Sunday, November 15, 2009

Economics 15/11/2009: When Ryanair gets serious...

Per my continued opposition to absurd tax measures, see the following statement from Ryanair and my comment below:

Apart from landing another rainy cloud on Mrs Coughlan's fine parade (after all it does call Tanaiste out as being somewhat disingenuous in her claims), this statement is worth looking at a bit closer:

If the Irish economy is losing €600mln in tourism revenue, the VAT on this loss will likely be ca €80-100mln (as some services bear reduced VAT). This is the first round of losses to the Exchequer.

But every euro spent by a tourist in this country goes to pay for goods and services here, which in turn generates banks deposits and payments to suppliers. These payments are then used to generate new economic activity, thus triggering a second round of tax receipts. And the merry-go-round then goes on to the third round and so on. 

Given the average OECD private spending multiplier is approximately equal to the M1/M3 multiplier, which is roughly 3.8-6 (depending on the range of years chosen, with the lower number coincidentally referring to the years of the most recent global markets boom), then these losses are indeed much greater than those claimed in Ryanair note. 

Back of the envelope calculation suggests the Exchequer will be foregoing some €120-250 million more in revenue on top of the first round losses. And this is before we factor in income taxes and other taxes, such as charges on fuel that foreign motorists might pay while touring Ireland.

So we are now back to the old equation: put a €10 tax in place, lose some €100-230 million in revenue. Good luck running the country with these mathematics...

Note: that article attacking my and Ryanair analysis of the travel figures that predicted the yet-to-materialise substitution effects of Irish travel tax is available from the Irish Times site (here).


Unknown said...

Thanks for your explanation of how the multiplier works. But for those of us just tuning in, can you say where the €600m figure comes from? And can you respond (perhaps you already have?) to any of the points made in the Irish Times article? Finally, do you see any benefits to the €10 tax other than tax revenue?

Paul MacDonnell said...

@Lorcan I don't think Constantin even identifies the 'tax revenue' from the tax as a 'benefit'. So there are no benefits whatsoever.

MK1 said...

Hi again Constantin,

I see the 10 euro tax item raises your ire again, and you and I discussed it already some time ago.

I do not agree with your analysis, that a 10 euro tax would deter a traveller or would make them select a different destination. In the grand scheme of things, this tax is miniscule and is NOT a factor in the decision making process of either a tourist or a business traveller, nor an Irish-person or former resident coming home for a visit.

Thr Irish Times article is a good one but I dont agree with their synopsis totally either as such a tax producing a benefit due to Irish travellers switching to internal holidays.

The net conclusion is that a 10 euro tax doesnt have ANY effect, in my opinion, and if you have any research that shows otherwise, please point me to it.