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In today's Irish Times, Fintan O'Toole calls for a bold restructuring of the Irish economy to cope with what will almost certainly be it's worst performance in GDP terms for 60 years.
Fintan proposes a basic effective income tax of 25% on every one, with high earners having their incomes capped at 80,000 for two years. Scrapping the tax shelters, inefficient tax breaks, and whacky subsidies like the Horse and Greyhound fund (70 million euros? Really?) should go a long way towards plugging the 20 billion euro gap in the public finances. Finally, scrap wasteful overlaps of public and private life, and introduce universal preschool education where now only a child benefit allowance exists.
The plan is bold, it is thoughtful, and it might change some minds.
Does it change yours?
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Steve,
As far as I can see, you haven't yet come out for or against the proposition that high earners should have their incomes capped at 80,000 for two years.
If this measure was introduced, I think we could see disastrous effects on innovation, enterprise and many aspects of job performance in the Irish economy. The implications for Exchequer funding are surely quite serious. If there is not enough innovation and enterprise to generate employment (and labour tax), reduce state transfers and generate corporation tax, then we could be in for a rough ride?
In other words, we should think carefully about how we might change the incentives for people who would take risks and scarifice time to re-build the economy. I might be wrong, but would you put your life-savings on the line and work an 80-hour week, if you couldn't earn more than 80,000 (even just for two years)?
I've no realy background in economics, but was very interested to read this piece.
The one thing that struck me about O'Toole's article was that, without doubt, the incentive to work hard, earn more and push one's self would be lost if a level playing field was too rigorously enforced.
It's nice to see someone talk about positive change, rather than reactionary drivel. This is an opportunity too, I only wish people would see it that way.
Martin, I'd be very surprised if anything like this was implemented, but it is a nice idea. I don't think it would hurt the economy's overall innovation profile if the cap were for, say, two years. But the temptation to allow the cap to stay in place would be too high. Also, restructuring the economy's income and consumption paths so drastically would have---gasp---unintended consequences, some of which might not be all that good. An Ireland of people with a basic standard of living, with world class education and infrastructure, but slightly slower innovation, might be a compromise worth making. I'd have to see the numbers before coming down on one side or another. But you know me, I love thinking about these things:)
Hi Clare,
What if we changed the cap from 80,000 to, say, 300,000? Would the incentive be taken away too much then? You make a valid point, but lots of people would see their standards of living going up rather quickly if this were implemented---better schools, roads, etc, so maybe that might compensate?
Have to call crapola on this one.
- Caps on income are useless, its all about margin(al) income and cost, right? Its not that people are paid too much, its that their pay is not tied to productivity delivered. Legal "green belts" that increase the price of a barrister for instance; legal green belts that block effective broadband competition.
- I think the tax shelters and related legislation needs a good cut the root and branches review. Their is crap in there, no doubt. But I do doubt that it will return more than €1bn. To get to the €4bn we need to save next year, we have to actually make some big changes, structural, functional changes.
- "Share the pain" is a catchall, and catchalls are not good Policy (IMHO). A closer look at "Incentives" to "Desired Actions and Behaviors" might be a more radical focus (?). If you have two income household with 80k coming into the home, what activities will decrease their consumption of energy by 10%?; increase their at work productivity by 10%,
The one thing I will say for Mssr O'Toole is that the "Free Economy" is now underwritten by the State, and the Black Swan has indeed landed, laid an egg, and it is, a stinker.
Steve, Its interesting to think about setting the cap at different levels e.g. 300,000. But I think Paul Sweeney has hit the nail on the head with his comment that "its all about margin(al) income and cost... its not that people are paid too much, its that their pay is not tied to productivity delivered." This leads me to suggest that we should not be considering an outright income cap at all.
Instead, we might consider a very high level of top-rate marginal income tax. There could even be a sliding scale from 48% to 58% to 68% to 78% to 88% for every extra 50,000 earned. This means that there would still be an incentive to increase productivity, even at the top-rate of 88%. I think there has to be some incentive to increase productivity, even if it only constitutes getting a 12% return at the margin.
Addendum: I picked these figures right out of the air. And I also have to emphasise that I am only discussing these ideas in relation to temporary management of the public finances during recession. If a high-burden top-rate level of marginal income tax was maintained ad nauseum, could we find ourselves knocked off on the steady state growth path? You know more about the macro stuff than me; I'm just taking a brief excerpt like this one as the cue for my concern:
http://www.questia.com/googleScholar.qst;jsessionid=JBQYQnpy7ndWtjL3GmJy1j14ZqzpJCPhjWDwcFjlJjhy1BbnkZRb!721571787!-1100836617?docId=5000389936
Hi Paul, I don't know about the cap on income being a bad idea---when was it really tried? I can't think of a single period in a modern capitalist economy where the experiment has been tried, I really can't. I'm sure, of course, that it won't happen, but that doesn't make it a priori a bad idea. The incentives to innovate, etc, wouldn't be damaged too much, because the cap would be for 2 years. Most start ups aren't making 300k in year 2 of their businesses. The structural changes which have to be made must take three forms: first, wage & direct benefit cuts for the public sector above 50k, second, widening the tax base to include those on very high as well as lower (but not very low) incomes, and third, slash spending on mad stuff like greyhounds, rich people, and so forth. Plug the rest of the hole with borrowing for the moment, and hope the international economy turns upward in 2010, not 2012. That's got to be the pragmatist view right now, praying all the while for a respite from the torrent of bad news coming our way!
Martin, smart post, but remember with a small open economy, ease of movement of capital, and tightly integrated capital markets, Irish high income earners will simply move their spare cash abroad, out of the tax net. They did it in the 1980's with Ansbacher, famously, because the effective tax rate for high earners was upwards of 70%. If we graduate the tax schedule, we change the incentives in unexpected ways, but one thing I can be sure of is that work rates won't decline much over the next 2 years, as anybody with a job will fight to keep it, and the possibility of moving from one job to another, even to the same job in another country, is pretty low right now. So what matters is not labour supply elasticities, or labour-leisure tradeoffs, or any of that stuff. What matters is the ability of the government to run a sensible deficit, strip back some, but not all, of the benefits of the public sector, and think about the structural reforms Paul talked about. There is a lot of low-hanging fruit out there with regard to structural reform---just look at the health service for 100 examples.
By the way, I should say I'm not a proponent of Fintan's idea, I just like mulling the idea over in my head for a while 🙂
The ideas put forward by O'Toole reek of totalitarian socialism and quite frankly suck.
What good is an income cap in the private sector? What money will be saved by this and where will it be spent?
Same about the 25% minimum income tax. Why not just create one lever of income tax (albeit 25, 35, or 45%) combined with taxfree allowance? It would simplify the tax system, and create huge savings within the civil service. It will also stimulate initiative, innovation and entrepreneurial spirit. If you study harder, work harder, risk more you earn more. Logic all around.
I do however agree with scrapping stupid tax benefits, there are too many and they are administered by nitwits. We need a radical re-structuring of public expenditure, one that can be best accomplished by disbanding whole departments and starting anew. Re-structuring doesn't work, one only has to look to the health boards -> HSE fiasco.
The current government has shown that it has no grasp of the situation. Rather than increasing taxes, which only serves to take money out of the economy and pump it on wasteful public sector projects, it should increase the spending power of it's citizens. Only this will put "grain" into the economy's mill.
Evert, there is a definite need to articulate a coherent, stimulating, industrial policy. I don't mean sending everyone into the factories again, but job creation policies will help far more than public sector wage cuts. Fintan quite rightly suggests that some tax-shelters and the madder subsidies should be shut down, culled, or restructured, which would again help. Spending on green resources would also help immensely. But that's not happening, sadly.
Stephen, How about using public sector wage cuts to fund job creation? The government does not need to increase their tax-take they just need to spend what they have more wisely.
This might work, but that money is coming straight from borrowings, so it wouldn't help us in the long run. The growth which will come from job creation normally comes from 2-3 years later.
Stephen, you say "I can’t think of a single period in a modern capitalist economy where the experiment has been tried, I really can’t." But something close to it has been tried.
If the cap is viewed as a 100% tax on all income over the cap, then Britain's 95% (99% ?) tax in the 1960s comes close to a cap. The 1960s Beatles song Taxman has the words
Let me tell you how it will be,//
There’s one for you, nineteen for me,//
‘Cos I’m the Taxman,//
Yeah, I’m the Taxman.//
Should five per cent appear too small,//
Be thankful I don’t take it all.//
If you want the guitar chords, let me know.
Thanks Derek, great quote!