The Government’s paper on Ireland’s effective corporate tax rate confirms what the dogs in the street have known for a long-time: Ireland has a low,extremely low, corporate tax rate.
There is that vexed question of what corporate income counts for the purposes of determining the actual rate of tax companies pay here. Professor Jim Stewart produced data which showed that the effective tax rate of US multinationals operating here was 2.2 percent in 2011. This was disputed because Stewart – using the US’s Bureau of Economic Analysis – included the $140 billion that US multinationals move through Ireland on their way to other places, including tax havens. Some claim you can’t count this because it is not taxable in Ireland.
But, of course, that is the point. The issue is not the Irish corporate tax rate per se but the role that Ireland plays in the global tax avoidance chain – the ability of multinationals to use Ireland to avoid paying taxes that would be due elsewhere. That is the character of a ‘tax-haven conduit’.
In this respect, it is worth remembering:
‘Tax havens attract foreign investment not only because income earned locally is taxed at favorable rates, but also because tax haven activities facilitate the avoidance of taxes that might otherwise have to be paid to other countries.’
The Irish corporate tax rate is the sign on the door. It’s an inviting sign – a low-tax rate of 12.5 percent. But the real goodies are what’s behind the door – the prospect of using Ireland as a transit point in the global avoidance chain.
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Take a very quick look at the green line on the chart below. Very quick – the green line represents Irish labour costs.
On a quick look, it appears that Irish labour costs started growing in 2010; and that by last year labour costs growth in the EU and Ireland converged. Now take a closer look. In reality, Irish labour costs actually fell in 2010. In fact, the gap between the EU and Ireland are widening. The chart was ‘structured’ to not only elide over these inconvenient facts but to actually give the opposite impression. Welcome to the world of massaging stats to fit a political purpose.
For make no mistake – the National Competitiveness Council’s Costs of Doing Business in Ireland completely fails to present the reality of wages, labour costs and taxation in the Irish economy. Instead, they construct ‘evidence and arguments that neatly into line with the Government’s desire to depress wages and cut taxes. Funny that.
Are wages a danger to ‘competitiveness’? First, let’s remind ourselves of the current situation, something the National Competitiveness Council (NCC) fails to do (again, funny that). Using the last year for available date we find, using the mean average:
Whether using the labour cost survey (which surveys firms) or the macro-economic data contained in the national accounts (where you divide employee compensation by hours worked) the results are pretty much the same. We are well below averages – in particular, when compared to EU-15 countries not in bail-out (excluding really low-waged Greece and Portugal) or other small open economies.
So we start out pretty low.
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The Universal Social Charge (USC) is a great tax. Many progressives were critical of its introduction and rightfully so. In replacing the Income and Health Contribution levies, the USC ended up increasing tax on low income earners – at a time when the economy was still melting down, people were losing their jobs and income was falling. That was inequitable and economically irrational.
However that is a criticism over rates and thresholds – elements which can be easily changed. The reason the USC is great tax is because it is simple, transparent and, most of all, no matter how many tax accountants you hire, you can’t escape it. The tax has almost no exemptions, reliefs, or allowances – unlike the income tax system.
Dr. Tom Healy of the Nevin Economic Research Institute made an interesting observation:
‘Perhaps there is a case for abolishing income tax as we know it, replace it with USC, make the rates more progressive (e.g. by introducing three or even four bands) and then re-term it as ‘income tax’! . . You see – the beauty of USC is that, it applies to many different kinds of income, it is not riddled, to the same extent as ‘income tax’ with all sorts of reliefs and exemptions, it is reasonably simple to understand and operate.’
Now that’s blue-sky thinking. Check out this little stat: income tax– with tax rates of 20 percent and 41 percent – raises €11.4 billion in revenue. The USC, with a tax rate of 7 percent raises €3.9 billion. At a much lower rate, it raises over a third of the entire income tax system.
To raise the same amount as income tax, the USC would need to be raised to 20 percent (with the lower rates rising proportionally). A tax rate of only 20 percent would raise as much as income tax. That’s pretty effective and efficient.
This is not an argument for a flat-rate tax. Dr. Healy points to the potential of introducing three or four different tax bands. In fact, in the EU-15 only Ireland and Germany have two tax rates. Other countries have three or more:
- Austria and the UK have three rates while Sweden has two central tax rates and one local
- The Netherlands has four tax rates
- Belgium, Finland, France and Italy have five tax rates
- Spain has seven central tax rates and four regional rates
- Luxembourg has 18 tax rates (yes, 18)
So a number of tax rates can be used, rather than an essentially flat-rate.
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Some commentators are celebrating our ‘recovery’. Some have even said that we have recovered relatively quickly, after a dramatic fall. Here we go again – rewriting history, distorting the current situation.
Ireland holds the record for the longest domestic demand recession in the EU. And the really bad news is that we may not be out of it yet. The following table breaks down the length of consecutive domestic demand recession that EU countries have suffered since 1960.
Almost all EU countries have, since 1960, suffered at least a two-year domestic demand recession – with the exception of France and Malta (though data only goes back to 1996 for the island). Some domestic demand recessions have been harsh – Estonia’s two-year experience saw a fall of over 30 percent; some have been mild – Poland’s two-year experience saw a fall of less than one percent.
Ireland – along with Spain and Greece – have the longest consecutive domestic demand recession: six years. And in the tradition of breaking the tie, let’s count the number of years that domestic demand fell since 1960:
- Ireland: 12 years
- Greece: 10 years
- Spain: 9 years
With 12 years where domestic demand fell, Ireland wins on points.
Indeed, Ireland wins the double: longest domestic demand recession and the highest number of years where domestic demand fell. Since 1960, Ireland has spent 23 percent of the time suffering from falling domestic demand. That’s the cup.
But, surely, this is nit-picking – what with all that recovery going on. So don’t worry about it.
Enjoy the weekend.
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There’s a lot of confusion out there. IBEC found the recent fall in consumer spending ‘puzzling ‘ – what with all the increase in employment. Others have found it strange, too – strong employment growth but falling consumer demand. Shouldn’t the big increase in employment translate into higher consumer spending and domestic demand? What’s going on here?
Well, it’s only puzzling if you accept that employment grew by 60,000 over the last year. However, once you lift the lid on the numbers and find that the 60,000-growth number in the CSO’s Quarterly National Household Survey (QNHS) is a statistical quirk, then it starts to make sense.
First, let’s note the CSO’s warning about interpreting trends in employment growth during the period they are realigning their sampling base with the 2011 census. This realignment ensures that their Quarterly National Household survey sample is aligned with the population. They do this after each census.
‘After each Census of Population the sample of households for the QNHS is updated to ensure the sample remains representative. The new sample based on the 2011 Census of Population has been introduced incrementally from Q4 2012 to Q4 2013. This change in sample can lead to some level of variability in estimates, particularly at more detailed levels and some caution is warranted in the interpretation of trends over the period of its introduction.’
Now let’s look at the employment numbers. Between the 4th quarter in 2012 and 2013, employment grew by 60,900 – or 3.3 percent (not seasonally adjusted). However, self-employment grew by 33,400, or 11.5 percent. So, self-employment made up 55 percent of all employment growth. Is this realistic? No.
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RTE’s David Murphy described the Quarterly National Account numbers as ‘really good’. Professor John Fitzgerald said the numbers showed a ‘reasonably robust recovery’. We are told the actual numbers aren’t all that important– the ones that show economic growth actually declining in 2013, the ones that show that the decline in the final three months of last year was the worst quarterly performance since 2008. Don’t mind any of that downer stuff. Like the following chart.
Domestic demand comprises consumer spending, investment and government spending on public services (excluding exports and imports). This makes up 75 percent of GDP. It is one of the better indicators of the domestic economy, but by no means the only one. Another great advantage is that it is not as sensitive to multi-national accounting activities as other indicators.
So what does the above chart show?
A flat-line for the last three years.
Six years of a domestic demand recession.
It goes up a bit and a down a bit (slightly more down), but never strays too far from the flat-line. Domestic demand fell in three out of the last four quarters. Since the Government took office, it has fallen seven out of eleven quarters. In the final three months of last year, the fall in domestic demand was the most severe since 2011. ‘Really good’? ‘Robust’?
Some commentators pointed to rising GNP. The problem with using GNP is that it is determined by international flows; if a company keeps profit here, GNP goes up; if they export it, GNP goes down. Whichever the company does has little impact on the domestic economy. So GNP went up last year – but it was not based on rising domestic activity.
RTE news last night, as part of its coverage of the CSO economic numbers, featured a successful café. The owner claimed that patrons have started spending a little bit more – which I’m sure is true (the business opened its third outlet). This anecdote was used to portray the entire economy as starting to grow through higher consumer spending.
But the CSO reported that consumer spending fell last year. It fell faster than the year before – 2012. It fell three times more than the year before. Nothing on that in the RTE report – that would cut across the constructed narrative of an improving economy.
Have a good St. Patrick’s weekend. Have a better one than the economy is having.
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The Youth Guarantee programme is potentially a positive development. To prevent long-term youth unemployment, the Government launched a programme that would guarantee young people either a place in education, training or a job.
However, a couple of developments put in question the operation and effect of this guarantee – and both revolve around our old friend, JobBridge. First, as part of the Youth Guarantee Implementation Plan, JobBridge will now become mandatory:
In the case of young people, failures to engage that will give rise to sanctions will include:
- Failure to apply for or accept an opportunity on the national internship scheme (JobBridge)
This suggests two things: first, young unemployment must now pro-actively apply for JobBridge – something that wasn’t required before. Second, it seems the Department will pro-actively create new JobBridge opportunities (that is, contacting employers to participate in the scheme) and then offering them to young unemployed; previously, JobBridge opportunities were generated by businesses alone. This indicates a substantial increase in the scheme.
And the sanctions will be pretty harsh. Young people could see their Jobseeker payment cut by up to 25 percent.
The second development is the news that one company – Advance Pitstop – has taken on 28 interns. This company employs 200 people nationwide so the interns, whose labour is essentially free, make up 14 percent of their payroll. Unsurprisingly, this made national news and not a little bit of criticism (this company is not the only one that has been featured in the media).
Should a scheme that provides labour to employers for free be mandatory? Clearly, there are areas of social protection which are already mandatory. For instance, a Jobseekers’ recipient must show they are available for, and actively seeking, work. Past practice also requires recipients to meet with Department officials as part of the evaluation process, take up a ‘legitimate’ offer of training / job or attend an accepted training / education course (of course, there’s a number of issues with ‘legitimate’).
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The Live Register has fallen below 400,000 – the first time since May 2009. While the Live Register is not an official measurement, the Seasonally Adjusted Standardised Unemployment Rate shows unemployment at 11.9 percent. Our unemployment rate is now down to the Euro zone average. This led the Minister for Social Protection to state:
‘Minister for Social Protection Joan Burton said the figures were encouraging and signalled Ireland’s return to being a “normal euro zone country”’.
Yes, when it comes to a straight unemployment rate we may well be a ‘normal euro zone country’. But there’s something that has been not so normal and which has impacted directly on the Irish unemployment rate. Yes, I’m talking about emigration.
Let’s compare the increase in Irish emigration since 2008 with that of other EU-15 countries. We’ll do this by taking the annual average number of emigrants between 2008 and 2011 (the last year Eurostat has data for) and comparing it with the annual average number of emigrants between 1998 and 2007.
Spain has been particularly hard hit – with over 400,000 emigrating in 2011. Ireland comes second followed by Portugal. After these three countries, the next hardest hit by emigration was Italy.
Irish emigration has been more than five times the average of other EU-15 countries. In terms of emigration, Ireland is hardly normal.
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According to Finfacts:
‘Michael Noonan, finance minister, signalled in a statement last Thursday that his Department is preparing a report on the corporation tax rate that is expected to be ready by the end of March as part of a publicity offensive to counter claims that Ireland’s effective rate (actual tax paid or provided for in an accounting period as a ratio of reported net income) is in low single digits.’
Apparently, the Government has ditched its previous claim that the effective corporate tax rate is 11.9 percent – when the study this was based on was shown by Dr. Jim Stewart to be defective as a comparator. Now it needs a new study to substantiate an old claim (it helps that the Government has already predetermined the conclusion, now they just have to fill in the numbers).
This blog has always endeavoured to assist the Government. So I’d like to point the Government to some reasonably robust numbers. It can use either Eurostat or its own Central Statistics Office. Either way, they show Ireland has a low-low effective corporate tax rate.
One part of the equation – how much corporate tax rate is paid – is easy to determine. What is more difficult to estimate is the level of profits. Both Eurostat and the CSO use the category ‘entrepreneurial income’. Eurostat defines it this way:
‘. . . net entrepreneurial income . . . approximates the concept of pre-tax corporate profits in business accounting. ‘
The CSO defines entrepreneurial income as
‘ . . a more comprehensive measure of corporate profitability.’
So, armed with this ‘more comprehensive measure of corporate profitability’, what are the effective corporate tax rates for EU-15 countries – combining both financial and non-financial companies?
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There are many issues to be sorted with the introduction of the Universal Health Insurance: will it be a competitive private insurance market (a la Netherlands with its rapidly rising health costs) or will it adopt a single-payer model; what services will it include; will it contain truly free GP care and will it include considerable subsidies for prescription medicine? And then there is the issue of whether an NHS-style system (most EU-15 countries finance their health systems out of general taxation) would be more cost-effective – that is hardly featuring in the debate.
Here I want to look at how it will be financed based on the Government’s current proposals. It seems clear that people will be required to purchase a basic health insurance package (contents unknown) from one of a number of competing health insurance companies.
But there is a real danger that the Government is intending to introduce a finance model that will be regressive (i.e. impact on low-average incomes more than higher incomes) and contain no obligations from employers to make any contributions. Both these elements fly in the face of social health insurance models that exist in Europe.
First, the method of financing will be regressive. We don’t yet know the cost though the Department of Public Expenditure and Reform is reportedly claiming that it could be €1,700. In the Netherlands, which is supposed to be the Government’s template, the cost is €1,478 for each insured adult with reliefs for low-income earners.
Let’s assume, for this argument, that the package is €1,500. The Government is committed to exempting low-income groups (unemployed, etc.) and subsidies for the low-paid, though we don’t yet know the threshold. This helps, of course. The problem lies with income groups above the threshold – in other words, those that don’t receive a subsidy.
We can see immediately that a flat-rate payment will be more expensive – as a proportion of gross income – for those at the lower end. For instance, if you are on an average income of €36,000, the health insurance will be approximately 4 percent. If you are on €100,000, the health insurance will be 1.5 percent. That doesn’t seem very equitable – because it isn’t.
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OK, this follows on from yesterday’s post but whenever I hear someone on the media claiming that Ireland is a high-tax economy, I’m going to @ the programme with this graph.
The question is simple: if Ireland is a high-taxed economy how come we have the lowest tax on labour in the EU except for Bulgaria and Malta?
Don’t underestimate the import of this battle. Keeping taxes low (while at the same time fighting off wage increases) is just a continuation of the austerity battle. People paid for the crisis; now there will be an attempt to make people pay for the recovery. What little is given in tax cuts will be taken away from free health, free education, affordable childcare, public services and income supports; in other words, all the programmes and infrastructure that can raise living standards. People will be required to subsidise their own tax cuts – and this after we’ve been forced to subsidise financial institutions and the economic collapse caused by speculative activity.
So please feel free to use this graph to get the word around. We’re not a high-taxed economy – but we are a low waged economy with even lower levels of public services and income supports. The only high this economy experiences is rising profits.
Oh, and deprivation and emigration, too.
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No matter what the evidence, regardless of what the data tells us, there are some who are determined to assert the opposite. Take taxation – the evidence is absolutely clear: we are a low-tax economy. Don’t forget what this debate is about: we are a low-waged and low-taxed economy and there are vested interests, politicians and commentators who are determined to keep it that way.
So let’s go through this again (it’s been discussed here and here) but this time from a different angle, avoiding the difficult comparisons using GDP, GNP, hybrid GDP, etc. Let’s look at taxation on labour (i.e. wages and salaries, excluding the self-employed).
This represents the total amount of taxation on wages and salaries – income tax, employees’ social insurance and employers’ social insurance. This is the total taxation on labour.
Look at where Ireland lies – 25th out of 27. We’re above Bulgaria and Malta and that’s about it. In Ireland, total taxation on labour is equal to 30.1 percent of total wages and salaries. We are well below the average for the entire EU, 34.7 percent below average.
How can anyone claim that we are a high-taxed economy?
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Unite has produced ‘Ireland Needs a Wage Increase’ – a comparative study of Irish and European employee compensation. The bottom-line is that
- Ireland is a low-waged economy when compared with other EU-15 countries
- Productivity in Ireland is above the EU-15 average
- Irish profits are higher and rising faster than in the EU-15
In addition, the document highlights the plight of workers in low-paid sectors (their compensation levels are even further behind EU-15 averages), labour costs as a proportion of total operating costs (lower in Ireland) and future wage growth projections which show us even further behind.
The document also provides comparisons on a sector basis (e.g. manufacturing, transportation, financial services, hospitality, etc.).
This should put paid to the argument that Irish wages are somehow out of kilter with the rest of our European peer group – but it probably won’t as the wage-deflationists will just ignore these facts. That’s why it is even more important to get this information around.
The full document can be accessed here: Ireland Needs a Wage Increase
The summary can be accessed here: Ireland Needs a Wage Increase (Summary)
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Eurostat has a particularly grim measurement – severe material deprivation. They take nine deprivation indicators in which people cannot afford the following items:
- to pay their rent, mortgage or utility bills
- to keep their home adequately warm
- to face unexpected expenses
- to eat meat or proteins regularly
- to go on holiday
- a television set
- a washing machine
- a car
- a telephone
If people cannot afford four of these nine deprivation experiences, they are categorised as suffering from severe material deprivation. This is a harsher measurement employed by the CSO – which has a deprivation rate based on suffering from two of eleven deprivation experiences.
So what is the deprivation rate for tenants with a rent at reduced price or free – which is basically public housing tenants. In Ireland this would largely mean local authority, or social, housing tenants.
Ireland leads the EU-15 table – higher than even Greece and Portugal. More than one-in-four public housing tenants suffer from severe material deprivation. This shouldn’t be surprising – the CSO estimates that 52 percent of public housing tenants suffer deprivation using their measurement.
We are getting lots and lots of talk about tax cuts. Where do people who suffer from material deprivation fit into this agenda? Nowhere, it seems. They are being air-brushed out of the debate.
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