TASC Blog Post 3/3 (unpublished): Tackling Selfishness In Ireland

Tackling Selfishness In Ireland (unpublished)

Author: Mr. Niall Douglas MBS MA BSc

Progressing onwards along the earlier themes of my posts – Progressive Conservative Economics (http://www.progressive-economy.ie/2009/10/guest-post-by-niall-douglas-progressive.html) and Taxing Sin, Never Good (http://www.progressive-economy.ie/2009/11/guest-post-by-niall-douglas-tax-sin.html) – I now come to another major item highlighted by the TASC conference: one way of tackling the selfish behaviour in Ireland which contributed to our Economic slump. As outlined in the last post, the proposed Economic stimulus must be revenue neutral and it ought to align taxation with morality.

It would seem that our present government has decided to more or less hold the current low taxation levels and to decrease public spending in order to balance our books. I gather that most of the other people posting to progressive-economy.ie would rather prefer a rise in taxation now or borrowing (i.e. a rise in taxation later) whilst leaving public spending more or less untouched. However, the perennial problem in arguing for any rise in taxation always is justifying it to people: witness how the National Health System in Britain is presently considered the most immune from the swingeing 15-25% spending cuts which much follow their next general election because of how successfully the British Labour Party argued prior to 2002 in favour of raising taxes in order to pay for its improvement.

If one is to similarly argue in favour of raising taxes or borrowing in Ireland, it cannot be justified by amoral or immoral arguments such as bailing out the sins of the wealthy and privileged or withdrawing benefits or income from the poor. If it is to be accepted by the electorate, it has to advance the cause of a progressive society in the minds of the taxpayers just as British Labour’s NHS argument successfully did in 2002.

Learning from the USA

Many countries around the world try to emulate the economic performance of the US: we here in Ireland have tried to import their entrepreneurial culture, their low taxation and their university-centred R&D structure and to date we have had mixed success. In my opinion one of the most important but overlooked generators of Economic growth in the US is Section 501 of their tax code. This specifies the conditions for exemption from tax on corporations, certain trusts, etc. where subsection (c) (http://www.law.cornell.edu/uscode/26/501(c).html) lists which economic activities are eligible for tax exemption. Its scope is surprisingly broad (Wikipedia has summarised it at http://en.wikipedia.org/wiki/501(c)) but its basic principle can be captured very simply: any economic activity which greatly benefits wider society is not to be taxed, including any non-profit business.

Contrast this with the state of charity legislation in Ireland at present where one must comply with Section 207 of the Taxes Consolidation Act (1997). Firstly, one must form a special legal entity called a “Company Limited by Guarantee and Not Having a Share Capital” which in Ireland must have no less than seven non-family “arms-length” Directors[1]. Secondly, this entity must exclusively do one or more of the following: (i) The Relief of Poverty (ii) The Advancement of Education (iii) The Advancement of Religion (iv) Other works of a charitable nature beneficial to community but not including community activities such as sport or taking care of neighbours. Thirdly it cannot remunerate its Directors nor can it share its profits and it must have a “Charitable Governing Instrument” which is a complex legal document heavily restricting its powers drawn up at some length by legal experts. Fourthly, it and its Directors must have an established track record and auditable paper trail of charitable behaviour before tax exemption will be granted – in the case of granting tax-deductible donations this is at least two years – which means that initially the charity gets no tax exemption at all! Put simply, there is a very high standard for receiving and keeping official charity status (denoted by an official CHY registration number).

If you might think that setting up a charity is both costly and inconvenient to operate in Ireland, then you would be entirely correct: in most cases involving charity it is simpler and cheaper just to pay for things out of your own pocket. In my own personal experience, there is a presumption by Revenue against altruistic behaviour in Ireland and they feel a need for very ample and ongoing documentary proof of unselfish behaviour which implies that it is somehow unusual. This, in my opinion, is a very sad state of affairs as it assumes such a negative view of the Irish citizen – not that I blame Revenue, but I do blame our political masters for doing nothing about it because it is extremely easy to remedy AND simultaneously provide a large economic stimulus for our economy.

What to do about it

If there can be any definite economic stimulus through increasing income taxation, it is this: copy the spirit of charity law in the US and allow income tax deductions at the higher of the individual’s marginal rate[2] or the standard rate (currently 20% in Ireland) for ALL non-profit, community-serving or widely beneficial economic behaviour under the same headings as Section 501(c) of the US tax code. To help prevent tax evasion and to help ensure that people are publicly recognised for their service, local newspapers and media ought to also be able to tax deduct the costs of publishing the details of the hours being reclaimed for all local citizens in addition to the claimant filing receipts with Revenue.

To explain this it is easiest to give examples, so let us start with a married University Professor who in Ireland earns approximately €145,000 per annum and will pay a total of €44,426 in income tax which gives him or her a marginal rate of 30.64% or €22.21 per hour[3]. Let us say that this University Professor donates four hours of their time each weekend coaching at the local G.A.A. club: this allows the deduction of 4 x €22.21 = €88.84 per week from income tax, or a reduction in annual income tax of €4,442 which is an increase in take home pay of 5%.

So much for the wealthy, but what about those of middle income? Let us take an unmarried male Sales Manager on an income of €35,000 paying income tax of €3,340 (a marginal rate of 9.5%) who decides to improve themselves through a three year part time Open University Masters Degree costing €2,000 per annum. Currently in Ireland one can deduct university fees from income tax at 20% which is worth €400, but let us now include the 800 hours of study recommended by the OU. As this person has a marginal rate of 9.5% which is less than the standard rate of 20%, we use a deduction rate of 20% which is €3.50 per hour which comes out at 800 x €3.50 = €2,800 per annum. When combined with the relief from fees, this Sales Manager is now €3,200 better off per year which is an increase in take home pay of approximately 11.1%. Just for comparison, were the University Professor to similarly invest 800 hours into socially beneficial activities per year, they would increase their take home pay by 20% which makes sense given their much higher marginal Economic productivity.

One great concern under this plan is the plight of the poor. Ireland’s income tax is so highly progressive (see graph below) that the poor pay no income tax at all in Ireland when earning less than €9.15 per hour (€18,300 per year) and so this proposal effectively has no effect on anyone earning less than €23,000 a year. It is a perverse thing in this country that the poorest are already the most charitable with their time and while I would very much like to see their incomes topped up, they themselves would almost certainly find such an idea insulting. In the end, we are targeting those who are the least generous with their time precisely because they earn so much in the first place.

How to Fund this Proposal

As indicated earlier, this is a revenue neutral proposal: in order to fund this change, one increases the rate of tax. I estimate that this proposal could approximately halve the income tax collected by the government which is likely to be approximately €6bn next year. Here’s the breakdown of income tax paid per earnings bracket in Ireland in 2008 (source: http://www.ronanlyons.com/2009/07/28/a-little-quiz-on-irelands-income-tax/):

Raising the lower rate to 25% and the higher rate to 48% ought to balance the books: this also has the major side-effect of considerably improving still further the available tax deductions for charitable behaviour outlined above. Seeing as two thirds of Irish workers pay less than 10% of their gross income as income tax (as compared against an OECD average of 20%), one can justify the tax increase through moral argument just like Britain did with the NHS in 2002. Just as in that case, people have a very simple explanation which isn’t complicated nor unfair, so psychologically this is an acceptable tax increase because it clearly is intended to substantially improve society.

The Economic Stimulus

The change to income tax might be revenue neutral, but its effects on the Irish Economy most certainly would not be so. Obviously the effects of such a dramatic reallocation of income tax according to an individual’s merit are hard to predict, but I shall do my best to outline my thoughts on the matter.

Firstly, most Irish small business stands to benefit greatly from this proposal. Small Business Owners tend to perform quite a lot of unpaid socially beneficial activities anyway as part of interacting with their suppliers and customers, and most especially as part of the general business ecosystem in sponsoring events and working with the local Chamber of Commerce. For example, I recently completed the respected Masters in Business Information Systems at U.C.C. where the students are mentored by local business leaders at significant cost and expense to themselves, yet they receive no direct remuneration for their service. What they do obtain is a valuable insight into the next generation of business people and new contacts and opportunities which could contribute to their bottom line in the future. If you would like to deliver a strong dose of sustainable growth into the best of Irish small business, this sort of long-term visionary altruism needs to be strongly encouraged by the tax system rather than punished as at present.

Secondly, Education gets a major boost from this proposal by helping Irish citizens to keep themselves educated and skilled which is essential to sustainable Economic growth. In fact, from my personal experience of the Education system, this proposal alone would accomplish far more for Education than maintaining teacher’s salaries or school budgets because as any teacher knows, most of your effort in teaching is expended on those students who don’t want to be there. If one wants to seriously improve the efficiency of delivering Education, one should consider how the Open University delivers high quality education to 150,000 students each year at a fraction of the cost per student of the publicly-funded Irish education system precisely because its students want to study. If one feels that the OU is not up to a sufficient academic standard, I should add that Harvard University in the US operates one of the largest distance learning programmes in the world and no one would claim that their courses are substandard. In my opinion, public investment in education should be allocated according to the best return on investment – but I shall say no more for now as this precise topic is due in a future article.

Thirdly, cooperative ventures such as credit unions, crèches and organic food outlets all receive a boost – cooperatives which anyone may join are uniquely allowed to return profits to their members under the US tax code and applying this principle to crèches alone would do much to firstly reduce the cost of childcare, secondly to increase the quality of childcare and thirdly to save the €2bn or so a year currently mostly wasted in Ireland on universal child benefits. I shall return specifically to the topic of very substantially improving child care in a future article where I will show how when better allocated that €2bn could provide us with a Danish-style universal crèche system where every child under the age of five in Ireland is guaranteed a world-leading education.

Fourthly, philanthropic activities by the super-rich of Ireland get a very major boost. Too often we here in Ireland forget just how much the super-rich of America have donated heavily into Ireland throughout the last twenty years thanks to the US tax code: the contributions of Chuck Feeney alone exceed one billion euro[4], 63% of which went into Irish universities. Ireland has produced a host of its own super-rich in recent years none of whom are exactly encouraged by our tax code to be philanthropic, and I think this very short sighted in the long term.

Lastly, and most obviously, charities themselves would benefit from extra manpower and resources. Currently working for a charity even when unpaid is treated as any other job by the system: for example, those receiving social welfare payments are banned from all unpaid work (including improving oneself through part-time study) which has always seemed highly counterproductive to me. However, not just charities benefit but so do ALL non-profit organisations which are open for public membership, including all amateur sporting and even special interest groups such as bell ringing or bird watching. And perhaps, out of all of the benefits afforded by this proposal, this latter benefit is THE most important for economic growth, and this is why:

What this proposal sums up to is a publicly funded stimulus investment into people meeting one another and forming informal organisations. Too much of Ireland’s current economic malaise is simply people not networking by getting out and about meeting new people. Hence they lack the opportunity to initiate the generation of new ideas and possibilities within the Irish economy. This proposal does much to address this. No Economist can quantify the likely effects on Economic growth caused by such a proposal – Econometrics requires the system to not fundamentally change – but every single Economic theory out there from Communism right through to Anarchism views people forming new bonds with other people as core to Economic development. It is this we must stimulate, and in so doing simultaneously make Ireland a better and more humane place to live.

This week it was Income Tax. Next week I shall address reallocation of VAT as a method of applying further stimulus to the Irish Economy whilst trying to keep inside the EU rules for VAT. I look forward to your comments and I hope you will join me again in next week’s article.