It’s an established part of the Irish economic and political cycle.  Just when we are starting to see Christmas goods appear in the shops (in October, damn it), then we also start to hear the plaintive and deceptive tones of the special-interest groups trying to bend the ear of the Minister for Finance, and promote their own causes at the expense of everybody else’s.

There is a pattern to these transparently self-serving submissions.  Reduce (or more likely these days, don’t increase) the tax on this activity or that product, they say, and the effect will be a wonderful growth in jobs and prosperity, which will more than offset the tax foregone.  Alternatively, NGOs and quangos fire off a fusillade of demands that this allowance or that subvention should not only not be reduced but that, because their constituents are uniquely vulnerable, it should be increased (with wholly beneficial effects on the economy, of course).

And newspapers and other media blandly regurgitate the related press release without adding some proper analysis.

I am reminded of the famous candlestick makers’ petition revealed to us by Frédéric Bastiat (1801-1850) wherein they asked the French government “to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat”.

And how did our resourceful candlestick makers justify their demands? By pointing to the wonderful effects such a law would have on economic activity:

First, if you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged?

If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth.

If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land.

Our moors will be covered with resinous trees. Numerous swarms of bees will gather from our mountains the perfumed treasures that today waste their fragrance, like the flowers from which they emanate. Thus, there is not one branch of agriculture that would not undergo a great expansion.

The same holds true of shipping. Thousands of vessels will engage in whaling, and in a short time we shall have a fleet capable of upholding the honour of France and of gratifying the patriotic aspirations of the undersigned petitioners, chandlers, etc.

But what shall we say of the specialities of Parisian manufacture? Henceforth you will behold gilding, bronze, and crystal in candlesticks, in lamps, in chandeliers, in candelabra sparkling in spacious emporia compared with which those of today are but stalls.

There is no needy resin-collector on the heights of his sand dunes, no poor miner in the depths of his black pit, who will not receive higher wages and enjoy increased prosperity.

It needs but a little reflection, gentlemen, to be convinced that there is perhaps not one Frenchman, from the wealthy stockholder of the Anzin Company to the humblest vendor of matches, whose condition would not be improved by the success of our petition.

A wily bunch, these French candlestick makers.  But our own special-interest groups are more than a match for them.  I can already hear the thundering hooves as they launch their cavalry at the poor Minister, armed with blustering press releases and practised in tugging at our heart-strings.  Pass the popcorn.

It’s a commonplace that the Celtic Tiger died in the early noughties, when real growth was replaced by false growth based on inappropriately low interest rates, an over-stimulated construction sector, and excessive pay increases for all sectors.  At the same time, the public sector and its various agencies grew stale and bloated.  Proper management skills withered on the vine, as the solution to every problem became the throwing of money at it.  Those who shouted loudest, or who had an inside track, got an even greater share of the spoils.  Welfare benefits began to outstrip those available almost anywhere else.

And now that the tide has gone out, we see that the State’s finances are in ruins because we have an inflated public sector cost base and welfare budget, but our tax revenues have shrunk dramatically (the bank bailout is not the main reason we are bust).  The fiscal gap will have to be closed by higher taxes, lower public sector costs and decreased welfare benefits, and the process has started.  It is a condition of the bailout deal that we travel down this road, but most of what we are going to do would have to have happened even without the bailout.

We need to look back to a time before things went pear-shaped, to a time when tax rates and yields were sensible, when we got reasonable value for money from our public sector, and when welfare benefit levels were appropriate to our real standard of living as a country.

Realistically, this would be sometime around 2002.  At that time, we hadn’t yet experienced a prolonged period of low Euro interest rates which was to prove such a part of our problem; we hadn’t seen the worst of the crazy pro-cyclical property incentives and unnecessary tax cuts; and the three-card-trick of public sector bench-marking lay in the future.

Did we feel poor as a country in 2002?  Were welfare recipients marching in the streets at the low level of benefits available?  Were civil servants and politicians noticeably underpaid?  Were there PAYE marches as there were in the 1970s?

No, no, no and no.

So let us turn back the clock, fiscally speaking, and revert to a position that is acceptably fair and is affordable.  This will involve further big cuts in pay, pensions and benefits, combined with additional tax increases for all taxpayers, including a substantial annual property tax.  Let’s do it, and do it quickly.   While we are at it, we need to get smart with our policy on the statutory minimum wage by re-setting it every 6 or 12 months at the average of the currently prevailing minimum wage in a “basket” of competitor countries.

And let us be prepared to resist the shouts and roars from politicians, the media, NGOs and commentators that we are being savage in our treatment of this sector or that sector.  After all, all we are doing is trying to reconstitute the sort of economic and fiscal conditions that applied in 2002.  We thought we were doing all right then, and we were.  The social fabric was certainly not collapsing then, in fact we had a bright future ahead of us and, in contrast to the present national mood, optimism was the order of the day.

From the Irish Times a few days ago:

GERMANY’S MOST influential economist has said the Irish economy is “in rude health” and the incoming government should increase income taxes before demanding a cut in interest rates on Ireland’s EU-IMF loans.

Prof Hans-Werner Sinn, head of Munich’s Ifo economic institute, insisted yesterday that Ireland doesn’t need any EU bailout because there was “huge room to manoeuvre” on tax.

The German tax ratio is 40 per cent and the Irish is 29 per cent, 11 percentage points lie in between,” he said. “If you take just three points from the 11 you still have a huge difference to Germany and would have all the money you need.”

He said the Irish desire to renegotiate an interest rate cut was understandable, but that it should not be considered “if Ireland isn’t prepared to increase its taxes”.

“Ireland is a country in rude health, in no way comparable to Greece and I cannot understand any of these insolvency stories, there’s no reason to place Ireland under the rescue shield,” said Prof Sinn, head of the Ifo institute which is behind Germany’s closely watched monthly business confidence index.

His pronouncements on our tax take are rubbish, and I’m surprised not to see the figures being challenged.  It is very important, given the continuing debate as to whether we should place the emphasis on cutting public sector costs or on raising taxes further, that we at least use correct figures when referencing our existing tax burden.

It would appear that Prof Sinn is basing his diatribe on Taxation trends in the European Union, 2010 edition which uses outdated 2008 numbers and, moreover,  bases the comparative ratios on Gross Domestic Product (GDP), not on Gross National Product (GNP).  Ireland’s GDP figure is distorted by multinational profits and their repatriation, and is some 20% higher than our GNP (in most countries the figures are effectively the same).  It is therefore misleading where Ireland is concerned to compare our tax burden based on % of GDP.   

In addition, as anybody who lives in Ireland can tell you, Irish taxes have risen sharply since 2008  and GDP/GNP has fallen significantly.  Therefore, I would be surprised if our tax take wasn’t now higher than the German tax take in percentage of GNP terms.

The other factor which may be at play here (and I would be grateful if some reader would confirm this) is that sometimes elements of PRSI are excluded from reported tax take and netted in our statistics against certain social welfare costs.  This naturally has the effect of understating the tax burden ratio.

I have a horrible feeling that we will see Prof Sinn’s comments regurgitated by the usual suspects (Vincent Browne / Fintan O’Toole / Social Justice Ireland / ICTU etc), not because his pronouncements are accurate, but because they assist a particular agenda.  And if as a result policy is skewed excessively towards higher taxes, or our case for lower EU/IMF interest rates is damaged, we will ultimately all be the poorer.

Fr Sean Healy, the knows-enough-to-be-dangerous-but-not-enough-to-talk-sense spokesman for Conference of Religious of Ireland Social Justice Ireland, has claimed that €1.4bn could be saved by reducing the pension income tax relief to 20pc.  But as usual he has the numbers wrong.

Would employees be taxed (as a BIK – Benefit in Kind) on the value of company contributions to pension scheme on their behalf?  If not, then I can see that as being a major source of leakage which would depress the tax yield from the proposal.

But if private sector employees are to be taxed on employer contributions, then surely state employees should be taxed on the imputed value of the state’s contribution to their pensions?  Now that would be interesting.

In a paper presented to the recent Dublin Economic Workshop, a leading pensions expert said the only way to get savings of €1bn by cutting the pension tax relief to 20pc was to also tax the value of the contributions made to pensions by employers. This would hit public servants hardest, he said.  The value of an index-linked pension is massive.  I could see a public servant earning €50,000 having to pay an extra €4,000 or so in BIK.  Would that breach the Croke Park Agreement?

Fr Healy also fails to understand that employee pension contributions do not benefit from a permanent tax saving;  on the contrary, they are put into a fund and are later taxed when the employee retires and draws them down as a pension.  By and large, the tax is just deferred.

So if I only get 20% tax relief when I put the money into the scheme, but am taxed at up to 41% when I withdraw it, then why on earth would I continue to make such contributions?

The real impact of Healy’s proposal would be to make it even harder for the State to persuade private sector workers to fund an adequate pension for when they retire.  And ultimately such under-funded workers would fall back on the State’s coffers for assistance.

Another example of the law of unintended consequences.

Frankly, the gap between tax receipts and Government expenditure is so large that there will have to be both major tax increases and major spending cuts in December’s budget.  So here is what I think should be done. 

I haven’t costed the extra tax revenues or cost savings, because I don’t have the capacity to do so, but I am confident that the combined effect will comfortably exceed €4 billion, and perhaps much more.

FF are going down, so they may as well come out from their hiding place with all guns blazing, like Butch Cassidy and the Sundance Kid.  It might even get them a few votes from those who are realistic enough to know that there are no soft options left.

  • A new income tax rate of 50% for earnings over €100,000.
  • A temporary 3-year income tax surcharge of 20% of everybody’s final tax bill.
  • Bring anybody earning over €12,500 into the income tax net, at the lower rate of 20%.
  • Increase VAT to 22.5%.
  • Increase tax on petrol/diesel to UK levels.
  • Child benefit: (a) phase in a reduction of child benefit to UK levels over 3 years; (b) abolish child benefit for high income earners; (c) abolish child benefit for fourth and subsequent children who are born after 2011.
  • Introduce a new self-assessed annual property tax based on the aggregate of two measures:  (a)  based on house size, at a rate of €5 per square metre plus  (b) based on site value, at a rate of 0.2%; against the total calculated in this manner allow a credit for each property of €500.
  • Reduce all public sector pensions (both future and those in payment) by 30% of any excess over €50,000.
  • Reduce all public sector pay by 30% of any excess over €100,000  (such a high threshold would probably prevent too much flak from the Croke Park Deal hardliners).

Ouch, that budget would hurt like hell, but it might allow us retain our economic sovereignty.  Better sore than subservient.

Minister for Finance Brian Lenihan was quoted this week as saying that “….. there is nothing in the Lisbon Treaty that diminishes our sovereignty in fiscal matters….. the government secured a protocol confirming this position in advance of the second Lisbon referendum.  To suggest ….. that our corporation tax rate is threatened by proposals announced today is highly irresponsible and certainly not in the interests of this economy which depends so much on foreign direct investment.   As I said in my Budget speech: ‘The 12.5% Corporation Tax rate will not change. It is here to stay.'”

I think he is whistling in the graveyard.  He is right in saying that the Corporation Tax rate in Ireland will remain at 12.5%.  But that’s not going to matter, because what’s really going to happen is that the EU, or a large subset of its member states,  will introduce a new tax system allowing them to tax companies, irrespective of where they are incorporated or are resident, largely on the basis of the proportion of sales made in each country.   That system is part of proposals for what’s known as a Common Consolidated Corporate Tax Base (CCCTB).

So if you have a company resident and managed in Ireland, the current system means that all its profits are taxed in Ireland at 12.5%.  But let’s say that 40% of that company’s sales in the EU are made into France.  What’s likely to happen when CCCTB comes into force is that France will levy Corporation Tax (at their, higher, rate) on 40% of the Irish company’s EU-wide profits.  That’s a bit simplified, and of course credit will be given for Irish tax already paid on those profits, to avoid double taxation, but it indicates the nature of the problem.

Since Ireland is a very small country, most sales by multinational companies are made outside the country.  The danger of CCCTB is therefore very real and very large.

But doesn’t Ireland have a veto on changes such as this?  Well, we have a veto on any direct challenge to the actual rate at which we charge Corporation tax, but we may not be able to stop other EU member states from pressing ahead and changing their tax systems to one based on CCCTB.   The responsible EU Commissioner (who has the cumbersome title of Commissioner for Taxation and Customs Union, Audit and Anti-Fraud) is of a mind that CCCTB should be implemented by means of the “enhanced cooperation procedure”  of the EU Treaty.  This procedure would only require that one-third of all EU member states agree to implement CCCTB in their territories, and they could go ahead.  

The enhanced cooperation procedure is the means by which the concept of a “two-speed Europe” will come into being, and Ireland’s corporation tax advantage could be its first victim.

Fintan O’Toole wrote an opinion piece earlier this week in the Irish Times called “Bailout has turned us from citizens into serfs”.  As usual, it’s an interesting and extremely well-written article.  However, I’m again compelled to wish that O’Toole would stick to subjects in which he has some competence.  He tells us:

There are 1.9 million people at work in the Irish economy. Their average earnings last year were €36,300. After tax, that’s €29,500 each. From this, each one will stump up an average of €4,600 just to pay the interest on the money the State is borrowing to fund the bank bailout…..Or, to put it another way, everyone lucky enough to have a job in Ireland over the next 10 years will be working most of one day a week to pay for Seanie, Fingers and the lads.

The numbers here are ludicrous.  Where are the editors and fact-checkers? Assuming an interest rate of 6%, O’Toole would have us believe that the State is borrowing €145 billion to fund the bailout!  In fact the real net cost will be a small fraction of that (and the government will argue that the cost is in any event smaller than what it would ultimately have cost us all if they had let the banks collapse).

He bases his numbers on this blog posting.  At least the author of that blog is careful to advise as follows:

In fairness, it’s not clear that we have enough information to know that yet. If the banks raise their own capital we won’t need to borrow as much. Also, if we part-recapitalise the banks out of the National Pension Reserve Fund (which is what we did before) we will borrow less again.

And, more importantly, everybody seems to be forgetting the enormous value to the taxpayer of owning big percentages of BOI and AIB.  These organisations (unlike Anglo-Irish and Irish Nationwide, I fear)  will quite quickly return to profitability, and the government stakes will be worth billions.

The Irish Times wouldn’t habitually commission an economist or an accountant to write controversial articles on, say, theatre or art, where these are outside their sphere of competence.  So why does it regularly publish economically illiterate articles on finance matters, written by a social and arts commentator, however brilliant he may be in those fields?