Site Value Tax proposal draws an army of 'authors'

One particular trait of Irish policy research community is a troubling one – once a policy proposal is adopted by the governing party, the jostling and positioning begins to align various research bodies and policy advocates to claim the credit.

And so it is with the latest Programme for Government – no sooner did the ink dry out on paper as various august organizations and individuals have managed to stake a claim to fame as the authors.

I don’t know which proposal was finally used by the Green party leaders. All I know is that there is only one current proposal for Site-Value / Land-Value Tax that was produced in 2008-2009 period. This proposal was authored by me, sponsored by a group of research NGOs and is available on the http://smarttaxes.org website - a link to it here.

The proposal was publicized at a conference in April 2009 and at a public seminar in May, made public in Business & Finance, mentioned and cited in the Sunday Times and the Irish Times. I made the presentation on LVT/SVT available on my blog since April 07, 2009, and was a subject of a briefing for the Department of Finance in April 2009 which I attended. (Some links to these public domains: here, here, here).

The proposal (constituting the first volume of research on the issue) contained detailed estimates of the likely effect of the LVT/SVT on budgetary dynamics and revenue stability, as well as broad assessment of expected economic impact of such a tax.

The proposal was also delivered to the Taxation Commission as an official (and presumably logged) submission and the Taxation Commission report draws extensively in its section on LVT/SVT from this submission.

A second submission (see here), dealing specifically with the issue of using LVT/SVT to raise public investment funding was completed by me in August 2009 and made public then. It is also available on the http://smarttaxes.org website.

Both documents formed the submission on the Programme for Government by the Environmental Pillar member group, Feasta which was delivered to the Green Party and launched publicly at an event.

These are the matters of public record.

In the mean time, it came to my attention that a certain leader of one of the Social Pillar organization in the Social Partnership has been claiming authorship of the proposal. The irony has it, his own organization’s website contains no serious proposals for SVT/LVT despite having many detailed position papers on other policies. Other ‘authoring experts’ have been reported sending their CVs to the Green Party leadership in a hope of gaining a slice of action.

My research on SVT/LVT has been sponsored, kindly, by a group of private and NGO sources, cited on the submissions.

Economics 13/10/2009: Nama politicised

Update: a must-read today is Morgan Kelly's article in the Irish Times (here). As I have shown in my Business & Finance column well ahead of Morgan, buying equity in the banks to repair their balancesheets makes financial and ethical and economic sense.


So the Greens are now going on a methodical politicising of Nama. This was predictable, but it is nonetheless ironic, for it is normally the domain of FF to turn every economic policy into a political / interest-groups circus.

As a part of their Programme for Government, the Greens have promised 'protection' of defaulting homeowners. Instead of calling for a reform of our archaic bunkruptcy laws the GP is now considering several possible options for doing so.

1. Force the banks to purchase homes from defaulting homeowners, writing down existent mortgage. Assuming 5% default by homeowners (conservative number in my view) on roughly €82bn worth of principal residence-tied mortgages will yield a direct hit on the banks balancesheets of €4.1bn in 2010. Given the lags, one can expect this to be followed by a roughly 3-3.5% default rate in 2011, inducing another hit of €2.9bn, for a grand total of €7bn in 2 years. But this is not all - buying these mortgages out will imply the banks will take on assets that are worth significantly less than the outlays implied. For example, assuming 75% LTV ratio and 50% decline is peak-to-trough valuations (note: the first to default mortgages are more likely tied to lower quality properties, so 50% assumption is a reasonable one, if the average peak-to-trough fall was to be around 35%) the banks will be taking on an asset value loss of 0.5/0.75=33% of the mortgages assumed, or an additional €2.31bn. So capital base impact of this scheme will be around: 10% of RWA of 7bn-2.3bn = 470mln + 10%*(1+expected default rate+expected devaluation rate) of 7bn liability or ca 840mln. New demand on capital for banks will be in the region of €1.3bn immediately. Two questions to our GP friends: (1) Where will this capital come from? and (2) Where will the funding for acquisitions come from? If Nama is to be expected to generate commercial lending, what funding is available for buying out mortgage holders?
   
2. The Greens are also considering US-styled scheme where lenders are subsidized to reduce payments by those in default. This would be a temporary (presumably) bridge. The problem here is that if you subsidise my neighbour, I will face a choice: (a) continue paying my mortgage at increased rates (someone will have to provide the 'subsidy') or (b) default and get subsidised too. Any guesses as to what a rational agent will do? Once again, who will pay for this scheme and how can it be made compatible with Nama objective of relaunching commercial lending. How will the banks exit this scheme in the long run?
   
3. Measures to reduce the interest on mortgages: now this is ironic, given that this coalition has already swallowed IL&P increase in mortgages charges with Brian Lenihan saying that the banks are private enterprises and must be allowed to increase their profit margins.
   
4. Banks taking equity in home loans - equity in what? In a negative equity asset?
   
5. Mortgage terms extended. Given that we have been saying that 30-year mortgages at 100% LTV were reckless lending, making the same mortgages (now at 140% LTV) a 40-year contract will certainly be a prudent idea.
   

In the end, Green Party's denial of reality is evident throughout these proposals. The Exchequer is broke and Nama now means that we have no longer any capacity to aid the economy - we have spent the entire family silver on rescuing a handful of banks shareholders and builders. Instead of correcting the Exchequer deficit, the Greens are now full set to expand it to plaster over their disastrous agreement to back Nama. All of the above proposals will contribute to the future deficits and to the ongoing squeze of consumers, mortgage holders and taxpayers.

Months ago, myself and Brian Lucey have told this Government (including our direct briefing of the Green Party leaders) that Nama will trigger a wave of households defaults and that this will induce a new run on banks capital. We were called scaremongers.

The IMF seconded our views. The Fund opinion was ignored.

Now the Greens are running for cover on this issue, having pushed through Nama in the first place. This ethically disastrous stance of the GP leadership is a glaring example of how not to do policy.

Economics 12/10/2009: Ethics learning curve

Today, I received the following mass email from Trinity College Admin:

"On Mon, Oct 12, 2009 at 5:03 PM, Secretary wrote:
Dear Colleague,

I am pleased to announce that the Equality Fund 2009-2010 is now accepting applications for innovative and creative projects promoting equality and diversity in College. ...The themes selected for this year are:

• Enriching the inclusive College community
• Mental health and equality
• 'Treat others as they would like to be treated' (developing dignity and respect)
• Men and women in College: achieving full participation and potential
• Challenging Stereotypes..

Kind regards...

What did catch my attention is the third bullet point above. The theme dictum is "Treat others as they would like to be treated".

Trinity College is packed with smart and erudite women and men. I wonder how many of them have thought this to be an unfortunate (philosophically-speaking) attempt to establish a moral imperative rule. Unfortunate because as with all moral imperatives, the nobility of intentions might lead to an unintended consequence.

Imagine you are facing a person who might wish to inflict self-harm. Should you 'threat him as he would like to be treated'? Or you are facing a person who wishes to engage in an act you find repulsive? Or morally objectionable? Or legally wrong?

In ethics, it is widely recognized that moral imperatives do not provide sound grounds for ethical judgments or action. May be Trinity's Administration can acquaint itself with philosophy 101?

Economics 12/10/2009: Bertie's quote of the day...

Help us, but as we deal with the fallout of the Green Party disastrous attempt to save face on economic policy, here is a quote of the day from our former Dear Leader (may I remind you that my sources suggest that the current Governing Party's largest fraction in the Dail actually lobbying for his return):

Irish Times (without irony): "Were they not the people you suggested should go off and commit suicide at the Irish Congress of Trade Unions (Ictu) conference in 2007?"

Bertie: "That wasn’t about a boom-and-bust issue . . . It was trying to get the Ictu to hold their nerve and keep productivity high. Anyway, it was the collapse of Lehman Brothers that did the real damage. That decision will in history be written as the biggest mistake that American administration ever made, because Lehmans was a world investment bank. They had testicles [sic] everywhere."

Oh, my, what can one add...

Full interview available here.

Economics 12/10/2009: Green Party 'Programme' - a bark without a bite?

First Update: see second section below

It is time now to start chipping at the latest Programme for Government published this weekend.

First, the Programme was clearly written in haste. Forget its economic thesis that fails in its entirety to recognise the scale of the crisis we face. It is simply written in haste: page 1, just above the signatures of Mr Cowen and Mr Gormley reads "It was negotiated prior to the worst to the worst global downtown (sic) since the 1930s."

Now to the core of the 'Programme' itself.

Introduction: "The time for crisis management is over. Now we must set about re-creating the Republic. This Renewed Programme sets out the Government’s vision of national renewal and economic."

This statement is truly extraordinary for several reasons.

Firstly, neither our fiscal nor financial nor economic data show that 'the time for crisis management is over'. If anything, given that this Government is appealing to the EU to extend its holiday from the Stability and Growth Pact (SGP) compliance beyond 2013, the country is yet to face the stage of the real 'crisis management'. GP leadership is simply in the state of an even deeper denial than their FF colleagues.

In fact, the Green Party leaders are now firmly in the denial of economic reality as outlined by

• Jean-Claude Trichet last week when he said that the crisis is far from over,
  
• the IMF as outlined in their World Economic Outlook and GFSR reports from two weeks ago where the Fund economists warned of the upcoming second wave of financial, fiscal and economic crises;
• the OECD which late last month has warned that the Eurozone economies are facing renewed pressures on exports and growth;
• the Bank for International Settlements which, also last month, warned that more banking sector woes are inevitable for the Eurzone (to which we, of course, belong and of which we represent the sickest member state);
• the ESRI which forecasted prolonged recession through 2010 and anaemic recovery through 2013.
  

Second, a promise of 're-creating the Republic' is not a matter for the competencies of the Government (it is rather a matter of an entirely separate mandate which has to be explicitly delivered to the Government and cannot be assumed by the bi-laterally negotiated Programme for Government).

Third, the Programme must have far reaching, wide ranging economic, social and political reforms in order to live up to the promise of 're-creating the Republic'. As all analysis to date shows, it fails to do so, qualifying more as an interim shopping list for a minority partner in an unstable and unpopular coalition than an ambitious 're-creation of the Republic'.

I am amazed that the above-average educated Green voters were actually willing participants to this ridiculous posturing by the party leadership that also reaches beyond their democratic and, potentially, legal mandate. Can the premise that the GP-FF deal attempts to 're-create the Republic' be challenged legally, one wonders? If the claim is a statement of true intent, the Programme is a constitutional challenge to the status-quo. If it cannot be, then it is simply a case of grandiose over-hype - a crime of sick marketing over-reach, perhaps. Let the GP leaders make their choice...

"Any wrongdoing will be uncovered by the institutions of the state and brought to its logical conclusion. We cannot accept a return to the old ways and we will simply not allow this to happen." I would like to point out, to the GP leadership two facts. First, it was not the institutions of the state that unearthed all recent expenses scandals and all past over-spending scandals, the white elephants and corruption scandals. Instead, it was private sector media that did their jobs. Second, there is absolutely nothing neither in the Programme, nor in the conduct of the GP leadership to date that indicates the GP position of a watchdog over ethics and legality of Irish economic and political elites conduct. Nothing whatsoever. What the GP had, so far, contributed to the 'governance' or the banks, for example is a sweetly irrelevant promise to replace the boards of the banks within 2 years of Nama initiation. Given that countries change their entire governments within a span of several months post election, this is a puzzling anaemic 'watchdog' effort by the GP.

"The credit crisis hit more than our banking system. It is hurting homeowners and those in arrears. Government will support families having difficulties with their mortgage payments." Again, a bark that is not matched by any bite whatsoever in the Programme. There are no envisioned supports for the defaulting homeowners, no measures to address the issue of real debt rising in light of negative equity and tax increases. If anything, the Government (and the Programme re-enforces this effect) so far has been at the forefront of increasing financial strains on homeowners.

" Moving to a low-carbon economy, we will take advantage of our own natural resources in energy, forestry and food. " Another statement that is not grounded in reality. For example, Ireland is the least forested country in Europe and as such has no natural resources in this area. We have one of the most expensive food production sectors in the OECD, reliant more than any other OECD country on subsidies for agriculture. Our energy sector is at best can be described as a failure. The GP has neither the capacity to recognize these realities, nor to address them.


Update 1: Economic Policies (Section 2)

Economic policies, section 2: this and section 3 following it are the rehashing of the already woefully outdated and thin on reality December 2008 Smart Economy platform.

“We will introduce a new national performance indicator… formulated … with other quality of life measurements”. In other words, given that we already have non-descriptive stats, such as GDP-based measures that do not reflect our true income, the GP is offering more smoke to cover up the real rate of economic decay in this country. This fits well with their claims that the party stands for more transparency. For example, the new indicator can simply induce an artificial rise in the standard of living by assuming that our public sector spending (all of it, including wasteful pay and pensions practices) yields significantly higher multiplier than 1.

Even more worrisome in this is the possibility that such a ‘cover-up and pretend all is going on swimmingly’ approach to statistical valuations can be used to ensure that Nama yields a ‘success’ in some future. Thus, the new Programme for Government has started the process of politicization of Nama - the process that the Government was explicitly trying to avoid.

What is even more egregious in the GP policy platform is that it cuts across Brian Lenihan's (unbelievable, nonetheless explicit) promise of no new taxes in Budget 2010. The entire Programme's outlook on public finances is more resembling of the 2004 Social Spending Boost programme rather than anything even theoretically close to what will have to be done to return Ireland to some sort of fiscal solvency.

While re-affirming the Government commitment to bring deficit to 3% of GDP levels by 2013, the Programme for Government envisions more than Euro1.5-2bn annually in new spending and not a single cut to the existent spending. This would imply that reaching the SGP target by 2013 will require freezing all expenditure at the current level and yielding real economic growth of 4.21% per annum on average in real terms over the next 3 years. This is simply an unrealistic assumption of highest order.

"The future of the economy lies in exports... we must drive down our costs..." It is amazing that the focus on exports does not really figure whatsoever in the entire programme, apart from a sickly Euro100mln mixed-used (not exclusive to exports) support fund (see below) - which was already announced back in the beginning of 2009. If the future of our economy does lie with exports, why is the entire Green Party platform focusing on domestic energy independence and broadband and knowledge economy development?

As far as driving down costs - the GP does absolutely nothing (other than very generalist aspirations for productivity improvements in the public sector) to reduce the greatest historical drivers of inflation in the country - public services and state-monopolized or controlled sectors.

Tax Reform section explicitly ignores the need to grow the real economy, focusing exclusively on 'Green and Smart Economy', thus betraying deeply rooted inability of the authors to understand the issues of economic growth.

Serious contradictions emerge in the treatment of income tax policies. The first bullet point claims that the Programme aims to "Abolish the employee PRSI ceiling in parallel with the reduction of the temporary income levy in order to remove the inequity whereby higher paid employees pay proportionately less of their income for social insurance than low paid employees." Several things are simply out of order in this statement:

1. PRSI is paid by self-employed and sole proprietors as well as PAYE workers, yet the former have no access to PRSI-financed benefits. What inequity is the Green Party platform removing here?
2. PRSI and Income Tax are largely paid in this country by those with incomes in excess of 70,000 per annum. Given that some 80% plus of our tax revenue comes from these employees and business owners, what inequity is the Green Party aiming to remove by levelling even higher tax on them?
3. The statement explicitly states that the income levy is viewed by the Green Party as temporary. Will abolition of PRSI ceiling be temporary as well in line with income levy? Not a word on this in the document, implying that the GP wants to replace a temporary levy with a permanent tax increase which will disproportionately adversely impact those on wages in excess of 52,000 per annum and who are already bearing the disproportionately higher tax bill and many of whom have not even a theoretical chance of benefiting from PRSI-financed services.
   

The last point is important, as in the second bullet point of the section, the document states: "simplification and rationalisation of the various levies into the income tax system beginning in 2010". Now, once again, levies were set by the Budget 2009 explicitly as a temporary measure. The Government at the time advocated this approach precisely because they did not want to raise taxes permanently. Now, the Green Party is pushing for a permanent increase in taxation.

The third bullet point is simply an example of 'redistributive' quasi-socialist policies that the Green Party leaders are pursuing across their platform. Imagine two individuals - one earning 50,000 per annum, another 30,000 per annum. If the first person saves 10,000 in a pension fund, her tax reduction will amount to the same 3,000 as that of the second person. Net marginal tax paid by each person will thus be: +2,000 for the first saver and -1,200 for the second one. In effect, the first person will subsidise the second person's pension and consumption to the tune of 2,200 (assuming both share equally in the benefits of general tax revenue). Why? What does this have to do with any notion of fairness? Have Messrs Boyle, Ryan and Gormley think any of this through?

Taxation for sustainable development is perhaps the only thought through section of the entire document. However, on Business Taxes and Local Taxes the GP is once again goes flat.

Overall, GP's platform on economic policies is un-ambitious, unimaginative, poorly thought through and outright destructive to the real economy.


Stand by for further detailed analysis of the Programme