Last night on Prime Time Brendan Burgess, from Ask About Money, stated that high-income earners in Ireland pay more tax than high earners in other countries.
‘We have a very low direct tax economy in this country for the lower and the middle paid and very high taxes for the upper paid. And that’s something people don’t appreciate. And they need to appreciate that.’
Let’s do some appreciation. Are we a ‘very low’ direct tax economy? Direct, or personal, taxes include income taxes, social insurance (PRSI) and other taxes on income such as Ireland’s Universal Social Charge or Germany’s surtax.
We are low-tax, well below a lot of other countries. But we are not that far behind the EU-15 weighted average, not that far behind ‘high-tax’ Sweden and ahead of another ‘high-tax’ economy, France. So I don’t know that I would call it ‘very low’ but we certainly should be doing better.
But what about that ‘very high taxes for the upper paid’? We don’t have ‘effective’ tax rates for different income groups to compare (that is, the tax rate when all reliefs and deductions are taken into account). We only have ‘headline’ tax rates – which only include basic reliefs like personal tax credits. But the following headline tax rates come from the OECD Benefit and Wages database. The highest level of income for Ireland in the database is €119,000 (a couple, both working) so I’ll use that to compare with the same level of income in other countries.
Headline tax rates on Irish high-earners are well below most other countries. If they were living in Germany they’d be paying €11,000 more in income taxes and social insurance.
There is caveat in this. In Ireland, taxpayers get relief on pension contributions, mortgage interest, health insurance and a rake of business investments. Do taxpayers have access to the same level of reliefs and allowances? More? Less? We don’t have easily accessible comparable data. (Also, the tax rate for Italy in the above chart is for €107,000 – the highest level of income in the OECD database).
However, when looking at headline rate, Irish high-earners are not over-taxed in comparative terms.
And there are some further explanations needed (the type of explanations that rarely get a hearing on current affairs programmes). Take the example of Sweden. The chart above shows Swedish headline rates lower than Ireland. In the first total direct taxation chart, Sweden is only slightly above Ireland. Some might find this surprising since we all think of Sweden as high-taxed.
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The new Global Competitiveness Report is out. This is produced by the World Economic Forum (the crowd that occupies Davos once a year). It purports to rank countries by their business competitiveness. Ireland was ranked 25 in 2014. Last year we were ranked 28. Our competitiveness has improved. Yawn.
The rankings are based on a number of indicators – infrastructure, taxation, business efficiency, labour market, ease of doing business, etc. The rankings are compiled based upon a survey of 13,000 ‘business leaders’ throughout the world. So it is subjective – opinions formed by the executives of multi-nationals and large companies. You can only imagine what they might think. They’d probably give gold stars to countries that have hardly any tax, any wage, and require workers to bow every time the owner’s son drives by.
But actually, no. These captains of industry and finance actually like (or don’t dislike) high-tax, high-spend, high-regulated economies – everything that we have been told is bad for our economic health. Here’s how our peer group – small open economies in the EU-15 – rank in competitiveness.
All the other small open economies are ranked higher than Ireland. Two of the countries are ranked in the top 10 in the world – Finland and Sweden. Let’s go through some of the economic sins as written down in the orthodox bible and see how the different countries fare (taxation data is taken from Eurostat’s Taxation Trends).
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The Sunday Business Post ran four stories last weekend- including a front-page banner headline – attacking not only public sector workers’ living standards, but workers in public enterprise as well.
Semi-States Enjoy Pay Increases During the Recession
Sitting Pretty in the Semi-States
Public Sector: the Insider Story
The Special Protections of the Semi-States
The Sunday Business Post is determined to outdo the Sunday Independent in public sector worker bashing.
And the most interesting thing about these articles is that they are based on a survey and a reading of wage numbers that are not only completely wrong – but make the most basic statistical mistakes. This is poor analysis, masquerading as informed commentary. Let’s look at some of the claims and see where they went off the rails (unfortunately the SBP is behind a paywall).
The SBP Survey on Public Enterprise Wages
The SBP did a survey. It purported to show the average wage in a number of public enterprises for 2009 and 2013. From this they deduced whether the average wage rose or fell. Here’s what their survey found.
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Question: why has employment growth collapsed in the first half of the year after recent claims by the Government that 60,000 jobs per year were being created?
The answer lies in statistical misunderstanding, Government spin and the failure of many commentators to read the numbers correctly. For the fact is that the 60,000 job-creation number was never real and the recovery in the labour market is sluggish at best. This post may get a bit involved but stay with me – for this is as much a story about how the recovery is being contrived as it is about bald numbers.
Last year, employment growth suddenly took off. In 2012 employment actually fell by 11,000 – and this was after a loss of nearly 300,000 since the start of the crisis. However, in 2013 everything changed. Employment grew on a full-year basis by 43,000 (this is consistent with claims by the Government who were using quarter-to-quarter figures).
This was quite a turnaround. The Government claimed their policies were working. For many commentators this was proof that recovery had returned. But there were a couple of problems.
- First, this employment growth took place while the economy remained in a domestic demand recession. Given that employment is sensitive to domestic demand, this didn’t make sense.
- Second, the usual pattern of an economy coming out of a recession is that employment growth lags. This is because if there increases in business output, the first beneficiaries are those already in employment; they get an increase in hours which had previously been cut.
- Third, the actual job numbers were throwing up some strange happenings. Self-employment (own-account workers) grew by over 10 percent and made up over half of the total employment growth. At one stage, self-employment was growing by nearly four times the rate of growth during the boom. This didn’t make sense – not with domestic demand stagnation. Agriculture employment showed a similar pattern.
These concerns were dismissed. Government policies were working and critics were just nit-picking. However, the CSO published warnings throughout all last year – warning people against interpreting growth trends. Why? Because they were re-aligning their sample base with the recent Census (don’t forget, the Quarterly National Household Survey is not a comprehensive head-count, just a sample; like a poll). This happens after every Census.
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If you’re into perverse economics, then you’re going to love the debate in the run-up to the budget. Already we have Minister Simon Harris calling for income tax cuts (didn’t the Taoiseach tell Ministers last year to shut-up during pre-budget discussions?). Of course, there is almost no discussion regarding affordable childcare, reducing education costs or introducing universal pre-primary education, providing affordable pay-related pensions to all workers, reducing health costs, reversing the high levels of deprivation and poverty, etc. Almost no discussion at all about how we can improve our living standards.
But of real interest to fans of the perverse is that while Ministers and interest groups line up to demand tax cuts, the Government will be introducing an extremely regressive ‘tax’ on almost all households – and there is no discussion about how this can be avoided. I am referring to the water charge.
While there has been considerable discussion about the costs to the average household (measuring showers, baths, brushing teeth), there has been little reference to the distributional impact of the charges; that is, the impact on different income groups. Let’s see if we can start to fill this gap.
Of course, we don’t have a history of water charges to measure so let’s look at waste collection charges. User charges, like sales taxes (VAT, excise) are generally regressive – they impact more on low/average groups. This is in the nature of the tax as lower income groups consume, whether goods or water or waste, more of their income than high income groups. The CSO Household Budget Survey provides information on waste collection charges from 2009/10.
There are two things worth noting about the above chart.
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IBEC’s pre-budget submission is a tour de force. In the name of ending austerity it calls for . . . more austerity; namely, reducing public expenditure in real terms. This is done to pay for tax cuts that will primarily benefit higher income groups. And in calling for real cuts in investment it then proposes to use fiscally inefficient public-private-partnerships which will drive up the cost of investment in order to create new channels of profits. And in all this it manages to avoid the elephant in the room – the long-term chronic under-investment of Irish business in the economy.
Irish business has gotten all the breaks. Historically, it has been the beneficiary of ultra-low corporate tax rates and social insurance while paying below-average employee compensation (compared to most other EU-15 countries). And, yet, it is a chronic under-investor. The following data is taken from the EU Ameco database.
In 2012, Irish corporate investment is at the bottom of the table. Even when adjusted for multi-national accounting practices (which is what the Irish Fiscal Advisory Council’s hybrid-GDP effectively does), we come in marginally ahead of battered Greece. Our corporate sector invests 38 percent less than the EU-28 average – or nearly €6 billion less. It invests less than half the level that pertains in other small open economics (SOE) – or nearly €9 billion less. This is pretty bleak.
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Stag-covery (n): a situation where statistical recovery occurs within a persistent economic stagnation
The CSO’s new release shows a statistical recovery and a stagnant economy – a state of affairs that can be described as stag-covery.
The headline rates show a GDP quarterly increase of 2.7 percent. This might seem solid enough but all this is driven by net exports. The domestic economy remains mired in stagnation.
The worst of the economic crash ended in 2010. Since then it’s just a matter of bouncing along the bottom. In 2013 consumer spending fell, spending on public services bumped up marginally while investment fell marginally. We can debate the swings and roundabouts (impact of the pharma cliff, aircraft leasing, etc.). But the narrative remains the same – the ship sunk to the bottom and is struggling to get back to the surface.
The first quarter of 2014 didn’t get off to a hectic start. On a quarterly basis:
- Consumer spending fell, though this shouldn’t be too surprising given that it was coming off a quarter that contained Christmas spending.
- Spending on public service resumed its long-term fall – by over 2 percent.
- Investment fell by a substantial 8 percent.
It is this inability of the latter to generate any momentum upwards that is particularly worrying.
This represents is a potential problem for the Government. In the last quarter investment fell by 8 percent. Yet the Government has pencilled in investment growth of over 15 percent this year. Of course, the game isn’t even half over but this is an especially poor start.
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Irish living standards are now closer to the bottom of the EU-15 countries than to the top; they are closer to Greece than to Germany or Belgium or the UK or most other EU-15 countries.
Eurostat has just released its annual estimates of household living standards. To measure this they use Actual Individual Consumption (AIC). According to Eurostat:
‘In national accounts, Household Final Consumption Expenditure (HFCE) denotes expenditure on goods and services that are purchased and paid for by households. Actual Individual Consumption (AIC), on the other hand, consists of goods and services actually consumed by individuals, irrespective of whether these goods and services are purchased and paid for by households, by government, or by non-profit organisations. In international volume comparisons, AIC is often seen as the preferable measure, since it is not influenced by the fact that the organisation of certain important services consumed by households, like health and education services differs a lot across countries.
For example, if dental services are paid for by the government in one country, and by households in another, an international comparison based on HFCE would not compare like with like, whereas one based on AIC would. . . Actual Individual Consumption per capita is an alternative indicator better adapted to describe the material welfare of households.’
In short, AIC captures goods and services bought by households and by Governments on behalf of households.
The following table shows the relationship of European countries’ living standards to the EU-15 average, with the EU-15 equalling 100.
Ireland is approximately 11 percent below the average EU-15 living standards. We rank 12th in the league table. What’s noteworthy is that we are closer to Greece than to most other countries. We are 14 indice points above Greece but 15 points below the UK. There are eight other countries above the UK.
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Previously, I discussed the assertions that rising housing costs were caused by over-paid construction workers. It wasn’t true but that never stops some commentators from trying to find blame – and finding it in workers’ pay packets. It’s been going on since the start of the crisis. And it still goes on.
The Irish Times reported that consumer prices in Ireland are still much higher than in most other EU countries:
‘Even after six years of austerity, consumer prices in Ireland are on average 18 per cent higher than the European Union norm, prompting renewed concern about the country’s competitiveness.’
Why should this still be the case? Costs associated with being an island on the periphery (transport and import costs?). Oligopolistic price-setting in key sectors? Alan McQuaid, economist with Merrion Stockbrokers, believes he has part of the answer:
‘The other key issue which these figures highlight is the underlying cost for retailers – eg rents, insurance and wage costs – are higher than elsewhere. You cannot look to have one of the highest minimum wages in Europe, and then not be surprised that prices are more expensive than the rest of the bloc.’
Oh, my, it comes back to those darned over-paid workers, this time in the in the retail sector where workers are undermining our competitiveness by getting an average weekly income of €512 a week (and this includes management salaries; weekly income for shop floor workers are bound to be much lower).
Let’s look at this claim about high wages in the retail sector and see how we compare with other countries, using the National Accounts here and here. We will use the Wholesale / Retail sector (there is little data at the retail sector only) but this sector as a whole would impact on costs for consumers. First up, employee compensation.
Ireland is below the mean average of other EU-15 countries (no data for Sweden) and well-below most other countries. We’re only higher than other peripheral countries and low-paid UK. This shouldn’t be surprising. Unite the Union examined employee compensation using the Eurostat Labour Cost Survey and found pretty much the same picture.
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The affluent are blessed in their champions. They have a myriad of commentators fighting their corner. In the Sunday Independent Colm McCarthy, discussing the benefits or otherwise of a third tax rate on high incomes, stated:
‘In order to raise meaningful amounts, it (the threshold to enter the third rate of tax) cannot be pitched at a level much higher than the €100,000 indicated, but that pulls into the high-tax bracket many people who do not consider themselves exceptionally well-off.’
€100,000 not exceptionally well-off? Ok, maybe, but they certainly are ‘well-off’; very well-off. In fact, they are in the top 3 percent of income earners in the state. If these high-earners don’t consider themselves exceptionally well-off, what would they think if they were part of the 50 percent of income taxpayers who earn below €29,000 a year? Or the 25 percent of the population who live in official deprivation.
These kinds of comments are part of the don’t-tax-high-earners-too-much-because-then-they-will-leave-in-a-tax-huff argument. Thomas Molly, writing in the same newspaper, puts it this way when discussing the wealth tax:
‘Any other sort of wealth tax is likely to bring in very little money as the cash moves overseas at warp speed but is guaranteed to scare away many of the people who create wealth and jobs in our society.’
Ah, tax flight – the phenomenon whereby high taxation causes people to leave the jurisdiction. How valid is this? Not very. The US is a good place to study. Individual states can set their own income and wealth taxes in addition to Federal taxes. And moving from one state to the next is not nearly as challenging as moving from one EU country to the next. So what happens when states like Maryland or New Jersey or Oregon raised taxes on the highest income groups? This study – ‘Tax Flight is a Myth’– found:
‘Attacks on sorely-needed increases in state tax revenues often include the unproven claim that tax hikes will drive large numbers of households — particularly the most affluent — to other states. The same claim also is used to justify new tax cuts. Compelling evidence shows that this claim is false. The effects of tax increases on migration are, at most, small — so small that states that raise income taxes on the most affluent households can be assured of a substantial net gain in revenue.’
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What are we to make of the two headlines this morning? First, from the Irish Times:
‘Work pays better than welfare for most unemployed, ESRI finds’
And then there’s this from the Irish Independent:
‘Why families are better off staying on social welfare’
Both stories refer to a study that will be launched today by ESRI researchers, using the institute’s Switch tax-benefit model that allows a detailed examination of households’ financial situation both in work and out of work. I will be going into more detail once this report is published but in this post I want to address a broader narrative: namely, to ‘make work pay’ requires more social protection spending and more public intervention into key markets.
The Irish Times reports two findings:
- Nearly six out of seven people would be financially better off in work than on welfare (or nearly 85 percent)
- Among those people in employment or unemployed facing a situation where work pays less than welfare, more than 70 per cent chose work rather than welfare. So much for ‘life-style’ choices.
The Irish Times report goes on to state that:
‘The finding appears to debunk the myth that Ireland’s relatively generous social welfare system gives no incentive for people to work.’
Of course, we don’t have a relatively generous social welfare system but that’s another story.
The Irish Independent, however, focuses on the small numbers who would be better off on social protection. They report that 45,000 workers would not receive any benefit from taking up work, of which 22,000 would actually lose money. However, even the Indo report admits that most people still take up work, regardless of the financial impact.
So to the degree that people are not better off taking up work, what is the reason?
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Do we spend too much on healthcare? The EU Commission seems to think so. In their country-specific recommendations for Ireland they state:
‘Even though Ireland has a relatively young population, public healthcare expenditure was among the highest in the EU in 2012 at 8.7% of GNI, significantly above the EU average of 7.3%.’
The implication is that our spending on healthcare is 16 percent above EU average levels. What more justification does the Government need to continue cutting our health services than to get a recommendation from the EU?
There’s only one problem. The EU Commission numbers are wholly unreliable and not a proper representation of health spending in the EU.
Before getting into the EU numbers, let’s see if we can discover just how much Ireland and other EU countries spend on health care by referring to the OECD’s Health at a Glance.
There are two measurements that can be used; first, health spending as a proportion of economic output. The latest year they have data for is 2011. To compensate for the fact that GDP is not a good measure for Ireland, I have used the Irish Fiscal Advisory Council’s hybrid GDP which measures fiscal capacity. This hybrid measurement stands between GDP and GNP.
Ireland is just below the average expenditure of other Advanced European Economies (i.e. EU-15) – but there is a major caveat which I will refer to below. It should be noted that if we used a straight health spending as a percentage of GDP, Irish spending would be 8.9 percent of GDP. Of course, benchmarking any expenditure against GDP has its problems, especially when a Government has been pursuing austerity policies that actively reduce the GDP.
For an alternative view, we can turn to the OECD’s measurement of healthcare expenditure per capita, using purchasing power parities to account for differences in currency and living standards.
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Basic Income is being discussed more and more. It will be discussed at this weekend’s Basic Income Ireland seminar. Basic Income is a weekly payment from the state to every resident without any means test or work requirement – a payment sufficient to afford a decent living standard. It would work like this: I receive a weekly payment from the state of approximately €200 per week (if that’s considered to afford me a decent living standard) whether I work or not. Any income I earn above that is taxed. If I choose not to work I still receive the €200 weekly payment. In essence, BI breaks the link between work and income.
There have been considerable criticisms.
First, it has been dismissed on grounds of cost. It certainly would be expensive, requiring very high tax rates on income from work. Tax rates of 40 to 50 percent on all income have been proposed to pay for the programme. And given the need to fund public services, additional social protection payments and investment it is hard to see how this could be introduced in the short-term.
Second is the impact on the labour market and work behaviour. In short, if you give everyone an adequate income would they choose not to work? This could create labour shortages in key sectors which would hamper growth and undermine the ability to fund BI.
Third is the inflationary impact. Boosting incomes could put pressure on prices and drive up imports which in turn would require increasing the BI as it struggled to maintain value. This could result in an inflationary spiral (of course, we could do with a little spiral to get us out of this deflation).
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Remember back to the renegotiation of the debt repayments on the Anglo-Irish promissory note last year? Amidst the sound of champagne corks popping we were told we would get a budgetary dividend of approximately €1 billion. Overnight, our deficit was projected to fall from an estimated 3 percent in 2015 to 2.2 percent. Less tax increases, less spending cuts. Of course, we had to be quiet about all this – for fear of frightening the monetary-financing horses over at the ECB. But what it meant was less fiscal pain.
So what happened to the dividend? In short, it’s disappeared. Under the latest Government projections, the deficit has quietly but firmly gone back up again.
After the deal, the deficit in 2015 was projected to fall to €3,955 million (prior to the deal it was projected to be €5,325). However, in the Government’s latest Stability Programme Update, the deficit has increased – back up to €5,235. In percentage terms, the projected deficit yo-yoed – falling from to 2.9 percent of GDP to 2.2 percent after the deal, only to bounce back up to 2.9 percent.
So, instead of facing into a budget that needs to find €2 billion in fiscal adjustments, we should have only needed an €800 million adjustment. And when you factor in the ESRI’s claim that, apart from water charges revenue, we wouldn’t need any more fiscal adjustments, then we should be facing into a budget where the Government could run expansionary policies (increase spending, cut taxes) and still meet the EU budgetary targets.
So what went wrong?
Three things happened.
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