Notes On The Front

Progressives Should Champion the Tax Commission Report

The Commission on Taxation and Social Welfare’s recommendations should be at the centre of a progressive programme to increase resources for a strong social state.  While there will be disagreements over this or that proposal, the broad thrust of the Commission report is progressive and substantial.

The Irish Fiscal Advisory Council has estimated that the main recommendations could raise up to €15 billion though the range of revenue yield could vary considerably (they helpfully provide an excel sheet of their estimates here).  The Fiscal Council stated: 

‘In many cases, there are no ready-made costings available for the measures proposed by the Commission. The Commission also tends to give general guidance rather than suggested rates or other specifics.’

So these are not precise or final estimates.  However, they show the potential to transform the social state. 

Depending on how one interprets the recommendation, the estimates could be higher or lower.  But they do contain proposals which, however interpreted, could cause some controversy, even among progressives.  Let’s go through some leading recommendations.

(a)         Land and Property

There are two main proposals in this category.

• Site-Value Tax: this tax would be applied to all non-residential property and replace commercial rates.  It would raise €1.9 billion

• Local Property Tax: The Commission recommended a ‘material’ increase in the property tax.  The Fiscal Council interpreted this to mean raising the tax to one of the highest levels in the EU – nearly six-fold, raising €2.9 billion.  Whatever about the economic and fiscal efficiencies this could produce, Fiscal Council’s estimate is probably a political non-starter.  But we shouldn’t assume that a six-fold increase was what the Commission had in mind.  It could be significantly lower but still constitute a ‘material’

(b)         VAT

The Commission proposes increases in VAT rates. The Fiscal Council interpreted this as increasing goods and services that are currently zero-rated or taxed at 9 or 13.5 percent to 15 percent.  This would raise €2.5 billion.  Of course, one does not have to support increasing all such goods and services (e.g. food) and one could combine this with a reduction in the standard rate. 

Progressives would rightly point out that increasing VAT would be regressive, hitting the lowest income groups the hardest.  However, it should also be noted that many countries with much higher VAT rates have lower levels of poverty and deprivation.  That’s because they channel this revenue into income supports.  So a high VAT rate is not necessarily opposed to anti-poverty strategies.

(c)          Capital and Wealth

There are two big items here.

• Restrict or Remove the Exemption of the Sale of the Principal Private Residence from Capital Gains Tax: In short, if I sell my house (my home), any ‘profit’ I earn will not be subject to capital gains tax.  This is a major tax subsidy and has no basis in equity – not if one believes that all income, regardless of source, should be taxed.  The Fiscal Council estimates this could raise up to €1.1 billion, though estimates could vary significantly. 

• Inheritance Tax: a range of revenue-raising measures (transfer of assets subjected to capital gains tax, reducing tax-free thresholds, reduce tax reliefs) could yield up to €1.3 billion.

These measures are likely to be highly progressive.

(d)         Environmental Measures

This category includes measures which the Government is already committed to; increasing carbon tax, for instance.  Another large item in this heading is the removal of tax-based fossil-fuel subsidies over the long-term.  Given that Ireland has the second highest-level of fossil-fuel subsidies in the OECD, as noted by the Commission, means that this measure goes beyond the fiscal and cuts to the heart of strategies to achieve climate justice.

(e)         Social Insurance

It is well known that Ireland has a weak social insurance system compared other EU countries.  Driving up revenue from this source will be key to funding a strong social state. In this regard, the Commission proposals are a little disappointing.

• Currently, employees earning below €352 per week are not subject to the 4 percent employee PRSI contribution. However, once they exceed that threshold, their entire income is subject to PRSI.  The Commission recommends that a lower nominal rate (e.g. 2 percent) be applied on earnings below the €352 threshold. Yield:  €500 million.

This would impact exclusively on low-paid and part-time employees.  While there is an argument in terms of fiscal sustainability and reciprocity (employees don’t start paying PRSI until they reach €352 weekly earnings but they can access social insurance benefits upon reaching €38 per week), introducing a new contribution rate would be penal given Ireland’s low-pay status.  This recommendation can only be phased in when a new collective bargaining regime becomes operational – so that low-paid and part-time workers have the bargaining power to help maintain their net income.

The other big item is the increase in self-employed PRSI from the current 4 percent to the employers’ rate of 11.05 percent. This is in keeping with the recommendation from the Commission on Pensions.  This would yield €800 million.

However, it is disappointing that the Commission didn’t propose substantial increases in employers’ PRSI to finance a strengthening of social security measures such as in-work family supports, short-term unemployment, illness and disability supports.  To given an idea:  employers’ PRSI would have to double to reach the EU average – or about 10 percentage points.  While we may not need that level of revenue given the relatively low-level of pensioners, each percentage point increase would yield over €800 million.

(f)          Income and Corporate Tax

The Commission didn’t propose any substantial changes to income tax, apart from phasing out tax relief on private health insurance as Sláintecare is implemented.  This measure makes up over half of a relatively low level of revenue-raising measures. 

Another disappointment, however, is the Commission's failure to tackle some of the regressive and inefficient tax subsidies available to the corporate sector.  Leaving aside the vexed question of Ireland's low corporate tax rate, the Commission’s support for such subsidies are justified on neither economic or social grounds.  In this regard, NERI’s Dr. Tom McDonnell, a member of the Commission, refused to endorse the chapter on corporate subsidies, writing: 

“Chapter Nine ‘Promoting Enterprise’. . . set out a series of recommendations that endorse and support a range of very generous tax expenditures and low tax rates for enterprises and/or high earning individuals. While in some limited and special cases these types of reliefs may individually have an economic justification, they also breach the principles of vertical and horizontal equity, are highly regressive, reduce transparency, and are at odds with tax justice and solidarity principles. Individually they are problematic, albeit perhaps, in some cases, defensible. Collectively they undermine the approach taken in the rest of the Report. In my view, the overall balance between fairness and potential efficiency gains is not achieved. This imbalance is compounded by the recommended retention of other generous tax expenditures on capital transfers described elsewhere in the Report and also by a rate of employer PRSI that is low by Western European standards.”

When progressives are debating the Commission proposals, they should bear this dissent in mind.

* * *

The Commission proposals are challenging:  increases in property tax, VAT, PRSI on low-paid groups.  But there are considerable variations possible and the Fiscal Council’s estimates are only one interpretation.  However, the broad thrust of the Commission’s proposals is:

• Progressive: half of the proposals relate to capital, wealth, and property.

• Efficient: tax increases on capital, property and consumption have the least impact on economic performance.

Most of all, it puts to rest the idea that substantially increasing overall tax revenue would hit income taxes.  The Commission shows this is not the case.

There is a reason the Tánaiste was quick to rubbish the Commission’s proposals.  They would impact mostly on high-income, high-wealth households – a key constituency in Fine Gael’s political base.  It also showed that a high-tax economy is not necessarily a high income-tax economy, undermining an ill-informed criticism of a strong social state.

Progressives need to put their own ‘interpretation’ on the Commission’s recommendations, using the Fiscal Council estimates as a starting point.  But the debate will get ugly and, in many cases, downright dumb.  Fine Gael’s Cllr. John Kennedy wrote in the Irish Times:

“Throughout the report, there is a heavy emphasis on “redistribution” and in the case of the recommendation on capital acquisitions tax [inheritance tax], this sentiment borders on being an example of bona fide Marxism which is rare to see in such a commissioned report.”

Geez.

So let’s champion the Commission report, if only as a starting point.  Let’s debate the particulars.  Let’s improve on some of the recommendations.  Let’s address the omissions and shortcomings (in particular, employers’ PRSI and corporate subsidies).  But let’s not allow the report to be side-lined, gather dust, consigned to an historical waste-bin. 

It has the potential to build a strong social state in an economically efficient way.  Isn’t that what all progressives want?

It's Not Just Tech

Understandably, a lot of attention has been paid to the job losses and hiring freezes among tech companies, especially given the treatment of Twitter workers.   This is a high-profile and economically important sector.  However, we are in danger of overlooking a larger, potentially more dangerous development– the considerable reduction in employment throughout the economy in the last three months, most of which is impacting on low-paid sectors.

While there was strong growth in employee numbers up to April, between May and August, there has been a decline of 56,000 employees, or 2.4 percent.

So far the unemployment numbers has not matched this reduction.  The CSO’s monthly unemployment report shows an increase of only 4,700, or a 4.2 percent, in the numbers unemployed.  The Live Register isn’t picking up anything significant either.

However, there are a number of reasons why a decline in employee numbers doesn’t automatically translate into an increase in unemployment.  People could be leaving the labour market for caring duties, or education and training.  Others might be leaving the country – returning or leaving home.  Some might be taking up self-employed work.  In other instances, two part-time employees might leave and be replaced with a full-time worker; in this instance, the number employed falls but not the total hours worked. A fruther qualification is that recent months should be treated as provisional and subject to subsequent revision.

Whatever the explanations we should be alert to this potentially emerging trend, especially as to where it is impacting.

There are 33,000 fewer employees in the hospitality sector, followed by falls of 8,000 in the arts & entertainment, and distributive sectors.  The losses in these three low-paid sectors made up 87 percent of the entire economy-wide loss of employees.

There were no significant gains made in any sector bar the financial services sector.  There was a minor gain in the ICT sector but that is before the recent job loss announcements (which may not become evident in the data for a few months).  In short, almost all sectors suffered a loss of employees.

And as often happens, it is young people and women who take the first and significant hits.  While there was a 2.4 percent decline in employee numbers:

• Among 20–24 year-olds, the reduction was 7.7 percent
• Among 25-34 years-olds, the reduction was 3.1 percent

And women were more than twice as likely as men to suffer a reduction in employee numbers.

References to a potential recession are actually references to unemployment.  In some cases there is a limit to what a government can do in the short-term.  If there is a ‘correction’ in the tech or other multi-national dominated sectors (code word: job losses), Ministers can do little to influence what is a global process. However, governments can influence domestic economy.  And they can help mitigate the damage. 

This requires measures to ensure that demand, especially consumer demand, is maintained.  Boosting wage and income floors is one effective measure as these groups spend most of the additional income they receive; namely, the minimum wage and basic social protection rates.

Another helpful measure is to introduce a pay-related unemployment benefit.  This would help households maintain consumer spending in the short-term, rather than see their disposable income fall over a cliff, risking debt or significant cuts in their consumption.  Regarding this, the Government’s recent announcement that they will examine a pay-related element to unemployment benefit is good news. 

Unfortunately, this will take time (this should have been top of the agenda following the last recession).  In the intervening period, the Government could re-introduce the staggered payments under the pandemic unemployment payments which would provide some support.

Hopefully, this fall in employee numbers is only a blip with growth returning in the months ahead.   But we should prepare for the worst.  And the worst is that we are heading into a recession driven by job losses in both high-value and low-paid sectors.

It’s not like we haven’t been warned.

Wages are Falling - Profits are Rising

The share of wages in the economy is falling as profits are rising. While measuring wages (labour’s share) is difficult due to the distorting effects of multi-nationals, the CSO provides data for the domestic sector which is where 90 percent of work is done.

The share of wages in gross value-added (or net business income) has fallen significantly:  14 percent for the overall domestic economy and 31 percent for the domestic manufacturing sector since 2000.  In short, profits are gobbling up more and more of the net revenue that business is generating.

• In 2000, capital compensation (profits) took a 40 percent share in net business revenue.  This rose to over 48 percent by 2019.

• In 2019, the share of profits uin the domestic manufacturing sector rose from 43 percent share to over 60 percent during that same period.

One explanation could be that as economies modernise, more activity takes place in less labour -dense activities such as modern manufacturing or ICT.  However, the share of labour-dense activities has not changed over the 19-year period in the combined agriculture, distributive, hospitality and construction sectors.

One could also argue that higher profits are necessary to fund higher investment.  But with profits rising, has investment risen, too?  It doesn’t appear to be the case.  Using the CSO’s measurement of modified investment (excluding multi-national distortions) and excluding public investment we find:

• Private sector investment in 2000 was 23 percent of national income (GNI*); or16 percent if we exclude house construction

• By 2019 investment fell to 16 percent of GNI*; or 14 percent if we exclude house construction

It seems that rising profits have not resulted in higher investment though one has to be careful navigating the maze of modified measurements.

How do we compare with our peer group in the EU, other high-income economies?  Here we have to turn to net national income.  Our GNI* is not measured across European economies.  The best comparator is net national income which removes all capital depreciation.

Ireland is at the bottom of the table.  Wages (direct wages and/or employers’ social insurance) would have to rise by over 14 percent to reach our peer group average; and nearly 10 percent to reach the Eurozone average.

There is rarely a single explanation for complex economic interactions.  But the following must be a major contributing factor.

Trade union membership has fallen from 36 percent of all employees in 2000 to 25 percent in 2019 – a proportionate decline of 30 percent.  While there is some good news in recent years (it rose from a low of 23.4 percent in 2016), there is still a long way to go to return to 2000 levels.  And even further to reach the 80 percent benchmark established in the recent EU Directive on Adequate Wages.

This obviously poses a challenge for employees in the workplace – to organise through trade unions to capture a higher share of the net business revenue they generate. It poses a challenge to trade unions to reach out to those workers.  John Geary and Maria Belizon estimate that 44 percent of non-union member would vote yes to establish a union so there is an open door.

But this also poses a challenge to civil society groups who campaign on issues of poverty and social exclusion.  Can we really expect to build a strong social state in the context of capital taking more and more value-added? 

This makes trade unionists and anti-poverty activists natural allies in the struggle for higher wages (and so many other issues).  It’s time to pursue a common agenda.