The Myth of Fair Taxes

Opposition to taxes is universal. That statement looks like a truism - something so obvious that it does not need to be said. And yet there are exceptions. Few object to the things that our taxes pay for, unless it is the high salaries and expenses of those charged with the task of administering them. And lately in Ireland and in the UK there is plenty of clamour from those who see the solution to their own supposedly high taxes as the imposition of even higher taxes on others.

This is usually expressed as a move toward greater fairness. So, for example, many in Ireland would like to see the introduction of a third tier of income tax, taxing marginal income above, say, €150k at 50% instead of 41%. Meanwhile, in the UK, the run up to the 2012 budget saw a debate about whether the 50% rate already in force there should be reduced.

The other suggestion that is being made in certain quarters is the imposition of a "wealth tax"; a one off charge on the assets of the richest one or two percent of the population.

Whilst I can sympathise with the anger that lies behind such arguments I have serious doubts about the practical effects of such measures were they to be introduced.

50% Income Tax doesn't work

Consider, first, the 50% income tax band: those eligible to pay tax at that rate already have a marginal rate of 41% in Ireland. If they spend most of the remaining 59% they will pay 23% VAT on their purchases. With less to spend they will pay less in VAT so the €90 increase in tax on every €1000 of income has to be offset against a reduction of €21 in potential VAT income due to the reduced spending. The net gain to the exchequer is therefore only 90-21=69 or 6.9%.

It is also important to look at the kinds of things such individuals are likely to spend their money on. Someone on a tight personal budget will inevitably make the bulk of their purchases in British or German owned chain stores on goods imported from the Far East. Those with cash to spare are more likely to spend that spare cash on high-end Irish made artisan products or imported luxury goods that earn high margins for their Irish importers. Reduce the amount they have to spend in this way and you damage Irish businesses and put Irish jobs at risk.

Wealth Tax - the best way to export the nation's wealth?

I turn now to the idea of a wealth tax. It is my understanding that the wealth that is being talked about here is not cash lying idle in some vault. It is tied up in property, in race horses, in various valuable artefacts and, mostly, in businesses. In order to liberate cash to pay a wealth tax it would be necessary for the wealthy person to sell some of those assets. A forced sale would, of course, not realise the full value of the asset sold. And who except another wealthy person would have the means to make such a purchase? And as the only Irish people with the means to make such a purchase would be seeking to sell some of his or her own assets the only serious buyers would be foreigners; Arabian sheiks and Russian oligarchs spring to mind.

The impact on jobs would perhaps not be great; the assets and the jobs they represent would still be there but now under foreign ownership. The government would have the cash to spend but the overall wealth of the nation would have been reduced and a significant part of it transferred overseas, something that not even those on the extreme left want to see. All this, of course, assumes that the wealthy would readily succumb to the imposition of such a tax without taking avoiding action such as moving themselves and their assets overseas.

The plain fact is that the only way to reduce tax is to reduce the size of the public sector. We can all point to waste and ways in which the public services could be made more efficient. But, just as we object to paying taxes we don't like it when one person's efficiency saving leads to the removal of a perk from which we have benefitted. You may say that a particular road improvement is a waste of money; I might be grateful for the opportunity to get from one place to another more quickly and in greater safety.

In reality there is a limit to what can be achieved through increasing efficiency and reducing waste. And the most effective way of bringing those savings about is to tighten budgets and leave it to the people at the sharp end to seek and to implement the necessary changes. And isn't that precisely what Fine Gael/Labour are trying to do and what everyone seems to object to almost as much as they object to taxes?

Who should pay for your child's communion dress?

I heard an extraordinary thing on Will Faulkner's radio show this morning. Apparently there is in Ireland a social welfare payment especially to cover the cost of children dressing up for their first communion. Will drew attention to a report that the government wants, not to end the payment, but to cut it back. According to the report, published in the Irish Examiner today 2nd February 2012, €3.4 million were distributed in such payments in 2011.

I have blogged previously about the extraordinary excesses of the Irish social welfare system but the discovery that such a payment is available left me spluttering into my porridge. I suppose I should not be surprised. The importance attached to such religious ceremonies within Irish culture is well known. News reports at the height of the "tiger" years claimed that some parents were hiring helicopters to bring their little treasures to Church for confirmation or first communion.

Solemn occasion sullied by materialism

It is at this time of year that such events take place and the shops are presently full of communion dresses. Hotels and restaurants advertise their availability for confirmation celebrations. I have made no secret of my atheism so I hope people will not be too shocked at my reaction. But, growing up in England I never came across any such pomp in the protestant churches I attended. Indeed, such extravagance is generally frowned upon because it is seen as being a long way from the teachings of Jesus of Nazareth that are supposed to form the basis of belief for all Christians.

In my mind confirmation and communion should be serious and solemn occasions at which the true Christian affirms his faith in the healing power of his/her Saviour, seeks the forgiveness of his/her sins and promises to lead a better life in the future. It should not be sullied by the materialistic symbolism of dressing up and partying. The idea that tax-payers should be asked to fund such behaviour at all, let alone at a time when the country is being bailed out by its European neighbours is surely beyond reason.

Irish parents are already in receipt of remarkably generous child benefits and those who qualify for this special occasion allowance will already have received a payment toward the cost of school clothing.

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.

Are Pensioners Over-indulged?

My last post dealt with child allowances and my belief that, in Ireland, they are excessive. This time I am looking at the other end of the age scale: old age pensioners; and especially those, like myself, of foreign origin residing here in Ireland. And, no, I am not complaining that we don't get enough; rather, that we are another group whose treatment by the state is more generous than it ought to be.

I recently turned 70 which means that I am eligible for something called "The Household Benefits Package". This consists of a free TV licence, assistance with telephone costs and a contribution towards fuel costs. The latter is in addition to the heating allowance to which every UK citizen over 60 is entitled. And the whole package, which amounts to about €700 per annum, is in addition to the far more generous tax allowances received by senior citizens in Ireland. My wife and I are jointly able to receive up to €36k per annum before we become liable for income tax. This age related exemption is, however, being phased out over 4 years from 2011 when it was reduced from €40k.

Free Medical Treatment

A further way in which I and other overseas pensioners resident in Ireland receive preferential treatment is with regard to the Medical Card which entitles certain groups to free medical treatment. In general it is not available to Irish citizens until they turn 70 and, even then, is subject to a means test. In the case of anyone in receipt of a social welfare benefit from any state within the European Union no means test is applied so that anyone receiving, for example, the UK state old age pension is entitled to a medical card. I have been happy to take advantage of this over the past number of years because I assumed that there was in place some kind of agreement whereby medical costs that I and my wife incurred would be reimbursed by the UK government.

In short, I have all the benefits of a UK citizen plus the advantages of living in Ireland. I thank the Irish for their generosity but can't help feeling that in this, as in so many other things, the Irish are too kind for their own good. The only downside from my point of view is the exchange rate. When we arrived we were receiving €1.50 for every £1 we transferred from our UK accounts. That changed quite dramatically within little more than a year since when it has been fluctuating at around €1.15. I can't wait for the long forecast collapse of the Euro which should mean I can once again get more €s for my £s and more to spend here in Ireland, helping local businesses to stay afloat.

Ireland’s Child Benefit is too Generous

One benefit long overdue for reform is the one that encourages profligate parenthood

What follows may not be true of Ireland but in the UK child benefit began as an allowance against taxable income. At that time there was also a small welfare payment called “family allowance” paid via post offices. The tax allowance was discontinued and the two payments merged to produce the present child benefit payment.

Two factors were cited as reasons for the change. Firstly the allowance against tax meant that people on higher rates of tax got more than those on lower rates – and those whose earnings fell below the tax threshold even without the allowance and who were therefore most in need, got nothing. Secondly it was argued, especially by family and women’s support groups, that the reduction in income tax benefited the main breadwinner – usually the man in those days – who did not necessarily pass the gain on to the main shopper – usually the woman. It was argued that men were more likely to spend it on drink and gambling rather than their children.

The benefit was therefore paid as a uniform amount regardless of other income and into the hands of the mother. This, of course, did not prevent the mother spending it on drink and gambling instead of the children and some no doubt did and still do.

Too much is paid out for second and subsequent children

The other interesting thing about the benefit as paid in the UK is that it has traditionally been paid at a significantly higher rate for the first child than for subsequent children. I suppose the argument for this is that it is perfectly possible to re-use clothing and other items purchased for the first child so that the costs associated with later children are noticeably less than that of the first.

In Ireland, not only is the rate paid for the first child substantially higher than in the UK, it is the same for a second child, more for a third and more still for fourth and subsequent children. This means that the parent of, for example, three children in the UK will receive £188 per month. In Ireland the equivalent payment is €427.

I find it strange that, in a country that has a tradition of producing large families the state should provide an incentive for continuing to do so at a time when arguably one of the greatest threats the world faces is over-population. Who will pay to educate all these children? Who will pay their medical expenses? As the existing cohort of adults live longer and young people spend longer in education how in future will those currently leaving colleges and universities keep the large number of individuals who are either too young or too old for productive work?

Reform this benefit now

This benefit is long overdue for reform. I would advocate a return to the idea of an allowance against taxable income but at the lowest rate of tax. This could be achieved by lowering the threshold for higher rate tax by an amount equivalent to the allowance. To illustrate the principle I offer the following example which I hasten to add bears no relation to any real situation.

Suppose someone earns €50k and has allowances of €10k, not including child allowance. The first €20k above the allowance is taxed at 20% and everything above that at 40%. The tax liability would be (€20k at 20% = €4k) + (€20k at 40% = €8k), a total of €12k. If child allowance is set at €5k that will reduce the amount taxable at the higher rate to €15k, reducing the total liability by (€5k x 40% = €2k). But I am suggesting that the threshold should be lowered by an amount equal to the child allowance so that the liability reduces only by (€5k x 20% = €1k), thereby ensuring that everyone eligible for tax gets the same rebate for his or her child.

Those earning too little to be liable for any tax would receive the allowance as a “negative income tax” paid through his/her employer. This would be objected to by some as placing an unnecessary burden on business and by others, once again, as placing the money in the wrong hands. This latter objection, I would argue, is no longer valid as in most households both parents are breadwinners. Where both parents are unemployed their job-seekers or unemployment benefit would be enhanced by an appropriate amount for child allowance as now.

Finally, whatever system is adopted the amount paid in respect of second and subsequent children must be less than that paid for the first.

Sweet and Sour Memories

Sugar beet and debt forgiveness may seem strange bedfellows but for me they show how history echoes down the decades

For most of the 1980s I was politically active in the UK: County Councillor, District Councillor, general election agent. And I was a regular attendee at party conferences, the party in question being the British Liberal Party and, later the Liberal Democrats. On one occasion – I think it would have been 1986 – I had the opportunity to make a speech at a Liberal Party conference. The issue being debated concerned the effect of EU subsidies to sugar beet production on the price of sugar on world markets. Many developing nations relied on sugar cane production in order to survive and the dumping of surplus European production on the world market was harmful to them.

My home constituency at the time contained a sugar mill and sugar beet was an important crop for many local farmers. I argued in my short speech that Europe should follow the Brazilian example and turn surplus sugar into fuel. I also argued, in the same speech, for the forgiveness of third world debt. This was long before such luminaries as Blair and Bono began putting forward the same argument. The gist of what I said to that conference was that these countries had been persuaded to borrow in order to invest in producing commodities that were now incapable of yielding the promised incomes. Meanwhile populations were starving whilst their governments paid out more in interest to first world banks than they received in aid from first world governments.

Fast forward ten years and I was participating in a major construction project at a steel works in Scunthorpe. My daily journey to and from work took me past the sugar factory which had shortly before been converted to produce ethanol fuel. Sugar beet continued to be an important agricultural product throughout Lincolnshire and East Yorkshire.

Another ten years passed and I retired and moved to the Irish Midlands. One of the things I was soon to discover was that many people were still angry about the closure of a sugar factory in Carlow and the demise of sugar beet production in Ireland. I was especially surprised about this given the country's commitment to reducing its carbon footprint and the presence of Green Party representatives in government.

Five years later still I am passing great mounds of sugar beet as a cycle around the countryside on the Laois/Kildare border. In the Irish papers I read of meetings to discuss the re-establishment of sugar production here in Ireland. Meanwhile it is the nations of Europe that are unable to meet the interest payments on their debts and whilst the people clamour for those debts to be forgiven the governments impose austerity measures in order to keep the banks on-side. Plus ca change!

Footnote: the efforts to kick start the industry in Ireland may have nothing to do with the mounds of beets I am seeing as plans are still only at the formative stage. I guess what I am seeing is a crop that will be used as a supplement to winter feed for animals which is a shame when it could be put to use reducing Ireland’s reliance on imports for sugar and fuel.

Anyone wanting more information should check out these links:

http://www.independent.ie/farming/crops/athy-meeting-for-beet-ireland-2941079.html

http://justbeetit.net/2011/05/08/update-on-sugar-beet-ireland/

Stop Blaming the Germans

Some people have started saying the Germans want to take over Europe. But since they are the principle source of our largesse, they have a right to tell us how it’s spent.

Recently I have heard people knocking Germany for her insistence that nations receiving bail-outs from the European Union adopt prudent economic policies. “They failed in two world wars; now they are trying a different way of taking us over” is the gist of what some are saying on both sides of the Irish Sea.

It seems to me that this betrays a complete lack of understanding of recent history. Those nations that now have to make difficult and unpopular decisions are the same nations that for the last couple of decades have been milking the EU for all it was worth. When I first arrived in Ireland towards the end of 2006 I encountered a forest of signs pointing out that this sewerage scheme or that motorway or the other new railway rolling stock was financed “with assistance from the European Regional Development Fund” or some other EU scheme.

When I did some work on a voluntary basis for a local development agency many of the projects the agency facilitated were part funded under one or more European “Directives” aimed at increasing social inclusion and helping reduce the disparity between the relative wealth of the more successful members of the European community of nations.

The CAP Boosts Farmers’ Incomes

As I cycle around the Irish countryside I marvel at the huge number of abandoned houses and cottages each with one or more smart modern houses built alongside and evidence of the success of the Common Agricultural Policy in boosting the incomes of farmers.

With each of theses examples I am struck by the fact that all of this European money comes from the taxes that French, British and German citizens contribute to the EU budget. Believe it or not I do not resent, in principle, any of it. I support the general idea that wealth should be redistributed from rich to poor both on a personal basis and between nations. But what I certainly do find disturbing is the extent to which the corruption in Irish politics ensured that much of this money ended up in places and pockets that did not deserve to receive it.

Parish Pump Politics Ruined Ireland

It was not just that developers were enabled to pocket vast sums of public money. The tradition in Ireland of “Parish Pump Politics” ensured that developments happened in places where local representatives could point to them as achievements that would not have taken place without their intervention rather than in the most appropriate and cost effective situation.

Whilst the banks were busy lending vast multiples of the money deposited in their vaults on the assumption that this gravy train would go on for ever, politicians were busy lining the pockets of their constituents, including public servants and the recipients of social welfare, on the basis of an identical assumption. Now, having received billions of Euros in grants and loans those banks and politicians are looking for yet more loans to keep things ticking over. Is it really too much for the lenders to ask that they dictate how those loans are distributed?