Cassandra 2012 Headline Animator

Friday 27 January 2012

Kenny is Right: The Irish Were Greedy


Taoiseach Enda Kenny has raised the ire of his fellow citizens by suggesting that their greed was at the root of the Irish economic collapse. How true is that?

About six months after I arrived in Portlaoise there was a release of apartments in a luxury block under construction next to the O'Moore Park GAA ground. People queued overnight to buy and they were all sold within the first hour. Some signed up and paid deposits for two or more units. Their motivation had nothing to do with a desire for a home. They believed that they would make a killing either from the rent they hoped to receive from future tenants or by selling on at a profit.

That is one example among many that illustrate the veracity of Enda Kenny's words yesterday when he said that the country had gone mad during the property boom, driven by greed. In Portlaoise not only were there more houses and apartments being built than there were ever likely to be buyers or tenants for. In addition several retail complexes were under construction or planned. Even then there were many empty units in the town centre and in each of the recently completed shopping centres. Some of these have now been occupied, but elsewhere businesses have closed leaving even more vacant premises.

This was the story right across Ireland. In our five years living here my wife and I have taken several short breaks in various parts of the country and in every town and village we've stayed or passed through there are newly built estates. At the height of the boom homes were being completed at a rate of 90,000 a year; enough to replace the whole of the previously existing housing stock within a decade. Anybody who had the temerity to suggest, as some did, that this rate of construction could not be sustained was condemned for talking down the economy.

Atmosphere of Affluence
The government was enabled to keep the level of general taxation down in part because of the revenue generated through stamp duty, a transaction tax imposed on every purchase. Social welfare payments and public sector incomes soared. But it is also unfair to read into Mr Kenny's words the suggestion that individual citizens were the only group on whom he was placing blame. I have indicated elsewhere my view that one of the underlying causes of the atmosphere that prevailed during those years of madness was the amount of money pouring into Ireland from tax payers in the wealthier nations of the EU.

In that atmosphere with new infrastructure under construction across the nation, brash new shopping centres and estates of homes described by their developers as "luxury" or "executive" even when all too often they were anything but, it was inevitable that people would forget the old adage "never a borrower or a lender be". It was easy to forget the reason why the system of hire purchase that enabled my generation to furnish our homes on so called "easy payments" was described by our parents as "the never-never".

As affluence increased steadily through the second half of the twentieth century and at an increasing pace in the first few years of the twenty first it was easy to ignore such seemingly old fashioned notions. It was all too easy to believe that, whilst it might be difficult to pay the mortgage today, tomorrow's salary increase would make it easier in the future. The more luxurious our neighbour's home and contents the more luxury we wanted for ourselves. That is the nature of greed. It feeds on itself, creating a sense of false security in its victims. Like a drug, it creates a craving that can never be satisfied. And, like a drug, when it is denied it leaves its victim with unbearable withdrawal symptoms.

As I indicated in that earlier post it is unreasonable to blame foreign tax-payers for wanting their governments to seek recompense. I can quite understand why Mr Kenny is both eager to demonstrate Ireland's willingness to repay her debts by paying off the most recent instalment to bond holders and to try to explain to the leaders of those wealthier nations how his country incurred such incomprehensible levels of debt in the first place.

Friday 20 January 2012

Emigration: Lifestyle Choice or Dire Necessity?


I am in regular contact with a number of the people with whom I was in school during the 1950s. All were born and brought up in England but a significant number of them have made their careers and still live in various "foreign parts." One runs a small mineral exploration business in central Africa, a couple live in the Philippines, another in Thailand. At least one is in Canada and another runs a website dedicated to the Norton motorcycle owners club in France. Yet another has lived in Johannesburg for many years.

Of the young men who served their apprenticeship alongside me in a small engineering company in the early 1960s, three emigrated to Canada as soon as they qualified. At that time it was possible to migrate to Australia for £10 and many did. Of my close relatives, a nephew moved his small business to Australia several years ago and has gone from strength to strength.

So there can be nothing intrinsically wrong with Minister Noonan's statement that "emigration is a lifestyle choice," for that is plainly the case in every one of the examples I have just enumerated.  On the other hand, when unemployment is running at 14.3%, it is at best stupid and at worst insensitive to suggest that the recent increase in migration from Ireland is not fuelled by the lack of opportunities here. That fact was confirmed in Will Faulkner's interview with a representative from the Australian immigration service on Thursday morning's Midlands Today programme.

Not a Choice, a Necessity
A young person seeking work in Australia recently had this to say in an anonymous article in the Kerryman: "I wish I could have stayed in Ireland. I wish that I had another option other than to leave, but I didn't." So no, Minister, these days emigration is not so much a lifestyle choice as a regrettable necessity for too many of your citizens.

The Minister is also showing a degree of stupidity when he asserts that Ireland needs to ensure that it is providing the best possible education and training for its young people so that they can take advantage of opportunities overseas. This, it seems to me, is the opposite of what is required. Whilst it is true that the only people able to take advantage of overseas employment opportunities are those with marketable skills, it must also be the case that those are the very people the nation needs to retain if it is to regenerate its failed economy.

What is needed is for the banks to start lending again so that young ambitious entrepreneurial people can start new businesses and generate the jobs the country so desperately needs.

Monday 16 January 2012

The Arrogance of Believers


I see that the UK government has indicated that it will withhold funding from any "free school" that teaches creationism (Richard Dawkins Celebrates a Victory, Observer, 15 Jan 2012). This is the doctrine that the universe was created more or less as we see it now just a few thousand years ago. This is taught by some organisations as if it were a scientifically sound theory on an equal footing with evolution.

It does seem to me that it is perfectly possible to accept evolution as scientific fact, based as it is on incontrovertible evidence, and at the same time to believe in a creator. Not, of course, a creator who constructed the universe exactly as it currently appears to us, but one who set off the "Big Bang" that science tells us got it all started.

The truth is that we cannot know if there is a creator behind it all. It is difficult for the human mind to conceive of anything that has not been created by an intelligent being, let alone something as vast and complex as the known universe. And then there is that ancient conundrum: if God created the universe, who (or what) created God?

The "Chosen People" Myth
What I do think is the height of arrogance is the belief that the creator, if there is one, did it all for the benefit of the human race. And that is topped only by the belief that it was done solely for the benefit of a small portion of the human race that will at some point see the elimination of all non-believers. I also think that the existence of a creator does not in any way imply the existence of an after-life.

Nor do I believe that praying or offering sacrifices or other forms of obeisance to the creator is at all likely to make that creator change his/its/her plans so as to satisfy our personal preferences. That is not to say that I don't believe in the power of prayer so long as the word "prayer" is a way of describing a period of quiet consideration of ones difficulties, a form of meditation, in which one is enabled to come to some level of understanding of the cause of those difficulties and, thereby, see a way to overcome them.

If you have read this far you will have gathered that, when I am asked about my religion, I tend to describe myself as an atheist or humanist. It is not that I belong to a formal organisation of those who describe themselves thus, just that my beliefs seem to be more closely aligned with atheism and humanism than with any of the multiplicity of belief systems based around the notion of a supreme being.

Friday 6 January 2012

Property Tax Pros and Cons


The Household Charge currently being introduced in Ireland is an interim measure pending the introduction next year of a "property tax". It is argued that Ireland is one of the few countries in the developed world that does not levy a tax on private domestic property and use that levy to fund local public services.

The notion of taxing property, or more specifically, land, goes back a long way and is based on the belief that the land and the natural resources on and under the land should be held in common. It is not possible to make a moral case for ownership of land and natural resources to be held exclusively by a single individual or family. Any rent charged for the right to develop and use the land rightfully belongs to the community. A property tax is therefore justified on the basis that it returns to the community a portion of the value generated by use of the land.

Location, Location, Location
Whilst this can readily be seen to apply to commercial uses of land, how can it be applied to domestic property? Especially in the case of the ownership of a single dwelling? The answer can be found in the old estate agent's adage "Location, location, location". Homes that are established close to good public amenities command a higher value than those in isolated locations. It follows that the increased value that arises because of those public amenities should be taxed in order to contribute to the cost of providing those services.

In a paper produced at Dublin Institute of Technology in 2005 Tom Dunne enumerated these arguments and went on to highlight the practical difficulties associated with the implementation of such a tax. It makes interesting reading and we must hope that Enda Kenny and his advisors have studied it. [Land Value Taxation: Persuasive Theory but Practically Difficult, Dublin Institute of Technology School of Real Estate and Construction Economics, 2005]

Tax Bads not Goods
A more thorough examination of the case for a tax based on the increased value of land that arises from community provided services can be found in an earlier article by Nic Tideman which also discusses the practical issues and offers suggestions for ways to overcome them. Tideman also points out that such a tax could be developed in such a way as to benefit the community by taxing only "bads" rather than "goods". Thus a business that imposes burdens on the community such as pollution or traffic congestion, lowering the value of neighbouring property, could be taxed at a higher rate than businesses that are of benefit to the neighbourhood which might even be exempted from the tax. [The Case for Site Value Rating, T. Nicolaus Tideman, Date unknown, originally published by the British Liberal Party]

I found the Tideman article via a website called Wealth and Want. Although this is a USA based site geared to the US economic situation the articles that the site owner has assembled and to which he has provided links are from around the world and relate just as much to the Irish and wider European economy as to that of the USA. He has created an excellent resource for those seeking alternatives to our failed economic system.

I would urge anyone actively seeking solutions to our woes, rather than merely seeking to explain how we got here, to study these articles. In my humble opinion they make a very strong case for a complete re-thinking of our economic system with the potential of ensuring fairer distribution of wealth, at the same time providing greater rewards for wealth creators. As the site's masthead states "... democracy alone is not enough to produce widely shared prosperity"

Sunday 1 January 2012

Are Sales Taxes Fairer Than Income Taxes?


With an increase in VAT taking effect in Ireland today (Jan 1st 2012) it is worth taking a look at the comparative fairness of taxes on sales and those on earnings.

There is a widespread belief that those individuals who receive very high earnings should pay high rates of tax on at least that part of their income that is deemed excessive. There are a number of problems with this concept. First and foremost, who determines what is "excessive" against what criteria? €100k? €500k? and just how punitive should be the tax on the portion of income that exceeds the chosen threshold?

Then there is the effect on incentives; although it is wrong to attach too much importance to this in relation to high incomes. Too often when an individual's earned income is so low that he or she receives support from a variety of social welfare programmes the marginal rate of tax becomes close to - and sometimes even exceeds - 100%. This occurs when the amount of support withdrawn as a result of crossing a particular income threshold exceeds the additional income received. That certainly is a disincentive. No one ought to be placed in the situation of becoming worse off as a result of working harder, working longer or receiving a promotion. So it is not necessary to feel too much sympathy for high earners whose marginal rate of tax exceeds, say, 50%.

More than one tax is levied on incomes
I can remember when the marginal rate of income tax on high earners in the UK was 90%. Executives justified high salary increases on the basis that, in order to give someone a £100 increase in take home pay it was necessary to raise his (and in those days it was nearly always a man) headline salary by £1000. Logically, when marginal rates fell dramatically under a previous Tory government, these individuals should have had their salaries reduced. In fact they just continued to receive big annual increases.

In most jurisdictions the tax that goes by the official title of "income tax" is not the only tax levied directly on incomes. In the UK, for example, there is "National Insurance", originally intended to cover the cost of health and social programmes this tax long since ceased to be so hypothecated and simply went into the general pool of government income. The equivalent in Ireland is PRSI.

Often these levies are applied only to income up to a certain level, thus reducing the effective margin between basic rates of income tax and the next higher band. So, for example, the basic rate might be 20% and the next band 40%, but, if the person on basic rate is also paying an 11% "Social Insurance" levy that cuts off at the same level as that at which the rate of income tax increases to 40%, the margin might look like 20% but is actually only 9%.

It's all so complicated
All this is starting to get complicated and I have only scratched the surface of the many different taxes on incomes and the allowances that can be claimed against them. And that is the other problem with income taxes. The harder you try to make them fair the more complicated they get.

Having taken a portion of an individual's earnings before he or she even gets to see its colour the government next proceeds to take another chunk from every pound, dollar or euro he or she spends. Actually, not everything because certain goods deemed essential to living, typically food and children's clothing, are exempted from sales taxes. And this is where the sales tax as a concept starts to look fairer than income tax. These days it is not possible to survive without purchasing some things that are subjected to sales taxes but it can reasonably be argued that the sales tax levied against big ticket items that only those on high incomes can afford ensure that the rich contribute more to the state's coffers than do the poor.

It is argued that such taxes act as a disincentive to consumption and that is bad for an economy but this surely happens only at the margins. If you can't afford to pay an extra 2% on the price of an item you probably can't afford it anyway. On the other hand, if paying €10k for something is no problem increasing the price by €200 probably won't stop you.

Increase sales tax on luxury goods
I would go much further, as the late Roy Jenkins did back in the days when the UK sales tax was called purchase tax, and levy a higher rate of sales tax on luxury goods. Of course, we are then presented with the problem of defining "luxury goods". One way might be to look at the average price paid for a particular category of item, say motor cars or ladies' wear, and levy the higher tax on those items for which the recommended retail price was more than double the category average. Difficult but not impossible I would argue.

And it could have another benefit: many such items are imported. Ireland and the UK could both do with reducing their level of expenditure on imported goods so a tax that acted as a disincentive would be beneficial. And, because the tax was determined against the value of the item rather than its origin it ought not to be outlawed by trade agreements as being overly protectionist.

So, on balance I tend to favour sales taxes over taxes on income when it comes to assessing their relative fairness. Of course, the elephant in the room is the size of the overall tax burden. And that depends very much on what you believe should be included on the list of things best provided by the state. Views on that vary widely across the political spectrum and between this side of the Atlantic and the USA. But that is a whole different argument.