The Pension Levy is Unfair

Writing in the Irish Economy blog Karl Whelan has a quibble about the argument that developed between Fintan O’Toole and Martin Cullen while discussing the pension levy on Questions and Answers last Monday evening. Specifically, O’Toole reprised his point which he made in the Irish Times that the government was not aware of exactly how much the pension levy would provide in savings because there seemed to be a misunderstanding about whether the levy was on gross rather than net income. The misunderstanding is important as it seemed that the calculation of 1.4 billion in savings was based on the assumption, stated by the Taoiseach in the Dail that the levy was based on gross income. The quibble is that whichever way the levy is applied, whether to gross or net income, the result is the same, according to Whelan.

Or as he puts it:

“The logic of proportional taxation means there is no difference between applying the levy to the whole salary and then applying income tax to the remainder of income or applying income tax to the whole salary and then applying the pension levy to the remainder of the income.”

Leaving aside the comment that it remains the case that contrary to the government’s assertion the pension levy will only net the government 900 million euro rather than 1.4 billion there is one matter that is not being addressed in the discussion. The pension levy is patently unfair.

This seems to be a concept that is increasingly difficult for commentators to grasp as they continue to chide ordinary workers for their apparent inability to accept the tough medicine they are prescribing. Considering the staggering and ever growing gap between dwindling revenue returns and a growing deficit it is not beyond the understanding of almost everyone in the country that government finances will have to be restructured. What is not understood by government, but is by the 120,000 people who marched on the streets of Dublin last Saturday, is that this restructuring should be done in an equitable way. So far the government has used the language of equality extensively while talking about the imposition of inequitable levies and cuts in public sector pay.

In its statement on Saturday in response to the march it said:

The income to be generated by the levy will reduce the cost of the public payroll and it will do so in a way which is progressive, with higher contributions being paid by those at higher levels of income.

The first part of above statement is correct. The levy will reduce the cost of the public payroll, although not as significantly as it claims – in addition there is no acknowledgement of the fact that taking money out of the economy through such a cut will have a deflationary effect on the economy (this at least is mentioned by economist who then go on to argue that the benefits of sending the ‘markets’ a signal that the government is serious about restructuring its finances far out weights the potential deflationary effect. This is stated at a time when ‘markets’ are risk averse and crumbling. Perhaps rather than market they think that it is the IMF who need to be sent a signal).

The second part, however, is a lie.

At the end of his post Karl Whelan states: “So score this one, on points, for Finto. But the issue is not whether the levy has been applied to net or gross income.”

Well, actually, it is. Because when we look at how the levy has been applied we can see how false the second part of the government’s statement is. In a commentary paper published on the TASC website, Gerard Hughes and Jim Stewart of the Pension Policy Research Group, in Trinity College, Dublin examine what effect the decision to impose the levy has on different salary incomes.

Their study “shows that the effect of the tax relief is to reduce the amount that has to be paid from 6.4% to 4.8% at €35,000, from 8.8% to 5% at €100,000 and from 9.6% to 5.4% at €300,000″. The result is a situation where those below €35,000 will pay more as a percentage of their gross income than higher paid workers earning between €35,000 and €75,000. This is because at €36,000 the marginal tax rate increases from 20% to 41%.

Here’s the important bit.

“We estimate from a Department of Finance classification of 300,000 public service workers by income range that many of the 92,000 lower paid workers (31% of the total) in receipt of incomes of up to €35,000 will make a higher net payment than 177,000 workers (59% of the total) whose incomes fall in the range €35,000 to €75,000. For the remaining 31,000 highest paid workers (10% of the total) with incomes in the range €75,000 to €300,000 the net levy as a percentage of income will be only a little more than for someone with an income of €35,000.”

But the chart they provide also illustrates the glaring discrepancy.

The bill, excitingly titled Financial Emergency Measures in the Public Interest Bill, which is due to be passed in the Dail tonight also reveals other inequalities.

As Hughes and Stewart say:

Apart from confirming the level of the levy the Bill also clarifies who is subject to the levy by specifically excluding 20 different bodies such as the Dublin Airport Authority.

The news yesterday told us that Chairman of DAA, Gary McGann, a former non-executive director of Anglo Irish Bank (resigning on the eve of nationalization) has now also resigned from that body, no doubt because he was in charge of the audit committee while the bank was swapping tarted up customer deposits with IL&P. So, by excluding certain bodies from the levy the government is protecting those who are paid by pubic money from the need to ‘share the pain’.

Hughes and Stewart have another point which is worth highlighting with regard to public sector pay, a subtlety that is often lost in the simplistic arguments conducted through the media. Some public sector workers are very well paid.

The focus of much media comment and motivation for the levy has been on the disparity in pay (including pensions) between public and private sector workers. Trade unions and others, who reject this view, point out the many low paid workers in the public sector. However it must be recognised that certain key workers in the public sector, such as hospital consultants, and others, are paid substantially more than similar employment in other countries such as France and Germany. The levy does not address this issue.

(Incidentally, Gerard Hughes makes an additional point on the progressive economy@tasc blog about how the difference between the quality of the public sector pensions and private sector pensions – the main reason given for why the pension levy is justifiable – was already taken account of by the government when it followed the recommendations of a Life Strategies audit as part of the benchmarking process in 2007.)

In a post from 2007 on his Notes on the Front blog, Michael Taft points out that ‘the economic 5% elite who own 40% of all the wealth (or the 1:34 club – the top 1% who own over a third of all financial wealth).’

While the data Michael refers to is old the point is still very relevant:

In 2003 there were 8,161 people earning this amount and more. Excluding the cases where no economic sector, was identified nearly a third of the top earners work in the broad medical area. This includes not only practicing doctors in highly-skilled disciplines, but also chemists, dentists and private hospital directors and managers.

And more interestingly, most of their earnings come, generally speaking, from the public purse:

Medical: GPs and consultant doctors benefit to a significant extent from public subsidy in the form of medical cards, VHI tax relief and use-of-public-resource subsidies, while chemists also benefit directly from GMS prescriptions and, indirectly, through tax subsidies for prescription medicine. Private hospital directors are certainly public-money reliant. It is arguable that very few in this category earn their income wholly in the ‘private’ sector.

Economist Philip Lane has argued that for Ireland’s finances to get back on track all workers, whether in currently profitable sectors or in those suffering adversely from the recession should take a pay cut – I imagine that this argument is based on that of equity. He continues to mention that this should be done in tandem with a change in the way tax breaks are provided.

Yesterday, according to the Irish Times:

MINISTER FOR Health Mary Harney has given approval for the payment of significantly higher salaries for hospital consultants under the terms of a revised contract.

The Minister sanctioned the new payments, which will see consultants receive salaries of up to €240,000 per year in some cases, at the end of last week on foot of a verification process carried out by the Health Service Executive (HSE). The new increased salaries will be backdated to the beginning of January.

……

A spokesman for the Minister said that the cost of the new contract would be €140 million this year in gross terms but that in net terms after income tax, health levies and the new pension levy was taken into account the bill would be €72 million.

So far, there has been no outcry about this from IBEC, or from certain well-respected economists.

Because it is impossible to square this with a call for ESB workers to accept a wage cut and the fact that government has just allowed landlords to continue to enjoy tax breaks that amount to 1.4 billion in lost revenue. Unless that is, there is a class issue at work which has nothing to do with labour costs and has everything to do with using the financial crisis to consolidate power among the elite.

Defending this decision on tax relief for landlords on Questions and Answers Martin Cullen stated this was necessary because otherwise ‘capital would flee the country’.

Which is like saying, we cannot tax the wealthy because they will not let us.

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Donagh

Donagh is the editor of Irish Left Review. Contact Donagh through email: dublinopinionAtgmail.com

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