Tag Archives: taxation

Taxing Wages – OECD 2015

Just released today. So, lets see how Ireland groans under a uniquely high burden of wage taxation shall we. Lets look, for illustrative purposes, at a single income average wage earner. Continue reading

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The Irish Corporate Tax Debate – Proof and Peers needed

The debate on Irish government and corporate tax rates rages on.  Unusually, this debate is resolving into a discussion between two academics. Jim Stewart of TCD has asserted a number of claims (here, here, here) on the effective tax rate and on the rate of tax evasion and manipulation by MNC’s. Seamus Coffey of UCC has produced a report that suggests that things are not as bad as that.  Not surprisingly these claims and counterclaims have been getting a lot of media attention

It is good to see academics taking a lead on this issue. However, what is of concern to me is that we are seeing a debate on what are in essence unproofed claims. That is to say, the reports and working papers seem not have gone through the usual peer review process. Peer review comes in for some justified flack. But as a mechanism to ensure some degree of bullet proofing of hypotheses, analyses and suggestions, it has enormous merit. My concern is that neither of the two protagonists in this debate have, as yet, published papers on the tax system. Checking SCOPUS, Econlit and Emerald FullText, the three overlapping databases of peer reviewed papers in management and economics, I see no publications whatsoever from Coffey, and those from Stewart are in the main on pensions and financial regulation.

Peer review in publication has a purpose. In the areas of taxation we have a number of journals of international standing that publish papers which are subject to rigorous peer review. A great part of the debate on this area appears (I am not an expert) to revolve around both the correct database to use and the interpretation of certain parts of same. Others internationally have published on these areas, in these journals. Submission, which may be happening, to these journals would achieve three things. First, it would open the debate up to a wider audience and therefore allow a wider perspective, with the result that the analyses can be placed in the literature and in the debate in a more holistic manner. Second, it would ensure that the inevitable errors of omission and commission that all authors are prone to are more likely to be caught, resulting in a more robust argument. Third, would provide face credibility to the research. Credibility in academia is a rather intangible thing. It arises from a long process of publication in peer review journals, engagement in public debate on the basis of that research, willingness to expand the debate  outside the narrow peer review boundaries but within the broad scope of ones competence, and above all a solid publication record. The latter is imperative – without peer review and revisiting ones research there is a weak foundation no matter how competent the person is. Competence needs to be constantly demonstrated and as an academic the best way to do so is via the publication route. We all think our analyses are perfect, our conclusions justified and so on. It is always a shock when people disagree, and prove to you that they, not you, are in fact correct. Thats the benefit of peer review.

The researchers here have been very careful, it seems to me, in their writing, to be as scientific as possible. I for one however would be much more comfortable, given the debate and its importance, if we were discussing papers in the British Tax Journal or International Tax and Public Finance, or Journal of American Taxation Institute, or Bulletin of International Taxation or European Taxation or … you get the idea. Instead we are discussing working papers and internal reports. As academics we need to ensure that the debate on our work is carried out when we have finalised it. We all publish papers on the web, or present them at conferences. Sometimes these are as far as they go, and debate on these can and should be encouraged. But working papers and reports are a stage, not the end, of a journey. Even when a paper is published in a peer reviewed international journal it can and oftentimes is overturned later.  The journey of research is constant.

We need to have debate on the issue of irish corporate tax, and there is a genuine concern about the timelags in publication. That said, the reality is that this issue has been bubbling for years and will do so for years. There is time to submit and resubmit and get published. At the end we have a more robust, more critiqued, hopefully more accurate set of findings. That is when the debate can really take off, but only if we get there.

 

Fifty Shades of Property Tax Grey (well, brown)

So the revenue have produced a heatmap of the country, at DED level, to give you a guide as to the property tax you will pay. Or, not.

Its fifty shades of brown …well, 7 anyhow. Take a look at Kerry and Kildare (yes, yes, I have two houses…one in Kildare where I live the other the old family home in Kerry) Anyone want to tell me that this is clear? Why not 7 distinct shades.  Yes, one can increase the contrast but then if its too high and one is on the border of two bands you cant see….

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Contrast this dogs breakfast with some of the work by AIRO and we see night and day….

Im going to send a copy of The Visual Display of Quantitative Information  by  Edward Tufte, the best book ever on graphics, to the revenue for Easter… Maybe the Troika have insisted we sell off all our colours or something….

Stabilizers

Ok..this is going to annoy everyone I suspect…

One of the things that strikes me about the debate in Ireland is the fundamental misunderstanding that exists about the public sector.

There is a large constituency of people who exhibit tendencies in their discourse that suggests that any wage over zero is too high – these are the die-hards whose discourse is a toxic mixture of ideology jealousy and half remembered catchphrases gleaned from too much Fox News. Small government via starving society of essential services or else making the workers therein so impoverished that they are amenable to bribery works so well in so many places…

There is another large, overlapping but discrete, group who suggest that while of course the government should have a role in the economy it should confine itself to capital and not current spending – far be it from me to suggest that many of these are private sector rent seekers who will cheerfully take the government (taxpayer) cash and spend it on whatever madcap idea has come to mind by a an unholy combination of bureaucrats chasing what they think is going to make ireland rich and vested interests seeking warmer vests, regardless of how low the total ROI will be

Then there is a group, again discrete, who urge us to “scrap croke park” (a football stadium cum conference center and also a totemic 2009 agreement between the government and public sector unions to keep nominal wages uncut in exchange for productivity and other gains), regardless of the fact that such cuts a) will, given higher fiscal multipliers in recessions, exacerbate an already bad domestic demand position, b) will in any case be utterly incapable, the downstream effects of a) ignored, of making a massive dent in the deficit and c) will result in a massive industrial relations mess.

Finally, we have the public sector unions, now moderatly cowed but who have over the years taken advantage of the supine and spineless political system to extract massive rent. Most public sector union leaders in Ireland have beards, for some reason.

I spoke recently to a representative of the first/third group, who urged me to brace for a 40% pay cut “like the private sector has had” via the immenent (wished for?) scrapping of the agreement. Hmmmm. Not quite true… Here is a graph of public/private sector average hourly wages and total employment over the last while. One of the things we want, those of us who dont deem all public servants inherent spongers (or is that the people on welfare? cant ever remember) is that government act to stabilize and smooth out the economic cycle. You dont have to be an unreconstructed keynesian (or even Paul Krugman) to think that smoother cycles are perhaps preferable to more jagged ones.

Both Public and Private wages have remained remarkably constant, or it would be remarkable if we didnt recognize that nominal wage rigidity (the empirical fact that people usually dont get/take/accept reductions in nominal wage packets) is the norm even in distressed sectors.   We also see that the government employment total has declined slowly – taken together this is what we would WANT to see, that government act to keep its injection into the economy smooth. Of course this is not, for the more thinking and conscious, a problem (for the reflexive “small government is good and therefore smaller is better so zero must be optimal” merchants this is a heresy) and acts to ensure that the government is doing its job.  The adjustment in ireland has been in the fall in private sector employment. But it has not been in private sector wages.

The problem in Ireland lies in the fact that there is a significant wedge beween public and private wages. Normal economics would suggest that , all other things being equal, having a permanent defined benefit pensionable job would allow people to take lower wages than those in comparable employment who have less security of tenure and less certain pension. But the opposite is the case here, as over decades governments bought industrial peace and election by generous wage increases.

A significant part of the wedge in pay (lets table the pension issue and how much that would cost to fund) can be explained by on average higher qualifications and greater experience in the public sector. While the government have announced new lower pay scales and less generous pensions for new public sector entrants , it is not clear that they can or should or will do anything for those (like me) who are already in the system. Amongst other things while there has been significant forbearance in relation to industrial relations cutting nominal pay would result in this evaporating. There would be legal difficulty and the certainty of challenges in moving existing pensioners or even those with a reasonable expectation of their pension entitlements to a less generous system, and at least in the university and internationally tradable sectors of the public sector we would face an accelerated brain drain.  And yes, there is one of those – right now it is hard to hire lecturers in Ireland, paying at the bottom of the scale which overlaps with the UK pay scales. It might come as a shock to UK academics but their prospects are positively rosy in comparison to here.  And of course removing several billions at one fell swoop from the pay bill will not magic jobs up for the unemployed but will instead add to their numbers (larger negative shock multipliers are so nasty), while also adding to the hole in the (state owned, supported and money absorbing ) banks from foolish mortgage lending.

Its a mess – there are no simple solutions and no lack of simplistic ones.

(so far 8) questions on the Fiscal Compact which I would like answered..

Following up on my blogpost today and just in time for the sunday business and talking heads shows, some questions spring to mind on the Fiscal Compact. Feel free to pose these to relevant politicians or better yet to answer them below..

  1. How would the existence of the fiscal compact have prevented the Irish economic collapse, given that we would (debt levels apart) have been pretty much within the terms of the criteria? Our problem on the fiscal side was that we were badly balanced in terms of the makeup of the tax base and clientilist in our expenditure.
  2. How exactly will a structural deficit be estimated, given that there is no consistent method for so doing and that it is dependent on in essence a backcast of what the economy might have been at were it growing at capacity? What models and approved by whom will be used to estimate the economic dynamics? What if the ESRI say we are in balance, the ECB say we are not, the OECD say maybe, and the IMF say we might be if their model is right…? Who arbitrates..?
  3. Given that the implied dynamics of the fiscal compact on sovereign debt are that it will radically shrink, what are the knockon effects and how will they be handled in terms of pension and investment funds which will now have to either move to other low risk assets with the danfer of igniting bubbles therein or take more risk with the consequent dangers to pension funding (private and public).?
  4. Would the existence of the FC have prevented the taking on of the bank debts, in 2008, given the effect which that had on the fiscal side? If this is so how can the FC be squared with the evident desire by the ECB to not see banks fail?
  5.  Given that if you exceed the terms of the Fiscal Compact you will be fined up to 0.1% GDP, will that not lead to a exceeding-fine-exceeding spiral?
  6. Given that in general Fiscal policy is taken as the taxation and expenditure elements of government as they interact with the economy, and that this is in essence a state level spending side only treaty, when can we expect common movement on either state level taxation or community level transfer payments to offset the pro cyclicality of this pact ?
  7. If this is ‘a vote on the euro’ what mechanism wil be used to remove us from the euro zone? What treaty, what section?
  8. Given that the government have already stated that the talk of a second bailout (aka being in the ESM) is ‘ludicrous’, and that the only sanction mentioned in the FC is not being able to access same ESM if one does not sign up, what is the downside of saying ‘hmm, no, not quite what we need thanks’?

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.