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Taxes and jobs. And unleash the McQuaid redux… March 26, 2013

Posted by WorldbyStorm in Economy, Irish Politics.
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Some fascinating stuff in the SBP on jobs and taxes this weekend. Take for example this crie-de-couer from Barry O’Leary, chief of the IDA.

“We’re not concerned about the rate of corporation tax,” said O’Leary. “We’re concerned about personal tax rates, which have reached a maximum. They’ve gone as high as they can go.” He said he welcomed the commitment made earlier this month by Minister for Finance Michael Noonan to reduce income tax rates as soon as possible.

Hmmm… interesting. As is the following:

During a week when Britain committed to lowering its corporation tax rate again, O’Leary said there was “no way” corporation tax changes would have any discernible effect on investment in Ireland. “They [multinational corporations] are continuing to come, in big numbers. Tax is just one element of it – if you were only deciding based on tax, you’d be going to Switzerland or Singapore or the Netherlands,” he said.

But could it be that he’s simply looking too closely at one aspect of the issue in reference to personal tax rates. For…

Alan McQuaid, economist with Merrion Stockbrokers, said that jobs announcements by multinationals in the first three months of this year had been encouraging, but domestic job creation had to catch up.
“SME job creation has the potential to be as encouraging. The creation of five jobs by ten companies is 50 jobs. It’s tough to get the domestic side moving, however, until banks start lending again,” he said. “The state of the labour market has a big impact on consumer confidence – if it’s seen to be improving, it’s a big positive overall.

And that’s really that. It’s all very well fretting about multinationals, but it is the domestic side where the problems lie and which are unnameable to amelioration by multinationals actions in terms of job creation in any significant numbers.And as to that fresh from the the Central Bank:

The study predicted that there would be a gradual improvement in the Irish labour market in the year ahead, with unemployment rates falling to 13 per cent by 2014.

13 per cent is crazy high. And McQuaid doesn’t see those figures improving in the next two years. Add to that Cliff Taylors pessimism about growth elsewhere in the SBP and it look grim.
Still, the orthodoxy always has a fallback… from the SBP editorial:

The government, and most of the country, seems to have completely forgotten the virtues of low personal and business taxation and its important role in stimulating the economy during the years when the real Celtic tiger boom of the 1990s was being built.

I’ve noted previously that income tax is now in or around where it was during those years. Years when the boom was arguably at its most sustainable. Which is perhaps why…

Almost no significant voice in public life now argues for tax cuts as a means of stimulating economic growth.

Because the orthodoxy line now is that we were under taxed during that period – and actually, they’re not far wrong in that.

Indeed, one of the internal dynamics of the present government is Fine Gael’s resistance to Labour’s push for further hikes in personal taxation. Differences between the two parties on tax increases brought the coalition to the brink in the days before the budget last December, and skirmishing has begun in recent weeks in advance of next December’s budget. It’s no coincidence that Fine Gael ministers have been warning about the dangers of more tax increases lately.
But remember that these arguments are being made against further tax increases, rather than in favour of reductions in existing taxation.

The SBP is sure that that’s not good enough.

Our marginal tax rates – at 55 per cent for the self-employed earning over €100,000 and 52 per cent for PAYE workers (why the difference?) – are too high, and the higher rate of income tax kicks in at about €32,000 for a single person. This is too low. It means too many middle-income workers are being taxed at rates more appropriate to much better-paid people.

But the oddity is that there’s no reason given as to why these are too high or too low. Somehow growth occurred in the 1990s with very similar levels of taxation. And given that the SBP is itself a doughty defender of the line that we spend too much on public services given how little tax we bring in the logic of its line can only be to yet further diminish those public services. Although it has a neat line in inevitability in the following paragraph:

Taxes that are too high kill enterprise and will strangle job creation. If there is to be an economic recovery in this country, it will be generated by the private sector, as the public sector inevitably downsizes. A penal tax regime – and we are at the brink of that, if not already there – will slow or shut off that recovery.

But unfortunately it appears to have almost completely missed the lesson of the past fifteen years.

We believe that the government should commit itself to reductions in personal and capital taxation in the years ahead. Budgets are tight certainly. A property tax is needed. But it is by no means clear that tax cuts will reduce revenues. On the contrary, when Charlie McCreevy halved capital gains tax in one go, revenues from the tax doubled the following year. Think about that.

The problem is sustainability and stability. Though not in quite the way the SBP sees it:

Public spending is clearly unsustainable in this country and must be reduced. But as the country emerges from the bailout, it must take a pragmatic approach to taxation. Cuts in personal, business and capital taxes, implemented correctly, will help in economic recovery.

But as noted in comments at the weekend, the editorial then concludes on this gem:

That must be more important than any ideological hang-ups.

Unless those hang-ups happen to be of a rightward persuasion.

Comments»

1. Michael Taft - March 26, 2013

High taxes kill off enterprise and strangle job creation?

Netherlands, Finland and Sweden rank in the top 5 of the world’s most competitive economies (according to the Global Competitiveness Index). The percentage of taxes on wages paid by employees and employers are 47% (Netherlands), 48% (Finland) and 55% (Sweden).

Ireland ranks 27th in the Global Competitiveness Index. The percentage of taxes on wages is 28%.

Unemployment is 6% in Netherlands, and 8% in both Finland and Sweden. In Ireland, unemployment is 14%.

High taxes kill off enterprise and strangle job creation?

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ivorthorne - March 26, 2013

They can’t hear you!

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6to5against - March 26, 2013

I remember in the Lisbon Treaty referendum, M Martin demanded that a SF rep name an economist who supported their view. Michael Taft was named and Martin shrieked in outrage that he had never heard of him.

Presumably its either (a) he’s not on RTE often enough for his inforned and detailed analysis to register with an Irish political leader, and its entirely ridiculous to imagine such a leader might actually seek out dissenting views,

or…

(b) they’re determined not to hear him. Or Paul Krugman, Or anybody else who doesn’t trumpet the consensus.

I think (b).

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ivorthorne - March 26, 2013

Probably a bit of both. They powers that be love a yes man and the orthodoxy love a circle jerk.

They assume if you’re not producing some minor variant of the dominant analysis, you’re clearly some sort of crazy, hippy type. After all, there is no alternative. We all know that.

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2. CL - March 26, 2013

Successive Irish govts. have based economic policy on the attraction of foreign capital. Light taxation on corporations is a key component of this failed strategy. The U.S. Chamber of Commerce, a notorious anti-working class outfit, has more influence on Irish taxation policy than do the Irish people. Irish socio-economic structure has been deliberately distorted to placate capital; the result is mass unemployment, mass emigration and a stagnant economy.

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CMK - March 26, 2013

The article WbS is discussing initially above gave a figure of approximately 4500 jobs created by FDI in the first quarter. These are, from what I can see, ‘announced’ jobs not actual, employing, tax paying jobs. At that rate, it would take almost 10 years to create 180,000 jobs. Given that no nett new public sector jobs are likely to be created ever again, the orthodoxy are more or less signalling that mass employment is here to stay, when they are brazenly trumpeting drops in the ocean as indicators of huge progress.

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3. Jonathan - March 26, 2013

They really are desperate, aren’t they? “On the contrary, when Charlie McCreevy halved capital gains tax in one go, revenues from the tax doubled the following year. Think about that.” I do think about that, about the fact that it happened around 2000, and about the collapse of the banking sector in 2008 after years of an expanding property bubble…

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4. CL - March 26, 2013

Plus, a policy of ‘internal devaluation’, reducing domestic costs and prices, requires mass unemployment. And living standards have to be suppressed to ensure a sufficient surplus is available to pay off the bondholders. So in this sense their policy is a success.

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5. gfmurphy101 - March 26, 2013

Tax Cuts Don’t Lead to Economic Growth, a New 65-Year Study Finds http://www.theatlantic.com/business/archive/2012/09/tax-cuts-dont-lead-to-economic-growth-a-new-65-year-study-finds/262438/

suppose they never seen this (or maybe they did and quickly put it in the bin …..can’t have anyone telling the truth in the media now ….can we )

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6. hardcore for nerds - March 26, 2013

“Our marginal tax rates – at 55 per cent for the self-employed earning over €100,000 and 52 per cent for PAYE workers (why the difference?) – are too high, and the higher rate of income tax kicks in at about €32,000 for a single person. This is too low. It means too many middle-income workers are being taxed at rates more appropriate to much better-paid people.”

I really hate people talking about marginal rates, in part because it relies on a supposed psychological effect where you don’t want to earn anything if it benefits the state/society more than it benefits you (in a way tax is enforced philanthropy; neoliberalism is ideological misanthropy) but also because effective rates are obviously the more important ones.

if you increase the level of income at which the higher rate kicks in, you’re reducing the effective tax rate on everyone above that (admittedly with decreasing effect in proportionate terms as incomes get higher). a better solution would be a third, intermediary rate of tax somewhere in between the lower and higher rates and applying to that middle range of income.

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7. Tomboktu - March 26, 2013

So, we have Michael Taft citing the World Economic Forum (not a bastion of marxist revolution, I would have thought) and gfmurphy citing the dangerously socialist US Congress, and yesterday I posted a film that deals with this theme too.

Evidence-based analysis from the SBP?

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8. hjfoley - March 27, 2013

Reblogged this on misebogland and commented:
Some interesting thoughts in this post

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