Colm’s columns

Colm Rapple
Irish Mail on Sunday, December 27, 2009

There is a good economic reason for not giving Christmas presents according to an eminent American economist, Joel Waldfogel. He holds the chair of business and public policy at the University of Pennsylvania so his views carry some weight. He’s been capitalising on this particular nugget of wisdom with a book “Scroogenomics: why you shouldn’t buy presents for the holidays”. He has been getting plenty of publicity for it in recent weeks.

Sorry about the timing but bringing you this news sooner might have upset your Christmas spending and that wouldn’t have been good for the economy. In any case, the Professor’s assertion that presents are a waste of money is a load of nonsense. It’s based on an over simplistic view of the value of economic transactions.

It’s only worth refuting because, if accepted, it’s faulty logic can be used to make the case for minimal government spending. If you accept the simplistic premise that the consumer knows best, then the Government should tax and spend as little as possible. That’s nonsense too.

Professor Waldfogel’s case is easily stated.

If you buy something for yourself for €50 then that is what it’s worth to you. But if you spent €50 on a present for someone else, there is every possibility that it won’t be quite what he or she wants, or needs. Therefore it may not be worth €50 to them.

On average, he claims, on the basis of some surveys, it is likely to be worth 20% less.

It’s a neat argument that fits in nicely with the common experience of unsuitable presents that never get used. But it ignores the fundamental fact that if someone spends €50 on an item either for own use or as a present, then at the time of purchase that item was worth €50 to the buyer.

That buyer got €50 worth of satisfaction from the item either as a result of using it or giving it. The recipient had the satisfaction of getting it, knowing that he or she was thought of, irrespective of whether or not it was something needed or wanted.

Of course, it would be better if it was the ideal gift but the same type of argument can be applied to all spending. We don’t only waste money on gifts.

Almost a hundred years ago the British neo-classical economist Alfred Marshall advanced the notion that all lotteries involve a loss of human satisfaction. His argument went something like this: if a million people put up €1 each to produce a prize of €1 million, the value of that prize to the winner is worth significantly less than the sum of all the €1s put up by the other ticket holders. That has to be true. The last euro of that prize was certainly worth more to the person who put up the stake than it is to the winner – one euro out of a million wouldn’t be missed.

But Marshall’s argument missed out too crucial point. Each of the stakeholders enjoyed the hope of winning. That in itself was worth the euro stake even accepting that it might be offset, to some extent, by the disappointment of not winning. So lotteries actually create value.

The hope value that lotteries create is similar to the intangible satisfaction of giving or receiving a gift, a satisfaction that Professor Waldfogel argument ignores.

So you needn’t feel guilty if the presents you gave were not the items or services that the recipients would have spent their own money on. You got a satisfaction from giving and they got a satisfaction from receiving. And, as a bonus, you helped to keep the economy ticking over. You helped add to that other intangible, consumer confidence.

The anecdotal evidence suggest that consumer spending was higher than expected this Christmas. It seems that consumer confidence got a boost from the fact that the budget was no worse than anticipated and also from a belief in Brian Lenihan’s claim that the worst is over.

There was a note of optimism in the latest ESRI Quarterly Review published on Wednesday. The expectation is for a return to economic growth in the second half of 2010 with a quickening of pace in 2011. Export sales is benefiting from the quicker than expected recovery in Germany, France, Japan and the U.S. and while demand at home will continue to decline, the drop in consumer spending is levelling out. The expectation is that it will fall by only 1% next year with some draw down of savings compensating for lower incomes.

Much depends on how fast confidence returns. While questioning some of the detail, the ESRI takes the view that Brian Lenihan’s general budgetary stance has been right.

But the worst isn’t over for everyone. Jobs will continue to be lost although at a slower pace than was feared earlier in the year. But even this latest more optimistic forecast envisages the average number at work next year will be down 76,000 on the 2009 level. Even assuming that a net 40,000 people will leave the country, the number unemployed is expected to rise by 40,000 to 298,000.

These are the people most affected by the recession and the Government’s effectiveness in 2010 must be judged primarily on how they fare during the year.

BEST BUYS

Savings

Keep an eye on the interest rate you are getting on your savings in the New Year. It’s all too easy to shop around for the best rate when putting money on deposit and then to forget that interest rates do change. Banks make a lot of money from their customers’ inertia. Rates have been particularly volatile in recent months and the trend is sure to continue, maybe even intensify.

Regular Savers accounts were offering very good rates earlier in the year. Some offered guarantees that expire either after twelve month or at a set date. Don’t assume that you are still getting the rate you first signed up for. Check what you are getting now.

The rates payable on demand deposit accounts are seldom guaranteed and can change overnight. Irish Nationwide and Halifax are both paying 3.75% on deposits. The Irish Nationwide pays that rate, which includes a bonus of 1.25% on sums up to €20,000. That bonus is guaranteed to continue until the end of 2010. Halifax pays that rate on the first €10,000 and it is guaranteed for 12 months from the time the deposit is made.

If you have a deposit with Halifax when does your guarantee run out?

Anglo Irish Bank was offering one of the highest rates earlier in the year. But at 3.1% it is not longer the best.

Don’t forget that DIRT is now charged at 25%. For those liable to pay DIRT, that higher rate adds to the attractions of Post Office Saving Bonds and Certs, the returns from which are paid tax-free.

And if you can put your money away for a few years watch out for the launch of the new Government Solidarity Bond that was promised in the budget.

Colm Rapple
Irish Mail on Sunday, December 20, 2009

The carbon tax is a nonsense. It will have scant impact on our carbon emissions. It’s inequitable, in so far as it will bear heaviest on low income earners. And it is economically inefficient in that it will adversely affect the competitiveness of many Irish businesses. It will also give a massive boost to cross border shopping, not for groceries and drink but rather for solid fuel.

It’s another example of the good intentions and woolly thinking that has informed much of the Green Party’s input to Government.

With some honourable exceptions, there seems to be a reluctance to criticise this tax, perhaps because of a fear of being accused of killing polar bears. Or perhaps there was so much in the budget that it has just got sidelined.

There was widespread opposition to the tax when it was first mooted by Charlie McCreevy some years ago, some of it from within the civil service. In a submission presented to Charlie McCreevy at the time, the Department of Transport maintained that a carbon tax could cause significant economic damage without any corresponding economic benefits. It argued that the tax would have little or no impact on the behaviour of transport users or on the level of emissions from the transport sector.

That latter point is not even disputed by Green Minister, Éamon Ryan. Demand for fossil fuel products is, as he put it himself,  relatively inelastic. In other words even a large increase in price doesn’t have much impact on the amount purchased. That’s particularly true of motor fuels, which will be bearing almost two-thirds of the carbon tax burden.

The ESRI estimated that a €20 carbon tax — €5 higher than is being imposed – would reduce fuel consumption in the transport sector by only 1.1% over eight years. The plain fact is that there is limited opportunities for fuel switching. It will take more than a few cent on the litre to discourage private motorists from driving.

Too much of the tax burden imposed on private motorists is charged on the actual vehicle through VRT and VAT and too little on the actual process of driving. The logical approach would be to cut the tax on cars and greatly raise the tax on fuel. That  might encourage a shift to public transport.

But not, of course, if public transport gets more expensive. Yet the current tax will bear more heavily on rail transport than it will on cars. Auto-diesel has gone up by 4.4% in price as a result of the carbon tax. The price of the marked gas oil used by Iarnród Éireann will go up by 8.7% when the tax is imposed in May.

Consumer prices have on average fallen sharply over the past year. But not the cost of public transport. Rail fares are up 8.3% while bus fares are up a massive 11.7%. The carbon tax will exacerbate the upward pressure on prices.

That will impact not only on passengers but also on freight services. There is not much more that road hauliers and Iarnód Éireann can do to become more efficient. The haulage fleet is relatively new and Iarnód Éireann has replaced most of its older locomotives. So the carbon tax isn’t going to have any significant impact on emissions. But it will have an impact on competitiveness. The extra cost will be passed on to businesses and inevitably to consumers.

It’s little wonder that the Department of Transport strongly recommended that all public transport operations including rail, bus and taxies be exempt from any carbon tax. A full exemption should also apply to rail freight operations while licensed road hauliers and own account operators, it recommended, should be subject to a preferential rate of tax.

No doubt Brian Lenihan will continue to be under pressure to grant such exemptions over the coming months.

The difficulties of imposing a hefty tax on coal and turf, will also be brought home to him. He has delayed imposing this element of the tax to allow “a robust mechanism to be put in place to counter the sourcing of coal and peat from Northern Ireland where lower environmental standards apply”.

But lower prices are likely to be a greater problem than lower environmental standards. Arigna Fuels Ltd, which operates about 25 miles from the border, estimated that a price differential of €10 would be enough to send its retail customers north to shop. The carbon tax will put up the price of coal by about €45 a tonne, an increase of 11%. Briquettes will go up by about 40c or 10%.

The Revenue Commissioners have pointed out that while it can exercise control under EU agreements on cross border movements of alcohol, tobacco and oils, there isn’t much it can do to prevent the movement of other goods. That’s why the excise duties on matches, mineral waters and video players were abolished.

The arguments used for abolishing those taxes, apply equally to any new tax on coal for domestic use, the Revenue Commissioners warned. There is a danger, they added, that imposing the tax on domestic use of coal could “lead to such control difficulties as could undermine, to some extent, the credibility of the tax”.

Those 4 X 4s will come in useful.

Colm Rapple

It’s wrong to accuse Brian Lenihan of not having a vision of Ireland in the future. Unfortunately there is every sign that he has a vision and it’s not a particularly edifying one. It’s of a low tax economy with a limited, not over generous, social welfare system. It’s a vision that owes more to Washington than Copenhagen, to the philosophy of the now defunct PDs than to that espoused by the founders of his own party.

It’s evident, not only in the provisions of this week’s budget but also in what’s promised for this time next year. The ground was well prepared to lessen the shocks of this week’s offering. There were some very able spin doctors at work in leaking the bad news by degrees in order to reduce the impact.

And in his budget speech Mr Lenihan started preparing the ground for the 2011 budget. We now have a fair idea of his long term plans. They are not particularly edifying but they can, of course, be changed. Securing that change should be part of the trade unions’ agenda for next year. But they may have too narrow a vision of what’s worth fighting for.

The income tax net is going to be widened to catch many low paid workers who currently don’t earn enough to pay tax. Over half of those on the Revenue books won’t be paying income tax next year. Mr Lenihan described them as “earners” but that figure includes many pensioners.

While broadening the base he also wants, he says, to make the system simpler and fairer. But it’s clear from his actions this year that he has no stomach for increasing the tax take on the higher paid. And if your objective is to reduce the overall tax burden it’s very hard to see how you can make the system fairer by bringing more low earners into the net.

One of his fellow ministers let the cat out of the bag when he defended the decision not to exempt any low paid public servants from the pay cuts. If you want to save a billion euro you can’t exempt the lower paid, he said. He didn’t elaborate but that is only true if you preclude the possibility of imposing extra cuts on the higher paid.

If that logic is applied to the income tax plans, then the extra tax taken from the lower paid will be used to reduce the tax burden of higher income earners. That’s the only way you can broaden the tax net while reducing the overall income tax burden.

That is the objective. The Commission on Taxation was charged with keeping the overall tax burden low, enhancing the rewards to work and increasing the fairness of the system. The “fairness” came last and wasn’t very evident in the Commission’s final report which broadly reflected the sectional interests of  its members.

It may be that the extra tax from the lower paid will be used to reduce the burden of the middle income groups but it would have to be thinly spread and will hardly compensate for water charges and the proposed property tax.  Unfortunately the first may be introduced simply because the EU and the Greens are demanding it, while the property tax is likely to be long fingered until the election and then dropped.

The notion of investing some €60 million installing water meters in order to impose a new tax on households is nonsensical. We have no need to ration water and while there is nothing wrong with a household tax to help finance local government there are many easier and less expensive ways of imposing it. But sin sceal eile.

The meters are unlikely to be installed in sufficient quantities to impose the tax for 2011. So back to what is certain.

There will be major changes in how PRSI and the levies are collected. They are all to be combined into a new “social contribution” which will be paid by everyone at a “low rate on an wide base as a collective contribution to public services”.

Whatever about the low rate, the rest of that described from Mr Lenihan’s budget speech could describe any tax. All taxes are social contributions so why separate this one. Is it the intention to abolish the idea of social insurance. Is the social insurance fund to be abolished?  We don’t know but the PRSI and levy system is not particularly progressive at present.

A worker on full rate PRSI pays 10% on the first €75,036, 9% the next €100,000 and 11% on income above €174,981. That’s including levies. The total imposition is much the same irrespective of income.

If the rate of contribution is to be lowered, the base has to be widened. The new tax could, like the income levy, be charged on a wider definition of income to include pension contributions, capital allowances etc. But better still there could be a charge on the profits of capital intensive firms.

Over €7 billion will be raised from PRSI in 2010. About half as much again will be raised from the health and income levies. How that money is raised and how the burden is shared is a matter of some importance to all taxpayers. Mr Lenihan should at the very least promote a discussion on the options in the interests of the equity that he espouses.