Monthly Archives: October 2011

Some thoughts on the presidential election 2011

So Election Day is here at last.  I’ve made up my mind pretty much on how I am going to vote, at least on the referenda, and know who my 7,6 5 and 4 votes are for the president.

A couple of things strike me.

Firstly, why on earth is this election held on Thursday? Throughout the years there have been calls for elections to be held on the weekend. We have an absolutely archaic method of applying for postal or absent ballot paper. Having election on a weekend would allow students, persons working overseas, persons away on business travel, people who simply cannot on the day easily get to a station to vote and to exercise their democratic franchise. There’s no reason on earth, other than a fear of what people might say, why elections should not be held over two days or over a weekend.

The   second issue that strikes me is the growing gap between modern media and how elections are dealt with. While it’s all too easy to overstate the role of blogs, Twitter, Facebook etc the reality is that these are growing as methods both communication and interaction. In particular we have the farcical situation where we still have an old-fashioned moratorium on broadcast media in Ireland. The airwaves (perhaps mercifully) go silent the day before the election. All this does is push the discussion further into the still somewhat inchoate social media. The alternative is the print media, which with longer lead times can often find itself not in a position to react to swiftly breaking news. It’s hard not to think that at least part of the timing around the Sinn Fein “revelations” re   Sean Gallagher and his fund-raising activities was to take advantage of the fact that the broadcast media would be going silent shortly thereafter, leaving him with little enough time to respond. In any case we pay taxes and license fees to ensure that broadcast media can provide a public service. What greater public services can there be other than, right up to the wire, providing the population with nuanced analysis and breaking news regarding fundamental electoral decisions around our Constitution and the election of a president?

The third point follows on from this. While not wishing to revisit the debacle around the electronic voting machines the above two points should indicate that with modern technology the possibility should at least be explored of moving towards for example the Estonian model of voting. In Estonia people can vote over the Internet, securely, in a prespecified period leading up to the Election Day. On Election Day they can only vote in person. This shows an awareness of modern technology and the willingness to ensure that where possible all people should get the opportunity to vote.    A number of the Swiss cantons have (not without some stops and starts) also introduced the opportunity for people to vote electronically, and although not possible to vote the Tunisian elections recently had a strong Internet/mobile  component in terms of assisting and guiding people  as to how to vote and were to vote.  Again there is no reason on earth why we should not begin to experiment with different approaches to ensure that democracy is within the reach of everybody.

The final point that arises from the above is the issue of “the diaspora”.  I have to say I’m quite ambivalent about the idea of people living abroad voting in Irish elections. By living abroad here I include people living in Northern Ireland….To my view voting should be tied to residency and taxation. I see no reason on earth why somebody,  although not an Irish citizen, but living and working and paying tax in Ireland for a number of years,  should not have a vote on everything up to and including parliamentary and presidential elections. If we reform the upper house, as we should rather than just simply abolishing it, then that would be an appropriate place to experiment with a limited number of (electronically voted) senatorial posts.  I think calls for people who simply hold an Irish passport but who neither live nor pay tax in Ireland to be given automatic rights to vote misconstrue the nature of what it should be to be a citizen. Citizenship must be active.  Part of the difficulty around this is that there are at least two classes of Irish persons living abroad. Firstly we have a very large number of people living in the North of Ireland who hold Irish citizenship. Secondly we have a very large number of Irish people living abroad were driven out of the country by lack of economic opportunity. Both are, to some extent, “hard cases”, And we know what kind of law that makes.   We need to ensure that future elections provide some form of inclusion of the diaspora and citizens living elsewhere. As to whether that should be an automatic passport driven right to vote on all and every issue with the same weight as those living and working in Ireland is to my mind a very open question.

Taxes…flat,open, and fair is too much to hope for

This is a slightly longer piece published as an oped in the Irish examiner.

In the next few weeks a large number of organizations will be announcing they have produced their “prebudget submissions”. Indeed, some have already done so – see for example the chartered accountants, the disability federation, the national women’s federation etc. Submissions are usually a discussion of what the government should do, from the perspective of particular vested interest. This does not mean they are mad, bad, or evil; it simply means that these submissions are what they are. There are also pretty much too late. The comprehensive spending review of the departments has been done, and the government does not make its decisions on the broad scope of policy in the last couple of weeks before the budget. In any case the government is no longer in charge of anything other than the tactical implementation of an overall strategy dictated to us by the troika. At most what these prebudget submissions can do is provide an impression to members of organizations and to the public at large that the organization in question has a concern not just for their own members before the broader economic and social perspective in which the budget will be framed. They provide a useful window ingot he thinking of lobby and pressure groups in that regard and should be welcomed and encouraged. However, any lobby group worth it’s salt will have made the proper back room deals with government and bureaucrats well out of the gaze of the public. Note that I haven’t bothered… I fervently believe in open, honest, clear dialog. Plus, I’m allergic to smoke filled rooms.

In that spirit would like to make my own prebudget submission. I like to make a submission on the basis of three proposed changes to the tax system. These would radically simplify and I think expand tax system, and would provide an impression of a greater sense of fairness.

My proposed changes will of course also not be taken on board. But as it is the season for these, here goes…

Firstly I would urge government to do a top to bottom reform of the income tax system. Income tax here I take to include not just the actual PAYE system, but all the various barnacle like encrustaceans that have latched onto it… we have a universal social charge we have pay related social insurance charge we will no doubt have other forms of charges over the years as the government scrambles to find extra money. My proposal is to replace all of this with a flat tax. A number of countries already have a flat tax, where after a certain minimum tax-free allowance all income, regardless of source, is taxed as a single rate. Of course this would have to be introduced along with the radical reduction in the amount and extent of tax-free allowances. The most comprehensive study on tax-free allowances, by members of the commission taxation, suggested that approximately €11 billion per annum in tax shelters was made available. the three greatest amounts of tax foregone arise from the PAYE tax credit, and subsidies to residential homeowners in the form of mortgage interest relief and the exemption of the principal private residence from capital gains taxes . These latter two would be eliminated under my flat tax proposal.

One issue with flat taxes they can increase income inequality. This can be overcome by having a higher personal tax credit. This credit could be as much as €20,000 or more, allowing people to earn that much money before paying a single penny in tax.

Opponents of flat taxes critique that they’re not progressive. This is incorrect, or perhaps incomplete, for of course they are progressive. If you earn more money you pay more tax, which is progressive. What critics, it seems to me, actually mean is that taxes are not progressive in rates, in that higher earners are not paying a higher proportion of their marginal earnings. Why this would be a desirable thing to have in principle has never been explained to me. There is enormous evidence that high marginal tax rates on relatively low incomes, such as we are now beginning to experience, acts as a very serious disincentive to work. Such evidence as there is from countries that have introduced flat taxes are that overall tax take increases. This is often due to an increase in voluntary tax compliance due to increased perception of fairness. There can also be beneficial labour market effects, bidding to increased labour market participation, and is some evidence that flat taxes can stimulate entrepreneurship. While not a panacea, they are therefore not self evidently a bad idea.

Flat taxes come in a variety of measures. One approach is a straight flat tax, where all income is taxed at a rate, without any deductions. The most commonly considered method is the one proposed above, which is progressive over the deduction. Flat taxes are also usually seen as the preference of “the right”, whoever they are, perhaps due to the perception of non-progressivity. However, in places where it has been implemented it is instructive that it has survived changes of government.

My second proposal is that we extend liability for tax to all persons who hold an Irish citizenship. Citizenship is not a one-way street. It contains both benefits and costs. I’m sure not the only person who finds it faintly nauseating when billionaire tax exiles, Irish citizens, descend upon us (but don’t stay too long as that would render them liable for tax) and tell us how we should run the country. As jn so many ways michael o’leary sets a tone here. Im not huge fan of the (relative lack of ) customer service one experiences with ryanair, and if possible tend to choose other carriers unless they are usurious. But, due to o’leary, we CAN choose, and nobody can deny that he runs, out of Ireland, a world leading operation. Plus, he lives, raises his family in , and pays taxes in this state. He has every right, indeed as a leading public figure perhaps even a duty, to opine on issues. This is his country. It’s quite different if people want all the benefits of Irish nationality without bothering to incur any of the costs. Time to call a halt I say.

In principle citizens of the United States are required to make a return to the Internal Revenue Service when their income, worldwide, exceeds a relatively modest amount. Like the United States Ireland has a very extensive series of dual tax treaties. Therefore tax paid in one jurisdiction, let’s say to pick one interesting example Portugal, can be written off against any Irish tax liability. If people don’t want to incurred costs of citizenship then they should and they can of course surrender their Irish passport. It is rumoured that in the last while a proposal to extend taxation this way was vetoed at government level precisely due to the fear that passports would be handed in. Why that should be seen as a problem is beyond me. If billionaire x chooses to forfeit his Irish citizenship then we as a nation should choose to forfeit anything other than raucous laughter when he (and, it’s always he) flies in and lectures us. An Irish army officer and rugby captain , Ciaran Fitzgerald, once famously on on camera rallied his (then amateur) players/troops by simply facing them and asking,,,”where’s your f*****g pride?” We need to ask the same of some of our multimillionaire tax exiles, most of whom “got their start” from and off the Irish taxpayer. If they don’t want to pay the price now of being Irish, then let them go. Too often the concept of “pulling on the green jersey” is invoked to ask commentators and analysts to elide, soft soap and bl ur the bad news. Here we can redeem it, and pulpit on with pride. Or , forfeit it. Let’s ask the tax exiles if they want to be Paul McGrath or Stephen Ireland.

The third proposal would be to adopt an open tax return policy. During the course of the presidential election we have seen competitive disclosure, where candidates have placed on the record their P 60 forms. While this is laudable, it is in my view being done simply to provide an impression, and perhaps the actuality, of openness and transparency, in the hope of attracting additional votes. By contrast in Norway while the details tax returns of individuals are not made available the information made public is the bottom line income tax paid (crucially this is limited to income tax paid in Norway) for each taxpayer. The idea is that this fosters a sense that everybody is in the system, and the system is for everybody. It also, one imagines, makes it that much more difficult for persons to plead the poor mouth. Combined with the second approach, which would result in the reporting of worldwide tax liabilities, this would in my view provide a much greater sense of the true nature and distribution of Irish incomes and taxes. Democracy thrives best in openness, and sunlight is the best disinfectant. As we move back to the 80s we see a growth in the black economy (incidentally, is it not time to have decent economic analysis of the probable size of same?) we will see the old habits, which we broke ourselves if, of tax evasion, black and grey economic activity and cash in hand returning in force. Any sense of rottenness in the tax system, which will grow as incomes become strained and the black economy makes a welcome return, will be best eliminated by an open and transparent approach.

The looming pensions crisis

This is an amended version of a piece published in the Irish examiner

In addition to the banking crisis the government also face a series of crises in relation to pensions.

There are at least three separate but related crisis around the issue of pensions. Firstly we have a situation where the state is paying pensions, both for public servants and for others, but of current income. Secondly we have a situation where the vast majority of defined benefit schemes in commercial organizations, so my statement was, are underwater. The third is the experience of the last number of years in relation to investments cannot but have heard it chilling effect upon the people’s willingness to engage with financial services, including pensions.

At present Ireland is in the lucky position that has a young population. Approximately 17% of the populations are in the elderly category. CSO projections suggest that this could rise to as high as 25% by 2021 and rise to as high as 46% in 2041. All of these persons will be dependent, at least in theory, a pension. From any of them, if the past is any guide to go by, this will primarily be displayed old-age pension.

A proportion of these persons will also be the retirees from civil and public service employment, and at least in the medium-term the majority of these will be on the “old-style” pension arrangements, where the pension is tied to the final retiring salary.

As of 2009 this liability, according to the Comptroller and Auditor General (p12 and generally here) for public sector pensions alone, was €116 billion. In other words were the state to have to go out, purchase on the open market an annuity the yield on which would be equivalent over the period to the pension to be paid to these public servants this would cost €116 billion. It is inconceivable that this liability can be allowed to continue to grow. Unchanged, the public sector pension bill could reach €5b per annum. The recent changes announced by the government in relation to pensions for public servants being based on a lifetime average will help to reduce the growth of this pension liability. It is entirely probable however that faced with the need to cut both immediate and future expenditure the state will have to move to reduce the actual amount of expenditure on public sector pensions in the near term. The proposed new arrangements would also it appears be applicable, in certain circumstances, to existing pensions. This might mean that public servants find that while their existing built-up pension entitlements stay as they are future pension entitlements might conceivably be linked not to final pay but instead either to average pay or to the consumer price index. Another possibility might be the imposition of additional taxes on lump sums, or indeed full retrospection of the average lifetime he provision. Public sector employees, existing and future, will need to be aware of the fact that pension provision, coming out as it does and will of current taxation, is going to be reduced.

Private sector pensions are not in much better shape. Up to 80% of defined benefit schemes may well find themselves in actuarial deficit. Persons paying into Defined contribution schemes have been very badly hammered, especially those coming up to the last number of years before retirement. All of this will serve to throw additional strain on the public purse.

Government does have a good plan in the automatic opting in of new employees into a defined contribution scheme. This is soundly based on research, and is to be welcomed. Personally I would prefer to have seen a situation where persons were not easily able to opt back out after a number of years, as is the case. However this will over time results in the building up of very large defined contribution schemes, which will in itself pose problems.

For instance, one could easily conceive of a situation whereby faced with pension pots of tens of billions and a government fiscal position that becomes Strained there is a temptation for said government to either engage in financial repression, or to direct pension savings away from market towards government assets. The experience of countries such as Chile and Poland is that strong controls need to be put in place to ensure that management fees of state-mandated pension pots are kept at the absolute lowest level possible. We must also take cognizance of the lessons from behavioural finance, such as a general tendency to overconfidence, loss aversion the tendency of people to over diversify, difficulties in people making decisions when faced with a large number of choices, and other heuristics and rules of thumb which might together resulted in individuals making significantly sub optimal choices in how they allocate their pensions savings. There is a wealth of research from behavioural economics which can guide this , if drawn upon. See here, for issues on individual choice; here for some Australian experience; here for a study of individual issues in dc investing; here for a more general survey. There is a nice piece in business and finance from the Geary institute also worth reading.

In an environment where there seems to be no such thing as a risk-free asset, where even sovereign bonds are now exposed to the possibility of major losses, where equities may be facing into a secular bear market, and where investors have been badly burned, the appetite for the risk required to grow defined contribution schemes to an adequately large amount of money sufficient to pay the pensions of the contributors is likely to be muted. That would be a pity, as taking risk is the inevitable requirement to ensuring that a decent return is obtained.

If we want to provide a decent level of income for ourselves when we retire then we have only two choices. Either We save it ourselves, or we pay for it through taxes. Either way there is a high probability that in the near term we are going to start to pay more. This will result in further withdrawals of money from an already fragile domestic economy. However, there is no choice.

Getting entrepreneurial….

Over the last few months I have been involved with some colleagues and external investors in setting up a Campus Company. This company ,, is part owned by me, part by TCD and part by others. It will deliver high end executive education, non certified short courses and postgraduate summer schools.

Such executive education initiatives are not by any means unusual in other leading universities, and we felt that there was an opportunity and gap here which we will endeavour to fill and service. It’s been a most exciting and humbling journey so far, which has given me a MUCH better grasp of what it is to be a business person in today’s Ireland.

I am still going to be Professor Lucey…the whole point of campus companies is to encourage academics to become entrepreneurs, to commercialise know how and know what, to open colleges up to business and vice versa. I hope and believe that the company will do well, but in any case it will be interesting to not just talk the talk but to walk the walk.