Saturday, April 4, 2009

Housekeeping: Daily Economics 02/04/09

So per your comments, let's start from the top.

First comment by the Anonymous:

I do not anticipate any significant reduction in the social welfare. Social welfare, from my point of view is divided into 2 parts:
  • unemployment benefits - which should be fully replaced with private unemployment insurance (competitively supplied and paid for by transferring PRSI into a mandatory insurance purchase). This will automatically restrict access to benefits to those who actually worked in the state. Under the current PAYG system, a cut in the benefit should not exceed 5-7% as people are losing their job and they do need assistance;
  • long-term welfare benefits - which include housing assistance, direct payments etc. These have to be cut by 20-25% to bring them closer to the UK levels. The benefits should have a life-time cap of, say, 10 years. Of course, exceptions, e.g lifetime disability, apply. Several reasons for doing so include: aligning the incentives to work and reducing incentives for people from elsewhere in Europe to migrate under our welfare umbrella. Social welfare recipients must be required to perform civic duties - cleaning up graffiti and parks, for example, which can total 5-10 hours per week. Welfare assistance to families with children should be conditional on children staying in school and not committing social order offences.
"(a)the DIRT rate 23% ceiling removed i.e. make it subject to income tax (bye bye billions of savings!!!) not to mention it wont actually raise any money as rates collapse and returns are made in Nov 2010 - but it will scare the big money overseas." This is a scary possibility. The Government simply does not understand the basics of saving-investment relationship and sees any surplus income (income over and above that which is required to keep ourselves alive) as being a form of 'excess wealth'. In fact, if you recall the idiotic banks' reports in 2006-2007 about the wealth of this nation, they too treated surplus income as wealth. So to Cowen and Lenihan, what's left in our pockets after we bought groceries and petrol and paid mortgages is a fair game for taxing. So let them do this! Let's see more corporate money leave Ireland, because until this happens, our Government will not even pause to think about their actions.

"(b) The PRSI ceiling lifted - hitting the middle/upper income bracket with a stealth 4% tax on top of levies up to 6% - Bye Bye wealth creators, entrepreneurs and prospective international employers". Distinctly possible - trade unions will buy this and for the Government this is a soft target. The measure will disproportionately hit those who are self-employed and/or employ others. In a labour-intensive world of services based economy, this will be a disaster.

"(d) announce property tax on private residence for next year: this is the most insane of all so it warrants further analysis: We have plenty of evidence from our pre-98 property tax days - it was a disaster which produced no net income... - do we honestly think people who paid huge stamp duty and saddled with big management fees and mortgage costs will do their patriotic duty and pay? ...This property tax will cost too much to collect; it will be political dynamite - up for abolition at every election. Contrary to David McWilliam's view that it is not a tax on work and therefore should be pursued I would strongly disagree. For instance who does he think would be asked be pay such a tax? fact it would be yet another tax on work NOT to mention further damaging the already crippled property sector. Which by the way we own through our guarantee of the banking system. The time to consider this type of annual property tax is (if ever) only when we see clear signs of recovery so it can be truly counter-cyclical, but not beforehand."

A lot is going on this point. Some property tax will be introduced, undoubtedly, later this year. And property-linked tax is, in my view, needed. I believe it should be based on land value of your property, not property itself - for many reasons which I will explain over time, so keep reading this blog in the future. Your arguments against property tax above are related to three main points: (1) cost and efficiency of administration; (2) incidence of taxation burden; and (3) timing.

On (1), I agree, our clowns will have hard time coming up with anything serious. Most likely, replacement of the half-brains we have with more half-brains that are lurking behind them - i.e our glamorous Opposition - is not going to solve this problem. But at least we can try. And the cost of setting up an LVT system does not need to be high - can run the entire housing market off a laptop, so can Land Registry Office, especially if we leave one chap/gal working there and tell them: "do it, or you are out of the job..."

On (2) land value tax will not have the same adverse effects as a property tax. First, LVT will not affect disproportionately those with higher mortgages, because their properties were mostly bought at the height of Celtic Tiger and are, therefore, located on poorer quality land (e.g bedroom communities, rather than D4). It will actually have a stronger impact on those who bought many years ago and who are now net recipients of transfers from improved land around them. This said, transition to LVT must take into account stamp duty paid, say in the last 7-10 years. It also should replace the stamp duty, in a revenue neutral way at the start. As far as who pays LVT - of course it will be the middle class and the 'rich' - there is no way around this. But some cash-poor, asset rich folks - families on social welfare that have inherited large homes - will be forced to trade down. This is good news. They under utilise their assets and thus should be given an incentive to trade these assets to improve their own income stream and improve the prospects of higher economic returns to resources. This is not a direct tax on labour and it does not discourage more effort/investment in human capital. In fact, it encourages the latter by bringing closer to reality the artificially depressed rates of return to higher education in Ireland.

On (3) - timing. It does not matter much when you introduce LVT, because you would set it on the basis of 2-3 year average valuation of land, not on the basis of an immediate land value. Depressing the returns to land - which LVT will do - will amplify the returns to adding value to that land through quality development, so you can think of LVT as being stimulative of good development and depressive of the overall sunk cost of development. It is, therefore, an expected support to the construction and property sector, but only in the area of added value, not speculative land banks holding.

"(f) reduce tax breaks on redundancy payments (excusing it by saying it will only affect to 'rich' i.e. payments above €100k - of course these unfortunates wont be rich for long as there ain't any jobs left and the banks will want this €100k to payback loans/mortgages etc." Yes, this will be damaging to the economy and the more vulnerable people who lose their better paying (and more productive) jobs. Given the structure of layoffs - with younger workers getting axed first - courtesy of our Unions'-sponsored idiotic labour policies - this measure will put extremely severe pressure on the households with greatest mortgages exposure, inducing a spike in mortgage defaults.

And per your intention to find a better location for your business - spot on. Your civic duty is to look after your own rate of return to your own talents and work. It is not to provide Cowen and the rest of the goons in the Leinster House with cash to waste. All I would ask of you is to send a Christmas postcard to your local TDs and to Cowen saying "Thanks to you, I am living outside Ireland now! Because of this, this year you will not be getting my taxes."

Per Fintan's comment:

"I wonder are we cynically waiting for the IMF to come in and force us to finally slash the untouchable public and social welfare bill? Sadly I think this government will try to play to gallery and therefore put most of the burden on the dwindling higher earners and naively expect this shrinking group to remain in Eire. They will not - this group is much more mobile than the govt thinks." Yes, Fintan, I agree with you. One small caveat - remember that when they tax higher earners - many of the PAYE higher earners are actually public sector employees... and the Government ministers etc.

Per third comment - by Anonymous:

I agree that one of the critical subheads is social welfare. It is a form of modern day slavery in so far as it locks potentially productive lives into a state of perpetual dependency. Higher taxation burden on lower income earners will indeed incentivise more transition out of work, so a cut in social welfare is needed urgently, especially as wages are falling.

Per immigrant labour: I am not sure you are right that we "had hundreds of thousands of immigrants paying little or no tax". Many of these immigrants were not aware of the tax deductions and did not avail of these, so while some have probably paid no tax (being out of tax net on the basis of their income or registered as sole-traders or employed via Northern Ireland-based subcontracting firms - practices well established in the construction sector), many were overpaying tax. In addition, thousands that went back home are now out of our pensions and welfare nets. On the net, I still believe immigration has contributed to the economy.

I warned (here) that our immigration flows since 2004 were of much lower (Human Capital-wise) quality and that this will end up costing us in terms of economic efficiency. A simple selection bias model would show that immigrants with above-average skills and aptitude are more likely to leave Ireland once they become unemployed, save for the social welfare generosity here. So the increases in the Live Register due to immigrants here are reflective of two things: (1) lower quality migrants choosing to stay here; (2) people who actually anchored themselves to Ireland (negative equity, family ties etc).

A friend of ours was made redundant this week - a Polish national who lived in Ireland over 10 years now and who was never redundant before. Professional girl, with good education (some of which she completed here, having paid out-of-EU tuition back before 2004). Should she be allowed access to unemployment benefits? Hell, yes. Should she be allowed this access ahead of a native person who have not contributed as much to the economy over the last 10 years, having, say, tapped the system of welfare instead of working? Yes, again.

What I mean here is that we have to be careful not to throw baby with the bath water - some (many) immigrants are very productive, very much contributive economically, socially, culturally to this country. They must not be bunched with the loafers and low-quality workers we have been attracting as well.

Over 20% of immigrants are unemployed and now on social welfare.As all the other tax revenue sub heads are down ,income tax is the only one they are going to target to pay for this.
This means immigration has been a burden on the Irish taxpayer.This ,in my opinion will have a negative effect on sentiment towards immigration.

It might be a selfish statement - coming from myself - given that I am a foreigner (having come to Ireland from the US and being a Russian and an Armenian), my wife is a foreigner (being an Italian and a Native American) and my son is somewhat a foreigner (Irish, American, Russian and Italian - some mix of nationalities he has). Even my dog is bloody American... But the facts are very simple - there are here foreigners who are world class workers and citizens. I know several Russians, Georgians, Serbs, Czechs, Ukrainians, you name it, in Trinity who either worked in the past or can work now in Yale, Princeton, Harvard, Chicago - you name it. They are obviously not a problem. On the other hand, I see hundreds of Eastern Europeans hanging about cash machines begging for money.

"More PPS numbers were issued to Non nationals in February and March than were issued to Irish people. Its hard to credit that all these new non nationals are taking up jobs here in this savage downturn. Something is not right. Is it possible some are somehow coming here and immediately going on social welfare?"

I have not seen the latest PPS numbers. But remember - PPS numbers are an opportunistic measure of actual employment. They might be a signal of an intention to seek employment, but they do not tell us whether a person was seeking long-term employment or just a summer (or even shorter) job, whether they were actually doing any labour search or whether they stayed in the country at all. Fortunately, our idiots in the Leinster House did set out a requirement that an Accession States citizens must work in this country for a number of years (in some instance, though - months) before accessing welfare system. You can see some of the details here. At the time of the Citizenship Referendum, I argued that the 2 years requirement (most extensive benchmark for accessing the welfare) is too short and should be extended to 5 years, with no exemptions for any forms of welfare. Of course, BBC, Irish Times and the rest of the 'Left' have accused me at the time of being anti-immigrant, even racist... Alas, in the end we opted for a shorter period.

"Why is rent income supplement being paid out when there are 250,ooo empty houses in the State? There is an oversupply of accommodation.Rent should be on the floor. Instead the taxpayer is subsiding landlords. I think the figure for this is around a Billion euros a year." Spot on - it is too costly and too loosely administered scheme that does not encourage tenants on assistance to seek cheaper accommodation. Cut assistance back by 20% to reflect the actual drop in rents and index future payments to average rents. We have social welfare recipients affording life in D4, while families that pay taxes cannot afford renting accommodation in D24! I would also remove social welfare housing out of Dublin City Center altogether (with exception of the elderly) and make the land available for development to accommodate families that actually work in the city. It is absurd that for the sake of 'maintaining community' we encourage city center residency for those who do not work (and who often contribute to social problems in the areas), while we require people who pay for this luxury to commute hours on end.

As Yeats said.. ''...things fall apart,the centre cannot hold...'' The middle classes cannot hold in this madness. Yes, it is time to send Cowen a note saying 'We are not paying your taxes anymore - get stuffed!" from each and everyone of us!

1 comment:

Anonymous said...

Thanks for replying in such detail Constantin. I only wish it was you and not the Trade Unions advising the government. WHY does our media completely overlook the middle-higher income group?

I do love this country, but I will not stay and be a slave to pathetic taxes attempting to prop up a Vincent Browne - Fintan O Toole model for Ireland. This effort on Tuesday I guarantee you will FAIL and I will not be alone in urging as many as possible to relocate!! Thanks again.