Be Afraid, Be Über Afraid: The Recession Diaries - November 3rd

The discussion on Frontline last night at some points bordered on the surreal. Take the discussion on taxation. The question was posed – how high would tax have to rise in order to generate €4 billion tax revenue (as opposed to cutting €4 billion). The first thing that struck me was – why was this discussion taking place? Is there anyone in the current debate who has called for an increase of €4 billion in taxes in the upcoming budget? If there is, I must have missed that meeting. It could be an interesting hypothetical laboratory question – much can be learned by such exercises. But I would have thought that Frontline was more interested in discussing the specific issues in the current economic and fiscal crisis. Essentially, panellists were asked to find an answer to a question that no one has asked.

Of course, such unasked questions provide an opportunity to mislead the debate. For instance, Suzanne Kelly, a tax lawyer, stated:

‘If you want to collect €4 billion through the income tax mechanism . . . I would say to you, the way you’d have to do that would be to raise the 41 percent higher rate to 75 percent and it would have to be applied principally to married couples at €75,000 or more. So if you have a Guard married to a nurse and they earn a €1,000 over €75,000 you would have to collect €750 in tax from them . . .'

Oh, my. A top rate of tax of 75%. And on a married couple (who are likely to have children). And at the current thresholds we have today. Well, you won’t find many people relishing that prospect. And that’s the point. These are scare stories, nothing more; frightening the children at bedtime to ensure they dream of public spending cuts.

Even Minister Lenihan dons a Halloween mask to haunt the crèches of our nation:

‘Mr Lenihan said the marginal rate of tax is 53 per cent and that if the Government was to increase it further to raise an extra €1 billion “everyone or every couple earning over €100,000 would pay tax at a marginal rate of 63 per cent’.

What Kelly and Lenihan are doing, in presenting this fright-fest, is deliberately manipulating figures and concepts. In particular:

• The marginal rate of tax refers to the amount of tax you pay on every extra Euro you earn. For instance, if you’re on the higher rate of tax, combined with the levies, you’re marginal rate of tax rate is 53 percent. For every extra Euro you earn, you pay 53 cents in tax.
• The effective rate of tax refers to the amount of tax you pay as a percentage of your income.

Many commentators want you to ignore the latter and concentrate on the former. That’s because the former, the marginal tax rate sounds, well, more frightening. But it doesn’t tell the true story.

Minister Lenihan embarrasses himself when he trots out numbers like these because it is clear he hasn’t even read the reports his own Department produces. The Department produced a survey – a sampling of 439 high earners – and assessed how much actual tax they paid as a percentage of their income (the effective tax rate). The results make for some sobering reading.

When we look at how much actual income tax is paid by higher earners, the perspective changes dramatically:

• 10 percent paid less than 5 of their income on income tax
• Nearly a third paid less than 15 percent
• Only 11 percent paid more than 20 percent
• But: no one in this survey paid more than 25 percent

In 2007, the marginal tax rate would have been 43.5 percent. But that figure is a long ways away from the reality of those who pay less than five percent of their income on income tax. Or 10 percent. Or 15 percent.

How does this happen? The survey publishes a list of tax breaks that primarily only high earners can access – about 54 of them. These reliefs, allowances, exemptions all reduce the tax liability for those on high income.

Let’s put these in perspective. In 2007 the effective tax rate (these don’t include discretionary reliefs such as mortgage interest, VHI, etc.) was for a single person PAYE person on:

• €30,000: 8.3 percent
• €40,000: 14.5 percent
• €50,000: 20 percent

Now compare that to the chart above.

Minister Lenihan and many commentators don’t want you to see any of this. And, indeed, it is hard to see. The level of secrecy and opaqueness in the tax system is part and parcel of Ireland’s world class standing as one of the most secretive tax havens (take a look at this – personally, if I have to live in a tax haven, sipping Pina Coladas and frying prawns on a beach in Bermuda seems preferable).

How can this be addressed? We already have a structure in place. For the super earners – those on €500,000 or more – they can avail of tax breaks until the cows give beer. But no matter how many they avail of, they must pay a minimum effective tax rate of 20 percent.

So why not increase this small amount and lower the thresholds. Is it too much to ask that those who earn €100,000 per year pay an effective tax rate of 25 percent? For those on €200,000, 30 percent? For those on €500,000, 35 percent?

This wouldn’t raise a pot of gold. But it wouldn’t be a pot of nothing. And the great thing is – you wouldn’t have to raise the marginal tax rate one cent.

The really frightening thing is the way that Ministers and commentators work so hard to conceal these basic facts from the national debate. But that doesn’t mean we have to follow suit. 

A little night-light will keep those scary monsters at bay - even Government Ministers.

Comments

[Proposition Joe]

I totally agree with a "minimum alternative tax" type of mechanism for ensuring ultra-high earners pay a realistic effective tax rate. The yanks have been using this approach for decades.

Of course, it might be simpler to just de-roof the vast majority of tax shelters, or at least severely limit the amount of relief per taxpayer that can be availed of. No more than 20k in pension contributions for example.

However I really have to pick you up on your characterization of Suzanne Kelly manipulating the figures. Read through the quotation you referred to above. Just in case any viewer wasn't aware of what one means by the marginal rate of tax, she builds an explanation right into her illustration:

"[if] they earn a €1,000 over €75,000 you would have to collect €750 in tax from them"

No extremes cases or exaggeration there, in fact it was made very clear that the amount of income taxed at the marginal rate may be relatively small.

So I think you owe Ms. Kelly an apology on this.

[Michael Taft]

Proposition Joe - Suzanne stated the following: 'If you want to collect €4 billion through the income tax mechanism . . . I would say to you, the way you’d have to do that would be to raise the 41 percent higher rate to 75 percent . . '

Note that she stated 'the' way you'd have to do it, not 'a' way you 'could' do it. There are other ways she could have elaborated (and remember, I stated that it was a nonsense issue anyway since no one has called for increasing taxes by €4 billion).

You could introduce a 1-2% levy on all net assets with no income threshold.

You could double the levies while abolishing mortgage interest and VHI relief.

You could double the corporate tax rate.

You could increase VAT by a third.

You could do many other things or combination of things. I wouldn't recommend it - it would tear a whole through the economy.

But Suzanne picked the most 'frightening' figure and claimed it was the way. I have been on interview panels with Suzanne and found her a very credible authority on tax. Therefore, she knew what she was doing. And fair play - that can be an effective debating technique even if it doesn't really tell you much.

[Proposition Joe]

Fair enough Michael, I was focussing on the issue of whether she tried to mislead the audience that her apocalyptic tax rate was effective as opposed to marginal.

But I do agree, it was outlandish for her to have only prepared an estimate for harvesting the entire 4 billion in tax. Speculating on how say 1.75 billion or 1.3 billion might be raised in taxes would have been a much more a more useful contribution to the debate.

Jack O'Connor sounded so taken aback by the suggestion that all 4 billion would be raised in tax that he failed to counter effectively. In fact his performance was on the weak side overall ... a logic-defying rigidity of thought came across, to me at least.

[Irish Mammy]

Hello Michael

I have a question from a non economist, there are so many figures being thrown around it's hard to keep up. Last night on the Frontline I believe it was Susan (although could have been the economist) referred to the notion only that only 35,000 people earn over 100,000.

However, a recent Prime Time programme referred to revenue commissioners data which said - 4% of earners make over 100,100 Euros. So the figures don't match as 4% of estimated population (4.1 million) is 164,000.

Also do these figures include those who avail of tax shelters or not?

What is the real estimate of the number of people on 100,000 + salaries in Ireland?

Thanks,
Treasa

[Conor McCabe]

Irish Mammy, in terms of salary, the number is somewhere between 78,000 and 98,000 (for 2006, last figures available). The 4% refers to 4% of wage-earners, which in 2006 was 2.261 million. And 4% of that figure is around 90,000, so for once Prime Time wasn't off the mark, so to speak.

Included in that bracket, of course, is every single RTE current affairs presenter and journalist, which is worth keeping in mind when RTE runs with stories about how taxing the wages of street cleaners will get us out of trouble, but taxing the wages of €100,000+ earners like RTE journalists will not.

http://www.revenue.ie/en/about/publications/statistical/2008/statistical-report-2008.html

However, what we're talking about is alary as income, but the rich in this country don't make their riches from PAYE-taxable income. The entire tax debate is framed in terms of PAYE, that's the problem. wage income in this country is taxed, while other sources of income are more or less left alone. and it's the speculative nature of those other sources of income which has damaged our economy, not wage rates.

[Michael Taft]

Treasa - Conor has provided a good survey from the 2006 Revenue figures (the latest data on their website). Earlier this year, the Irish Times published 2008 data that was taken from a parliametnary question. The can be found here:

It shows that there are 53,000 people earning over €100,000. The reason this figure is different from the one Conor quoted is that in the Revenue tables on their website many couples are counted as one taxpayer unit.

However, as Conor pointed out, this only only includes 'earned' income. Other income such as capital gains is taxed separately.

There are further problems with these figures - the tax shelter question you asked. They don't include income that is exempted (patent royalties, stallion fees, forestry, writers, certain interest income, etc.) It is also the income after pension contributions - and at the higher levels, pension contributions are used as a form of tax shelter.

Further, we should note the 'income' of proprietary directors is clearly an under-statement. That's because a lot of directors 'hide' their income in their companies (perfectly legal) and only draw-down a certain amount for income tax purposes. They can draw-down the money in their company in a number of other 'tax-efficient' ways (through pensions, capital gains, gifts to relatives, etc.).

All this to say - Revenue states there are 53,000 people earning over €100,000 for the purpose of income tax. But this should be treated as an absolute minimum base-line. It cannot be treated as the definitive figure for how many people actually earn over €100,000.

As to the percentage earning over €100,000 - the tax table states that these higher earners make up 2% of all taxpayers. However, if you look at the table you can see that a huge swathe of taxpayers are really part-time or casual workers. Over half a million earned less €10,000 and effecitvely paid no tax. Another, nearly 700,000 earned between €10,000 and €20,000.

All said, we don't have a single tabular form for all income earned by those at the higher end. This lack of data is reflected in the poor data relating to wealth - which I hope to do a post on soon.

Hopefully, this is answers your question - but if not, get back to me.

[Michael Taft]

Sorry, Treasa - forget to include the link to 2008 Reveue figures: http://www.tascnet.ie/upload/IT_table.doc

[Andrew]

just wanted to say thanks a lot for these blog posts, its great to have an accessible counter to all the spin that is going on. I've been firing off links to all my friends on Facebook since I found it yesterday, suggest others do likewise and keep them coming

[Tipster]

All this to say - Revenue states there are 53,000 people earning over €100,000 for the purpose of income tax.

Crikey. And according to a PQ in February, just under a fifth of those are in the public service:

http://www.kildarestreet.com/wrans/?id=2009-02-17.955.0&s=Shortall+servants#g956.0.q

[Tipster]

Michael, I meant to say to you at the TASC conference that it would be great to see you contributing to the Irish Times from time to time -- either on the main op-ed page or in the economist rota in the business section on a Friday.

[Ian C]

Michael,
Long time reader first time poster. Just following on from the point that Conor makes regarding income from outside of the PAYE framework. I can't believe that this is not brought up in more often in all the coverage over the crises here in the last few month. Surely this is the elephant in the room that needs to be addressed. The truly wealth in our society do not rely on their PAYE salary as there source of wealth.
I would be interested in, but have not been able to find any figures that break down the percentage of annual wealth generated in Ireland that goes to Labour (as opposed to Corporate profits etc..). Anyone like to post any links on these ?

[Barry]

Michael,

I’ve agreed with the spirit of this blog for some time now but after Monday’s Frontline I’m beginning to waver. A couple of points.

You have made much of the deflationary impact of the levys and proposed cuts to the public sector wage bill but I don’t think you have properly addressed the fact that the alternative involves more massive borrowing on top of the massive borrowing we are already engaged in, and all the extra interest that will have to be paid on it just to maintain public sector wage rates and social welfare levels. I believe Moore McDowell gave some figures of the extra billions that will have to be borrowed the fiscal consolidation programme is elongated as suggested by ICTU. Is racking up this kind of debt really on?

FOT, tried to make the same point that you are broadly making that when it comes to collecting tax; there is more than one way to skin a cat. You are both probably right but should I disbelieve the tax expert when she said that Fintan’s idea to go after the subsides to private landlords, for example, would take 2-5 years to bear fruit. Do we have that kind of time?

You make some good points about the tax system here and the potential to get a more equitable contribution from high earners but what will be the net return and will it do anything significant to bridge the fiscal chasm? Or will we still be borrowing billions to maintain wage rates in the public sector and social welfare rates that, in the final analysis, when we consider just how decimated our tax base has become since 2006, just aren’t sustainable?

Barry

[Michael Taft]

Andrew, Tipster - thanks for the kind comments. For me, it doesn't matter who's name is in the tag-line. I just want to see the ideas being expressed. I keep getting disappointed.

Ian C - there happens to be some data on this over at the EU AMECO database. The problem is that our numbers are skewered because of GDP and transfer pricing by MNCs. For instance, AMECO shows the Irish share in manufacturing to be half that of other EU countries, which is certainly not the case. Overall, Irish wage share is low by EU standards. But with our distorted figures one can't realistically say. It's so bad that we can't calculate our productivity levels and in certain industries Irish public agencies have to use US productivity as a proxy. If I had a Euro for every mention of transfer pricing in all the Forfas publications put together, I'd have a Euro.

In any event, you can't read too much into adjusted wage shares. It's always dependent on the economy. For instance, Portugese workers have one of the highest wage shares in the EU (much higher than Sweden). But they have the poorest wage levels - about 1/3 of the EU average.

Here is the link (if you can't open it or have problem getting around the databse - let me know and I can send the tables to you directly): http://ec.europa.eu/economy_finance/ameco/user/serie/SelectSerie.cfm?CFID=738503&CFTOKEN=59123e9cc8166ec4-BFA7F5D7-B2C4-A5C4-A12B572F6321166B&jsessionid=24068f5c608c7e5c4407

Barry - your questions are wholly relevant. Just speaking for myself personally (others can speak for themselves), I have tried to show on this blog the effect of deflationary measures - both economically and fiscally. By comparison I have examined specific examples of a stimulus programme with some numbers. But I have yet to group this into one mightu awesome package going over four years covering issues like growth, employment, borrowing, debt and deficits - all with multipliers. This is a big undertaking and please don't think is an excuse; I've actually been working on such a package for some months for a paper to be published. Unfortunately, my day job (and keeping up with this blog) gets in the way.

But you're right - it's time to get this work done and out in public arena. One of the problems - apart from not having access to the ESRI's ultra-super HERMES programme - is that base-line projections for growth and debt change each week, making forward projections very tenuous. Still no excuse. All I'd say - I understand the wavering but stay with this perspective for a little while longer and hopefully I'll be able to produce some data where we can have a more informed and constructive discussion.

Just on the particular point re: subsidies to landlords; there's a very simple way to clawback money, apart from the more negotiation approach that Fintan suggested (which is a good idea). Just cut the tax relief on interest paid by landlords on their dwellings. In a recessionary post-bubble, high private debt scenario, it doesn't make sense subsidising passive income - especially when that income derives from property.

As to how much from the rich - I never believed there's a bonanza out there that will solve all our problems. Still, there are resources to score. If, however, we do that to drawdown the deficit we won't be exactly burning that money, but we will be singeing it. Better to invest it and start getting an economic return. That's the more sustainable and growth-oriented way to control the deficit.