Colm’s columns

Colm Rapple
Irish Mail on Sunday, May 29, 2011

The forecasts for economic growth this year range from zero to 2%.  The most pessimistic prediction was that published during the week by the OECD. The most optimistic was issued only a few weeks ago by the ESRI.  There is a wide difference between the two but that’s easily explained. The OECD expects that consumer spending will continue to fall this year and at an even faster rate than in 2010. The ESRI, on the other hand, expects personal consumption to stabilise and remain at or about last year’s level. The ESRI is also more optimistic about export growth. It expects exports to be 7.5% up on last year while the OECD puts the growth at 5.3%.

Economics was never a very precise science and it’s even less so after the unprecedented traumatic events of recent years. But while there are different views on the outlook for the current year, both the OECD and the ESRI are agreed that the economy is on a growth path and is going to turn in a reasonable performance next year.

The ESRI is still the most optimistic of the two, forecasting growth of 3% but the OECD is not too far behind with a forecast of 2.3%. The Central Bank recently put the figure at 2%, no different from the rate predicted by the IMF last December when it finalised the bail-out agreement.

The figures are different but all are agreed that the economy is no longer contracting and will achieve a growth rate next year on a par with international trends. The OECD is predicting an average growth of 2.8% among its 34 member countries with the US economy growing by 3% and the Eurozone by 2%.

If we achieve the 3% growth predicted by the ESRI, we’ll be doing better than average and even at the 2% forecast by the others, we’ll at least be level pegging with our European partners.

So we have some reason to be optimistic and the clear message from these figures is that the more optimistic we are, the better we are going to do. Export growth is leading the recovery, fuelled by the upturn in world demand and our improved competitiveness. But domestic demand has a part to play. After the sharp contraction in both private and public spending in recent years any improvement in home demand will give the economy an extra impetus. With little or no scope for higher public spending, that increased demand has to come from the private sector.

Consumers have been spending less partly because they have less money but mainly because they feel less secure about the future and are saving more. We have suffered a number of traumatic economic knocks in recent years and consumers are understandably cautious about spending. There hasn’t even been the prospect of rising prices to encourage people to buy now rather than later. But that has changed to some extent. Consumer prices rose by 2.2% over the past three months and while much of that was due to fuel and mortgage interest, the price of clothes and footwear, which had fallen sharply last year, jumped by almost 11% recovering most of the previous reductions.

We may be insecure but surprisingly 73% of those surveyed last year for another OECD report said that they were satisfied with their life. That was far higher than the OECD average of 59%. Germany was down at 56%.

That satisfaction rating suggests that it wouldn’t take too much to bounce us back into a positive frame of mind. So an upturn in consumer confidence may come sooner rather than later. National morale seems to have received a boost from the recent head of state visits. That’s bound to help, as would a little less spreading of doom and gloom. It’s time to stop talking or thinking about default.

The national debt is manageable. There is, of course, a strong case for passing some of the burden onto the foreign financiers and banks that gambled just as recklessly on our property bubble as the Irish banks. And that should be pursued just as it’s essential to ensure that our own share of the burden is more equitable spread than it has been up to now.

But let’s not forget the facts. Even with the debts incurred in bailing out the banks, and projected budget deficits, the national debt will peak at less than 120% of national income in 2014. We were there before in 1987 with an underlying economy that had far less growth potential than it currently has.

At last count, our debt to GDP ratio was 96.2% — not too much higher than the Eurozone average of 85%. Greece is up at 143%, Italy at 119% and Belgium, which has had a caretaker government for over a year, is slightly ahead of us at 96.8%. Even Germany, for all its wealth, has a debt to GDP ratio of 83.2%.

So let’s look on the bright side. The glass is half full and filling, rather than half full and emptying.

Colm Rapple
Irish Mail on Sunday, May 26, 2011

The average Irish worker earned €39,555 last year and took home €30,950 after tax, PRSI and levies. His German counterpart earned €2,190 more but took home €5,569 less. That’s according to figures published last week by the OECD.  Like all averages these figures tell only part of the story. But they do confirm that we are still a relatively low taxed country. Taxes on income have been rising but they are still lower than they were in 2000 even allowing for the extra levy and tax burden imposed this year.

In a report that examines income tax trends in 34 member countries between 2000 and 2010 the OECD charts the significant easing of the tax burden in Ireland during the years to 2008 and the reversal of the trend since. But the tax-take in still significantly lower now than it was in 2000. That’s true for all of the categories studied, from single taxpayers on two-thirds of the average wage to double income married couples on one and two-thirds times the average wage.

Single parents and married couples with children are showing the greatest gains over the decade.

Many single parents get more back in social welfare and child benefit than they are paying in tax, PRSI and levies.

For instance a single parent with two children on two-thirds of the average wage, had a disposable income last year equal to 121.3% of earnings. That was after deducting tax, PRSI and levies but adding in social benefits and child benefit. In Northern Ireland a similar single parent ended up last year with disposable income of 98% of gross income.

Two-thirds of average earnings south of the border amounted to €26,370 last year according to the OECD estimates. On that income a single parent would have paid €527 in tax and €1,845 in PRSI and levies.

But social welfare benefits, including child benefit, would have provided €7,984 over the year – more than enough to offset the tax and leave the single parent with disposable income of €31,981.

So gross earnings of €26,370 translated into disposable income of €31,981. For every €100 in gross earnings this category of single parent ended up with disposable income of €121. That’s a big change from 2000 when social benefits were not high enough to offset the tax and PRSI bill. That, of course, created major disincentives to work. But that’s another story.

Single parents in Ireland enjoy a more generous regime than in any of the other countries surveyed by the OECD but these figures, of course, do not take account of non-cash benefits, most importantly child care facilities which are more readily available in many other countries. They do confirm, however, that the tax burden has eased greatly.

The income tax payable by a single parent on two-thirds average earnings fell from 7% to 2% between 2000 and 2010. Single taxpayers on average earnings paid 22% of their income in tax in 2000. That was down to 14.4% last year which was not much higher than the low of 13.6% hit in 2008.

The tax burden on married couples fell even more during the decade.

A married couple, one on 100% of average earnings and the other on two-thirds average earnings paid 17.6% of their income in tax in 2000. Last year they paid just short of 11%. There tax bill had hit a low of 9.2% in 2008 so they are worse off now but as a percentage of income their tax bill is now significantly lower than it was ten years ago.

The trend was much the same when PRSI, levies are taking into account and an offset is made for the impact of child benefit on household disposable income.  A double income couple, as outlined above, with two children paid only a net 12.6% of gross income to the State last year compared with 20.6% in 2000.

That 12.6% compares with 18.3% in the OECD as a whole and 20.7% on average across the EU.  A similar couple in Northern Ireland were paying a net 21.5% while a couple in Germany were paying 30.1%.

Taxes are going to have to be increased over the years ahead. It’s inevitable even if all of the waste in the provision of public services is eliminated. We were never a high-tax country and the tax cuts of the celtic tiger years, which politicians of all parties called for, left the exchequer in a clearly unsustainable position. That would have been the case even if there had been no bank crisis.

Economic growth was always going to slow down. The construction boom had to come to an end. The low rates of tax that bought votes and won applause during the good years were never going to be sufficient to provide the level of State services that citizens of a modern state have the right to expect.

So instead of feeling hard done by when taxes rise, as they inevitably will, we need to recognise that we can afford to pay a lot more and still be bearing a lighter burden than we did as recently as ten years ago.  If we recognise that fact and the extra taxes are more equitably spread than some of the more recent impositions, then we should be able to fight off the feelings of doom and gloom that can only serve to prolong the recession.

Colm Rapple
Irish Mail on Sunday, May 15, 2011
While maintaining a very vocal opposition to the levy on pension funds, many of those in the pension industry are more than happy to live with it and are already examining ways of turning it to their advantage. The levy is not a major problem but the industry very badly wants a reversal of the EU/IMF imposed plan to standardise the tax relief on pension contributions to 20%.  By promoting widespread concern at the potential impact of the levy, they may hope to dissuade the Government from going ahead with the progressive reduction in the maximum tax relief that was outlined in Brian Lenihan’s December budget.

The levy may not be an ideal tax but, given the need to raise money, there is more to be said for it than against it. Managed pension funds grew by an average of 4% over the past year. The proposed levy of 0.6% on the value of the fund is equivalent to a levy of 15% on the income. Of course returns can be higher, lower or even non-existent, but given that some fund managers impose charges of up to 2% a year, the extra 0.6% seems modest enough.

It is, of course, a wealth tax and this is possibly one of the reasons why some commentators have been getting positively apoplectic about it. But most people should see that as a positive rather than a negative. There is no good reason why wealth should not be taxed particularly in the hands of the very wealthy.  Pension funds are wealth and the vast bulk of the money in such funds is owned by high earners.

There are no firm figures but it is estimated that 80% of the tax relief in recent times went to the top 20% of earners. It may be less now that caps have been imposed on the size of eligible pension funds but on the basis of that historical estimate it’s fairly safe to assume that about 80% the money in pension funds is owned by the top 20% of income earners. If they own 80% then they will bear 80% of the levy.

It could be argued that they should pay more on the grounds that the greater the wealth the higher the tax rate should be. It is unfair that those who only got tax relief at 20% on their pension contributions should be paying the same rate of levy as those who got tax relief at 41%. But it would, no doubt, lead to administrative complications.

It has been suggested that the levy might encourage some to move the management of their pension funds offshore to avoid it. That’s unlikely given the low rate of levy but even if it does happen it should be possible to legally tax the pension wealth of Irish residents whether it’s managed at home or abroad.

So the inequities of the levy with regard to the private sector is being overstated although there is an inequity in not imposing the levy on non-funded pension entitlements. But presumably that can be more easily sorted out in the root and branch review of public sector pensions that now seems inevitable.

The last government originally proposed introducing a standard one-for-two top-up on pension contributions equivalent to tax relief at 33%.  But the December budget outlined plans to progressively reduce the maximum rate of tax relief to 20% by 2014. The TCD Pension Policy Research Group has estimated that standardising the tax relief at 20% could yield €1 billion a year to the Exchequer.

That would hit the take-home pay of those currently getting tax relief at 41% and reduce their incentive to save for retirement. In the longer run it’s undoubtedly a better option than the levy. International studies quoted in an ESRI report suggest that tax incentives are an expensive way of encouraging people to save for retirement.

But in the short-term the levy is a better option. It need have no immediate impact either on those still in employment or those already retired.  Managed funds grew by an average of 0.7% during April. There might just as easily have been no growth and the funds would be 0.7% worse off but that wouldn’t have sparked off demands for extra pension contributions or cuts in the pensions of those already retired.

There are those who will use the fears generated by the levy to encourage people to put more money into their pension schemes. It will be seen as a good sales pitch and legitimate up to a point although it should be remembered that a reduction of 0.6% in a pension fund should result in no more than an 0.6% cut in the pension that can be financed from that fund. That’s 60c per €100 or €2.40 off a weekly pension of €400.

Those sums should also be carefully noted by pension scheme members who may be coming under pressure to accept reduced pension entitlements or the closure of  a defined benefit scheme. A mountain is being made out of a molehill.

Colm Rapple
Irish Mail on Sunday, May 8, 2011

The Celtic Tiger has come and gone but the sharp inequalities that existed before its birth still remain. Figures just released by the Revenue Commissioners reveal that a quarter of all income declared for tax is shared among just over 5% of taxpayers. The top 1% account for about 11% of total income.

The top 5% enjoy average incomes of €185,000 while the bottom 36% survive on average incomes of less than €10,000.

These proportions haven’t changed much in the last decade. The share going to the top earners has remained fairly constant and while the share going to those at the bottom rose as more people found employment, the fall in unemployment, that eased income inequalities during the boom years, has been more than reversed in recent years.

The Revenue Commissioners are the only source of definitive information on the distribution of income in the country as a whole. These latest figures relate to 2008, the year in which the Celtic Tiger died. Incomes were still marginally up on the previous year and the number on the Revenue’s books at 2.33 million was marginally down on the previous year but up by almost 900,000 on the 1998 level.

That figure alone should be enough to convince even the most sceptical that the Celtic Tiger did really exist and has left us better off than we were before. Despite the recession there are still more people employed than there were a decade ago and we are wealthier than we were before the boom began although income and wealth is no more equitably spread than it was then.

High income earners have been targeted to some extent in recent budgets but these latest figures suggest that there is plenty of scope to ask them for a greater contribution to the State coffers, particularly as we are still a relatively low taxed country by western European standards.

Those 2.33 million taxpayers on the Revenue’s books in 2008 declared total gross income of €90.8 billion and paid tax of €12.2 billion. That’s an effective tax rate of only 13%. Gross income in this context is defined as total income before any allowances and before any relief for pension contributions, capital allowances, business interest paid, allowable expenses, or losses. Included in the total number of taxpayers were 432,058 two-income couples who were taxed as a single unit.

Some 5.4% of taxpayers, a total of €125,939, declared gross incomes in excess of €100,000. Between them they accounted for 25.6% of total income and paid 47% of the total income tax collected. There is no denying that the tax system is progressive. High earners paid more of their income in tax but they do account for a higher proportion of the total income and they pay only 25% of their gross income in tax.

Even on the basis of a narrower definition of income closer to what is considered income by PAYE workers the effective tax rate on those high earners is no more than 26%.

The top 1%, comprising almost 25,000 taxpayers, who declared incomes in excess of €200,000 were levied with an effective tax rate of 27.6%. They declared total gross income of €10.1 billion between them and paid tax of €2.79 billion.

At the bottom end of the scale there were 835,370 taxpayers who declared incomes of less than €20,000. They accounted for 36% of those on the Revenue’s books but for only 9% of the total declared income. They paid very little tax, not surprisingly since over 500,000 of them had incomes of less than €10,000.

More than half of the taxpayers, 54% or 1.26 million in total, declared incomes of less than €30,000. But they accounted for only 20% of the income declared and paid just over 3% of the total tax. Many of these taxpayers have since been hit by the Universal Social Charge which hits incomes well below the old income tax thresholds.

These latest figures are unfortunately a bit dated but it’s unlikely that the overall picture they present has changed much in the interim. Income inequalities have widened if anything and while the ability of high earners to contribute more to the Exchequer may have lessen somewhat, there is clearly still scope for further taxes on the higher paid.

That’s quite apart from the ability of the wealthy to contribute more. It has been pointed out in this column before but it is worth repeating that for every asset bought at an inflated price during the boom years, there was an asset sold for an inflated price.

Some people did very well out of the Celtic Tiger and many of them have held onto their gains. There were land-owners who sold at inflated prices and didn’t invest the proceeds foolishly in bank shares or in replacement over-priced land. There were builders who were able to command massive profit margins and developers who were able to capitalise on land banks built up during the pre-tiger days by selling homes at multiples of their development and building costs.

There are many wealthy individuals out there who should be made to bear a high proportion of the burden of setting the State finances to rights. There is little chance of a wealth tax being introduced but there’s an overpowering case for a sur-tax on high incomes.