and trust funds.
Given the rise of inequality in Ireland, it should be of major public concern when a senior manager in the national broadcaster talks about “a small number of extremely wealthy and extremely litigious individuals who seek to use the courts to shut down any public debate or discussion of their affairs – which in most cases would be perfectly legitimate areas of exploration or discussion.”
The "extremely wealthy" are obviously a small minority, and we don't have accurate data on their incomes and wealth, other than 'Rich Lists' or Top 100 lists published by newspapers or magazines. And it would be a mistake to simply assume everyone in the top 100 is included in Mr Bakhurst's statement.
But we do know about the rise in incomes of the top 0.5 per cent of tax units (individuals or households). Using the World Top Incomes Database, which is based on tax data, we know that the top 1 in 200 taxpayers in Ireland have incomes that average €500,000 - five times more than their average income of €100,000 (in today's money) in 1977.
We also know that this represents a greater share of all income, at 7.5 per cent, doubled from around 3.7 per cent in 1977.
Who are the one in 200 on this income level? Revenue figures for the number of income tax payers in 2011 shows over two million cases (2,0,88,443). One in 200 represents around 10,000 income tax payers (individuals or couples making a joint declaration). Actually many of them may not have incomes of €500,000 because people on even larger incomes will skew the data, but that is still a lot of households with incomes of several hundred thousand.
In more detail, Revenue reports 9,830 cases of income tax payers declaring more than €275,000. Between them they declared a total collective income of €5.1 billion, giving an average income of €522,062. Of course, hidden in the data a couple might make separate tax declarations of €250,000 each, yet not appear in this top income group.
As an aside, for anyone who is still worried about Ireland's legendary 52% marginal tax rate. These high income tax payers paid an average of 30.1% effective tax. (That's 0.1% above the new legal minimum of 30% for high earners. Someone's tax accountant/lawyer slipped up there).
But Mr Bakhurst is hardly talking about one in every 200 taxpayers. So the "extremely wealthy" presumably have much higher incomes. Unfortunately, we don't know anything as much about wealth - which allows people to pay capital gains tax rather than income tax, or to hold their personal wealth at arms length in companies and trust funds.
And of course, many extremely wealthy Irish people do not pay income tax in Ireland. So they are not even contributing to the public funds that have to pay the legal expenses of the national broadcaster when it is hauled into court by them for daring to encourage legitimate public debate or discussion of their incredible privileges.
Thursday, 1 May 2014
Tackling Health Inequalities (IMO)
Nat O'Connor: I had the opportunity to address the IMO's annual general meeting on Friday 24th April, at a scientific session entitled "Balancing a Strong Economy and an Equitable Society" (click here for my paper and presentation).
The IMO themselves have published a position paper on health inequalities, and as part of the AGM they launched a new paper on Balancing a Strong Economy and an Equitable Society, which is not yet on their website.
Tom Healy (NERI) also gave a paper in this session, on economic growth for a better, fairer society.
The key message is that distribution of income in the economy is deeply linked with health outcomes, and only by addressing inequalities in the economy (through wages, taxes, welfare, services, etc.) can we hope to make the necessary improvements in public health, especially among people who gain least from the current system.
The IMO themselves have published a position paper on health inequalities, and as part of the AGM they launched a new paper on Balancing a Strong Economy and an Equitable Society, which is not yet on their website.
Tom Healy (NERI) also gave a paper in this session, on economic growth for a better, fairer society.
The key message is that distribution of income in the economy is deeply linked with health outcomes, and only by addressing inequalities in the economy (through wages, taxes, welfare, services, etc.) can we hope to make the necessary improvements in public health, especially among people who gain least from the current system.
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