Unsecured Loans: Tax Revenue

Showing posts with label Tax Revenue. Show all posts

Thursday, November 29, 2012

Stamp Duty versus Mortgage Interest Relief

Here is a table of the amount of revenue raised from Stamp Duty on residential property and the amount of tax relief granted to residential mortgage holders for the past decade.

The figures for Stamp Duty are taken from here and relate only to Stamp Duty paid on residential property transactions, while the figures for mortgage interest relief are taken from here including the estimate for 2012, with a full-year 2011 figure here. The amount of income tax relief granted to mortgage holders is equivalent to nearly 75% of the revenue received from Stamp Duty on residential property.

The two columns do not reflect the same groups of people but there is likely to be very significant overlap. The Stamp Duty column will include duty paid by investment buyers who are not entitled to mortgage interest relief (but do get a separate relief). If investors paid a quarter of the Stamp Duty and were omitted the sums of two columns would be almost identical. The Mortgage Interest Relief column will include people who bought before 2002, though these will be smaller mortgages and many will have been repaid by the end of the period, and also first-time buyers who bought in the period in question but were exempt from Stamp Duty.

Although the Exchequer did collect significant revenue from the purchase of residential property by households in the last decade, the Exchequer has also lost significant revenue by awarding income tax relief for mortgage interest to households.

Thursday, November 22, 2012

Taxing Wealth, er… Income

This week Sinn Fein released their budget proposals in a document called ‘Making the Right Choices’. It contains a package similar in scale to the €3.5 billion of ‘adjustments’ proposed for Budget 2013.

There are €2,758 million of proposed tax increases and €705 million of net expenditure ‘savings’ (though €433 million of those come from increased revenue measures in health (recouping the full cost of private beds from private patients)).

One of the tax initiatives is a new wealth tax.

A 1% TAX ON NET WEALTH OVER €1MILLION, EXCLUDING WORKING FARMLAND, BUSINESS ASSETS, 20% OF THE FAMILY HOME AND PENSION
POTS: RAISES €800million

Sinn Féin’s proposal is to introduce a 1% tax on all assets over €1million net of all liabilities, including mortgage and other debts. The tax would not be levied on 20% of the family home, the capital sum in pension funds, business assets or agricultural land.

It would apply to the global assets of those domiciled or ordinarily resident in the state and domestic assets only for those who are resident in the state for tax purposes.

Two examples are provided to illustrate how the proposal might work. (Click to enlarge).

Here is a summary of Example B:

Of course, the first item on this list is not a typical component of wealth. Wealth is usually defined as a stock measure of the difference between assets and liabilities at a particular point of time. Income is a flow over a particular period of time.

We have taxes for income through Income Tax, USC and PRSI. The above case would be subject to Sinn Fein’s proposed 48% rate of Income Tax on incomes above €100,000. It also appears to be the case that those who are subject to the wealth tax will be subject to an additional 1% income tax on some measure of ‘net’ income. Thus, the proposal is part wealth tax, part income tax.

If income was excluded from the base for the wealth tax (as would be expected) then the tax liability in Example B would be €5,150. Raising €800 million from a wealth tax such as that would require the equivalent of 160,000 Ciarans. A newspaper report of the proposal says:

Mr Doherty claimed that financial management company Merril Lynch had estimated there were 18,100 people living in the State with assets of more than $1m (€778,000).

Taxing Income (again)

A couple of previous posts have looked at the implications of changes to income tax, here and here. A recent parliamentary question provides some details of what would happen if:

the marginal rate of tax on Income Tax was increased to 71% for very high earners or
if the effective tax rate of Income Tax + USC + PRSI was increased by nearly a third for high earners.

The answers to these questions were provided in a recent PQ set by Socialist Party TD Joe Higgins. The emphasis was on tax cases with incomes over €100,000. The marginal rate of tax for PAYE employees in this category is 52% (41% Income Tax + 7% USC + 4% PRSI). For self-employed/non-PAYE earners the marginal rate is 55% as there is an additional 3% USC levy for non-PAYE earnings over €100,000.

The question set looked for the impact of marginal rates ranging from 48% up to 78% on different income ranges excluding PRSI. With a 7% USC rate the proposed income tax rates start with the existing 41% rate up t0 71%.

Unsurprisingly the proposed 48% raise no additional revenue as that is identical to the existing rate. There is a minor gain from the 50% rate and from 55% up the suggested impact of the new tax bands and rates can be seen. The largest amount of additional tax revenue is in the widest band between €250,000 and €1 million with over €400 million raised from a new 75%. tax rate.

The marginal tax rate of 78% on earnings over €1 million raises just €110 million. This is because there are so few people earning this amount. The 2011 tax distribution statistics from the Revenue Commissioners show that just 636 tax cases reported an income of greater than €1 million. It is not clear how many individuals have incomes in excess in €1 million.

If there was 636 such people they would face an extra tax bill of around €175,000 from the 78% rate alone. The increased rates on lower income bands would mean the overall tax increase for such earners from these measures would be larger.

In total nine proposed new tax bands with a top marginal rate of 78% would raise a little over €850 million. This would help close a budget deficit of €13.5 billion but makes clear that increased taxes on high earners alone falls far short of the eliminating the deficit.

The second set of proposals had to do with increased effective or average tax rates for earners in similar income ranges used above. For incomes over €90,000 the proposal would see the overall effective tax rate rise from 34.6% to 40.2%, with an effective tax rate of 50% or more for all incomes over €300,000.

In total these increases would raise €1,337 million which is equivalent to around 10% of this year’s deficit. This is similar to an earlier proposal from NERI but gives specific effective rates for each income range. It differs in that the proposed tax increase is about twice as large and focussed on a third as many people. In both cases no specifics are given on how implementing these effective tax rates would actually be achieved.

Tuesday, September 4, 2012

Tax Revenue Profiles

While the headline is that “tax take is €365 million ahead of target by end of August” it is useful to go behind the numbers a little bit. The documents from the Department of Finance are:

Tax revenue is clearly €365 million “ahead of profile”. It was forecast that €21,711 million of tax would be collected by the end of August. The outturn is €22,076 million. However, there are a couple of points to note about the profile.

A revised profile was released on May 2nd to account for delayed Corporation Tax receipts from 2011 and the reclassification of some PRSI receipts as Income Tax that affected the first quarter figures..

As we previously pointed out the revised profile starts with a figure of €8,396 million of tax revenue to the end of March when it was known for a month before the profile was released that €8,722 million of tax had actually been collected in the first three months of the year. It helps to be “ahead of profile” when you use a profile that is more than €300 million below what you already know has happened.

So how have tax revenues fared in the months since the release of the revised profile. These are department projections for May, June, July and August and how they compare to the actual outturn.

Since the effective tax profile was released on the second of May, tax revenue is €21 million behind expectations. This is only a shortfall of 0.3% but it can be seen that the total figure is being supported by a €143 million boost from Corporation Tax. The performance of Income Tax and Excise Duty are significantly below expectations. Here are the monthly comparisons for total tax revenue.

By the end of June tax revenue was more than €500 million “ahead of profile” but about a third of that has been given up in the past two months, with August in particular falling well short. The DoF documents show that Income Tax and Excise Duty account for most of the shortfall.

The relatively good performance in the first six months of the year means that this month’s deterioration is unlikely to threaten the budgetary arithmetic and the end-year target of €36.4 billion. Tax revenue is “ahead of profile” for the year but the performance is not as strong when limited to the period since the profile was actually released.

It is likely that over the coming months there will be more months where tax revenue is “behind profile”. This could be a function of the projections as much as it is of tax performance. This is a by-product of moving more than €300 million of taxes from the actual receipts for January to March to the projections for April to December. By year-end it is probable that receipts will continue to move from the current €365 million ahead of profile closer to the €36.4 billion annual target.

Wednesday, July 4, 2012

Mid-Year Exchequer Returns

The end-June Exchequer Statement was released yesterday. Here are the relevant documents.

The media reaction to the release has been glowing with examples of headlines being:

RTE: Exchequer Returns ahead of target to end of June
Irish Times: Latest Exchequer Returns €500 million ahead of target
Irish Independent: Half year tax take €500 million ahead of expectations
Irish Examiner: Exchequer figures better than expected
Journal.ie: So far in 2012…tax take €500 million ahead of target

The Department of Finance are pretty upfront about all this and do provide all the necessary information required to explain why tax revenue is ahead of profile. What is absent in all the media reports is any explanation as to why revenue is up.

If this excess was completely unanticipated it would be a very positive development. There have been a number of factors such as delayed Corporation Tax receipts and reclassified PRSI contributions that slightly complicate an analysis of the 2012 tax figures

Each year a monthly profile of tax revenue for the year is provided by the Department of Finance and the Tax Profile for 2012 that was published on the 10 February. By the end of June it was expected that tax receipts would have accumulated to €16,025 million.

As a result of a delay meaning that some 2011 Corporation Tax was actually paid into the Exchequer Account in 2012 and the reclassification of some PRSI receipts as Income Tax a revised profile was released in early May. The updated figure was that €16,507 million of tax would be collected by June with the increase accounted for by the Corporation Tax and PRSI issues.

Just two months later we have learned that the actual amount of Exchequer tax revenue to the end of June is €17,014 million. The difference is the €507 million excess referred to in the media. However, given that the Department’s revised tax profile began in April it seems unusual that tax revenue for the next three months has come in €507 million ahead of target. Or this is how it might appear.

In the original profile it was expected that €8,136 million would be collected between April and June. In the revised profile the equivalent figure was actually slightly lower at €8,112 million. The outturn shows that €8,293 million was actually collected between April and June.

Tax revenue in the period since the new profile was released is €181 million ahead of target. So how come it is being reported that tax revenue is €507 million ahead of profile?

To the end of March the actual amount of tax collected was €8,722 million. As the March Exchequer Statement was released on the third of April we can assume that this fact was known when the revised tax profile was released a month later on the second of May. This revision indicated that April was expected to see €2,059 million in tax collected. Adding this forecast for April to the March outturn would give a cumulative forecast to the end of April of €10,781 million. The revised profile actually has a figure of €10,430 million.

So the Department knew that €8,722 million had been collected by the end of March and expected that €2,059 million would be collected in April but included a figure of €10,430 million in the revised profile. It seems that the revised profile was based on a cumulative figure to the end of March of €8,396 million rather than the €8,722 million that was known to be collected; a difference of €326 million.

Adding this to the €181 million that tax in the April-June period actually was ahead of profile gives the €507 million ‘excess’ reported today. Of the excess €326 million was completely anticipated because it arises from using a figure at the start of the profile that is lower than reality.

This is not to say that tax revenue is not performing well; it is. The budget had a 2012 forecast of €35,825 million (up on the €34,027 million collected in 2011). Because of the corporation tax and PRSI issues this was revised up to €36,375 million. The performance in the first six months of the year suggests that this can be achieved.

In fact, using actual the March figure (€8,722 million) and the revised total for April to December (€28,005 million) means that the Department of Finance now expect tax revenue in 2012 to be €36,727 million. This is a good performance but why not come and say that this is what they expect?

When the revised profile was released on May 2nd it seems reasonable to suggest that this would be based on the known figures at that time. By May 2nd the March tax return was known (and the April figure was also released the same day). Starting a profile that is €326 million below the known figure for March is a little odd but lowering the bar in this manner does mean we can expect to hear plenty of “tax revenue is ahead of target” for the next few months. Tax revenue is rising but, at this stage, most of it is anticipated..

Wednesday, April 4, 2012

First Quarter Exchequer Returns

The Department of Finance have released the end-March Exchequer Returns. The relevant documents are:

The Department have improved their presentation of the tax receipts data and much of the analysis that was previously provided here is now included in the release. This is a welcome development.

Another welcome development is the new Department of Finance Databank which gives monthly Exchequer tax receipts back to 1984. Expenditure figures are provided in the Department of Public Expenditure and Reform Databank which has been available for some time.

On the whole, the results seem slightly positive. Tax revenue is up on the year but a lot of that is due to delayed receipts from 2011 and some reclassifying issues between Income Tax and PRSI. Even accounting for these, tax revenue seems to be performing as expected though there is an unusual dichotomy between the performance of VAT (up) and Excise Duty (down).

The Current Account Balance is a useful indicator of the performance of the public finances. On first glance this would appear to be getting worse. In the first three months of 2011 there was a Current Budget Deficit of €4,177 million. So far this year we have accumulated a Current Budget Deficit of €4,918 million.

There are three factors to note before jumping to the conclusion that the Current Deficit is continuing to deteriorate:

The Sinking Fund Contribution of €646 million has already been made for 2012. In 2011 this transfer of €683 million from the Current to Capital Account did not take place until November. A year-on-year comparison is unfair on 2012 because it includes a payment that was not made by March of last year.
Last year the debt interest cost for the first quarter of the year was €1,425 million, but €577 million of that was paid from the Capital Services Redemption Account with the remaining €848 million coming from the Exchequer Account. In 2012 all the debt interest bill of €1,658 million was paid from the Exchequer Account.
This year’s receipts include €231 million of Corporation Tax which should have been collected in 2011 but a delay meant it was instead included in the January 2012 receipts.

To account for these we will subtract the Sinking Fund contribution from the 2012 deficit, add the interest paid from the CSRA to the 2011 deficit and subtract the delayed Corporation Tax receipts that have been added to this year’s revenue..

That means the comparison is between a deficit of €4,754 in 2011 and one of €4,503 million. So far in 2012, the Current Budget Deficit is about €250 million better than it was at the same time last year. It is not clear how much of this is down to timing and whether it will be continued into the second quarter, but it is positive that the current budget deficit is smaller (even if it is only marginally so).

Thursday, December 15, 2011

Wealth (and Taxing Wealth) in Ireland

Wealth has been getting a lot of attention in Ireland recently particularly in relation to the claim that it would be possible to raise €10 billion per annum from a 5% wealth tax on the wealthiest 5% of the population as detailed in the Budget Submission of the United Left Alliance and repeated on an almost nightly basis on television and radio.

The adult population of Ireland is around 3,400,000 so the 5% that are liable for this tax would be 170,000 people. In order for the €10 billion total to be achieved these people would have to be pay an average of an additional €60,000 in tax every year.

The ULA’s budget submission also envisages an additional €5 billion of income tax to be raised from those earning in excess of €100,000. According to data from the Revenue Commissioners in 2009 there were 110,000 tax cases reporting an income in excess of €100,000. The average income in this category is €180,000, but two-thirds of those who earned more than €100,000 earned less than €150,000. In order for the €5 billion target to be achieved those earning more than €100,000 will be required to pay an average of an additional €45,000 of income tax.

This is an addition to the €60,000 average income tax that this group paid. In 2009, this excludes payments made because of the Health Levy and also PRSI contributions. Anyway, the focus here is on the potential to raise €10 billion from a wealth tax.

Back in February the United Left Alliance were proposing that €6 billion a year could be raised from a wealth tax. Just ten months later they have increased this to €10 billion.

The original claims were based on a 2006 report by Bank of Ireland Asset Management on The Wealth of The Nation. The current claims are based on the Global Wealth Report (and accompanying Databook which has the details on Ireland) from Credit Suisse. For 2011, the report estimates that the average net wealth per adult in Ireland is $181,434 (median equals $100,351). With an adult population figure in the report of 3,403,000 that puts total net wealth in Ireland at $617 billion.

The Credit Suisse report estimates that there are around 70,000 millionaires in Ireland (and four billionaires). This means that around 100,000 of those in the top 5% have a net wealth of less than €1 million. Net wealth is

Financial wealth + Non-financial wealth - Debts = Net wealth

This figures under each heading are:

Financial wealth $435 billion
Non-financial wealth $484 billion
Debt $302 billion

We are not given an exchange rate to convert this into € but the euro has recently been around 1.30 to the dollar but was probably trading higher when this report was written. If we use an exchange rate of €1 = $1.40 that would give:

€310 billion + €345 billion - €215 billion = €440 billion

The estimate is that there is €655 billion of gross assets in Ireland and €440 billion of net wealth. The 2006 figures from the earlier Bank of Ireland report are:

€270 billion + €695 billion - €161 billion = €804 billion

The figures provided by Credit Suisse for financial wealth and debt are not that distant from the official figures given in the CSO’s Institutional Sector Accounts. This puts financial assets of the household sector in Ireland for 2010 at €311 billion and household financial liabilities at €194 billion. The asset figure is almost identical to the Credit Suisse figure but the liability figure is a little higher than the CSO’s.

The CSO put total financial wealth in the household sector at €117 billion. The following gives the breakdown of the assets and liabilities that gives rise to this figure.

The Bank of Ireland report puts the 2006 total of financial assets at €270 billion and exclude life assurance reserves from their total. Credit Suisse have a figure of €310 billion but the composition of this is not given.

To get a measure of overall wealth we need to add non-financial assets to those listed above. The Bank of Ireland report includes residential (€671 billion) and commercial (€24 billion) real estate in the €695 billion total for 2006 in that report, but seem to exclude land and other assets. Even putting an approximate value on all of these assets is extremely difficult.

It is not clear what Credit Suisse include as non-financial wealth but is it “principally housing and land” and they provide a figure of €345 billion but there is no way of knowing how this is derived.

The CSO do not provide an estimate of non-financial wealth in Ireland but the organisation’s Action Plan under the Croke Park Agreement states that “there is demand for a … survey
of household Income, Wealth and Assets.” It is not clear when this will be delivered.

And finally onto the distribution. Credit Suisse estimate that 5% of adults (175,000) have 46.8% of the €440 billion of the net wealth they estimate that is in the country. This is equal to €206 billion and would be an average of around €1.17 million per person.

A division of this by financial and non-financial assets is not provided and it is unclear what the asset allocation across this €206 billion is. Apart from the nebulous concept of “wealth” in the ULA document it is not clear what should be taxed. It will take a little more than an amendment to the Finance Act proposing that “a 5% tax be imposed on the wealth of the wealthiest 5% of the population”.

It is also not clear how sound this wealth distribution is. The Credit Suisse report says that it has wealth distribution data for 22 countries and uses this data to infer distributions for the other 140 countries in the report. Ireland is one of the countries that they claim to have wealth distribution data for and this is from 2001. The 2001 data and the 2011 estimates are summarised in the following table.

The series are reasonably consistent. The 2001 figure is that the bottom 50% have 5.0% of the wealth. For 2011 the reported figure is 4.8%. In 2001 it is indicated that the top 10% has 56% of the wealth, in 2011 it is 58.9%. For the top 1% the figures are 23.0% and 28.1%.

But where did the 2001 data come from? The report says the data is from Inland Revenue Statistics and to go see Ireland (2005). I doubt the UK’s Inland Revenue have data on the distribution of wealth in Ireland and we know that the Revenue Commissioners do not. The Inland Revenue may have data on Northern Ireland and they have lots of neat stuff here.

So what is this reference to Ireland (2005). From the bibliography this is:

Ireland, P. (2005): “Shareholder Primacy and the Distribution of Wealth”, Modern Law Review, 68: 49-81.

You can read this article here but the only mention of Ireland is because of the name of the author – Paddy Ireland. There are no wealth distribution statistics for Ireland in the article. None, but the reference has the words “Ireland”, “wealth” and “distribution” in it!

This report by the some of the same authors has almost the same wealth distribution as those shown in the top of the above table. The only issue is that there are for the UK in the year 2000. See table 7 on page 37.

There is another wealth distribution provided for Ireland in this report but this is claimed to be from 1987 and cites a 1991 publication by Brian Nolan, The Survey of Income Distribution, Poverty and Usage of State Services. However I think they actually a 1991 publication for the Combat Poverty Agency, The Wealth of Irish Households: What Can We Learn from Survey Data? (32mb!). Anyway here is the 1987 data which is confirmed on page 69 of the Combat Poverty Agency report.

When using the 1987 data this earlier report says “it is hoped that the shape of wealth distribution in these countries was reasonably stable from the late 1980s to the year 2000”. By 2001, in the Credit Swisse report they are saying that the wealth share of the top 1% was 23.0% up from 10.4% in the 1987 data. Not very stable. Of course, this 23.0% is a UK figure so we cannot put much weight on it.

In fact, without any evidence to support the claims in the report we cannot put any weight on it at all. Hopefully in time the CSO will address this data deficiency. The Nolan (1991) data is from a survey which will tend to underestimate the wealth of high and very high net worth individuals as they will be under-represented in the sample. Any information on the 2011 distribution of wealth in Ireland is little more than a guess.

A 5% tax on €206 billion would yield an impressive €10.3 billion but the proposal must specify what is to be taxed. The possibilities are:

Cash
Current Accounts and Deposits
Life Assurance Reserves
Direct Equity Investment
Business Equity
Pension Fund Equity
Land
Commercial Property
Residential Property
Other Assets

Putting a 5% tax on cash, current accounts, bank deposits and life assurance reserves seems practically impossible. The value of equities or private business comes from the dividends or incomes that these assets can generate and this are taxed under the income tax code. We have introduced a 0.6% annual pension levy for private pensions. A land tax is possible but unlikely and a residential property tax (or more particularly a site value tax) is due to be introduced by 2014. Determining what other assets should even be included makes taxing them difficult (yachts, racehorses, art, antiques, cars, jewellery, …)

All this is not to say that a wealth tax does not have merits. There have been moves away from wealth taxes in the past 15 years with many European countries abandoning them but France maintains the ‘Solidarity Tax on Wealth’. This is liable on net assets above €800,000 and was paid by 1% of taxpayers in 2007. See here and here for details (thanks to the Wikipedia entry) with more here and here.

The tax raises about 1.5% of general government revenue in France and is at a rate of around 0.5% of taxable net assets for the majority of those who pay. The ULA proposal seems to be to set these at a level ten times larger in Ireland – t0 raise 15% of revenue at a rate of 5% of net assets – and to levy it on five times as many people.

There is no way that this can be realistically achieved. The numbers on which the claim is based are questionable but to push the proposal to such drastic lengths is absurd. If we got €1 billion from a wealth tax it would be a start.

Tuesday, October 4, 2011

Tax returns flatter to deceive

The Department of Finance have released the September Exchequer Return which provides details for the first three quarters of the year. The relevant documents are:

As per usual we will focus on the tax figures in the Exchequer Statement as most of the expenditure figures are based on the rather meaningless “net expenditure” concept. The general reaction to the tax figures has been rather positive. Here are the relevant stories from two of the broadsheets.

Irish Times: Tax take ahead of target
Irish Independent: Good news for government as tax returns on the up

I must say that I cannot see the justification for greeting the figures in such glowing terms. The headline figure is positive as the table here shows but when we work through the detail the sheen washes off somewhat.

Tax revenue is now almost €2 billion up on last year, which is supportive of the positive view given above. Monthly tax revenue in 2011 has been ahead of 2010 for each of the nine months to date.

The three noteworthy months are April, July and September. Tax revenues in April and July were higher this year because of earlier than expected receipts of DIRT tax. This was expected in October so we can expect some drop back then. In July there was also a bump in Corporation Tax due to timing issues. The reason for the September increase will be explained below.

This chart shows the performance of the eight tax heads for the year to date.

We can see that the “increase” in tax revenue is down to Income Tax and Stamp Duty. VAT, Corporation Tax, Excise Duty, CGT and CAT are all lower than they were last year.

Income Tax in the Exchequer Account might be up nearly €1.9 billion on last year but it must be noted that the government is not collecting €1.9 billion of extra revenue as a lot of this is simply a reclassification.

In the last December’s Budget the Income and Health Levies were replaced by the Universal Social Charge (USC). While the Income Levy was included under Income Tax in 2010, the Health Levy was actually an “appropriation-in-aid” for the Department of Health and Children and did not enter the Exchequer Account.

Money raised by the Health Levy went directly to the Department of Health. In 2010, the Health Levy generated €2,018 million in revenue. It is likely that at least €1.2 billion of that would have been collected by September. Under the USC this money now enters the Exchequer Account. A substantial portion of the increase in Income Tax is due to this reclassification. Tax revenue is “up” because we are now calling an existing revenue stream tax.

Once account is taken for these issues and the tax credit and tax band changes introduced in the Budget it is probably that Income Tax is performing just like the other five main tax headings – i.e. worse than last year.

The other tax showing an increase is Stamp Duty. This again is not the positive sign the bare numbers would suggest. Stamp Duty is only up because the €457 million collected as a result of the Pension Levy introduced in May’s “Jobs Initiative” is included here. If we compare like-for-like Stamp Duty revenue is performing just like every other tax – i.e. worse than last year.

The key increases are Income Tax and Stamp Duty which as we know are largely the result of a reclassification and a levy that was only announced in May. The apparent poor performance of Excise Duty is explained in the Information Note:

However, it should be noted that this is not a true reflection of the position as there was a delay in the transfer of some €112 million in receipts from this source proper to September into the Exchequer account. These receipts were not received in time to benefit the end-September figures.

Although VAT is lower than last year no mention is given of the rate reduction for certain goods from 13.5% to 9.0%. This could explain up to half of the drop in monthly VAT revenue seen in September as this measure was expected to cost €120 million in 2011.

A similar pattern emerges if we look at tax revenues in the third quarter.

Take out the effects of the reclassification (Income Tax) and the Pension Levy (Stamp Duty) and it is hard to see how these tax returns are “good news”. Also remember that any bump in tax revenue as a result of the Pension Levy will be offset by the expenditure increases also announced in the “Jobs Initiative” which was ‘budgetary neutral’.

In fact it was expected that the Pension Levy would raise €470 million; €457 million was collected. What odds that the expenditure measures will be over budget?

Coverage of the Exchequer Returns seems to give inordinate attention to whether tax revenue is “on target”. The 2011 revenue targets were released by the Department of Finance back in February and have not been updated since.

Tax revenue is €160 million ahead of forecast, but this forecast was made before the government expected to collect €470 million from a 0.6% levy on private pension funds. With other changes announced in the “Jobs Initiative” it is likely that by September tax revenue should be around €300 million greater than was forecast in February. If this is included tax revenue is actually “below profile”. This is clear if we look at the profiles of the individual tax headings.

The only significant increases are for Income Tax and Stamp Duty. Stamp Duty is €384 million ahead of profile but this does not account for the €457 million collected from the Pension Levy – Stamp Duty revenues are below forecast levels.

Income Tax is ahead of profile but this is primarily because of timing issues due to DIRT and this is helpfully explained in the Department’s Information Note:

Income tax is €147 million (1.6%) above target. Excluding the beneficial impact of earlier than expected DIRT payments in April and July, which were originally profiled for collection in October, income tax is just 0.9% below target after nine months of the year. Given the very large target set in the Budget and the introduction of such significant revenue raising measures, this is an encouraging performance.

The last sentence is staggering. It is “encouraging” that Income Tax revenue is “just 0.9% below target”. The author of the note is definitely one who believes that the class is half full.

Aside from April and July which had bumps due to DIRT receipts, monthly tax revenues have been below the DoF forecasts for seven of the nine months so far this year. Incredibly, tax revenue for September was €44 million below target even though €457 million of Stamp Duty was not included when the forecast was made. What did they miss? Almost everything.

In September three-quarters of the tax heads came in below forecast. Stamp Duty was up €256 million but this was only because €457 million was collected in a Pension Levy which did not exist when the forecast was made. In reality Stamp Duty on the original levies was more than €200 million lower than the forecast revenue of €360 million. The only "good news” in the September figures relative to the D0F forecast was that €16 million more was collected in Income Tax. Everything else was in the red.

If we exclude the €1.2 billion added to tax revenue because of the reclassification of the Health Levy into the Universal Social Charge and the €0.5 billion collected as part of the Pension Levy then it is likely that tax revenue is running pretty close to last year’s levels even with the revenue raising measures introduced in last December’s budget. It is also likely that tax revenue is running below forecast if the forecasts had been updated for the tax changes introduced in May’s “Jobs Initiative”.

At best I would consider these a fair set of Exchequer Returns. Tax revenue appears to have flattened out but “good news” based on tax buoyancy remains absent.

Thursday, May 5, 2011

April Exchequer Returns: Illusion and Reality

We now have the Exchequer Returns for the first third of the year. While things do not appear to be getting worse, it is still clear that there is a way to go before things start getting better. The public finances are a mess. Here are the April documents.

As a result of the changes announced in December’s Budget we have to be careful about making direct comparisons between the 2010 and 2011 figures. As it stands tax revenue is now 6.7% up on 2010.

Tax revenue is up just over €600 million on last year but most of this can be attributed to a “bump” in April. It is not clear that this will be maintained and the DoF Information Note suggests that some of this can be attributed to the early receipt of DIRT payments.

We can get a better picture if we look at the changes by the main tax headings.

The increase, such that it it, is entirely due to the 20% increase in Income Tax collected. The first thing to note is that some of this is not actually an increase at all, just a reclassification.

In the Budget the previous Income and Health Levies were replaced by the Universal Social Charge (USC). While the Income Levy was included under Income Tax, the Health Levy was actually an “appropriation-in-aid” for the Department of Health and Children and did not enter the Exchequer Account.

Money raised by the Health Levy went directly to the Department. In 2010, the Health Levy generated €2,018 million in revenue. It is likely that at least €400 million of that would have been collected by April. Under the USC this money now enters the Exchequer Account. A substantial portion of the increase in Income Tax is due to this.

There also appears to be some timing issues with DIRT with about €120 million paid earlier than expected. We can expect subsequent Income Tax receipts to be lower because of this. The DoF Information Note does provide one year-on-year comparison that can be made.

PAYE receipts show the impact of the Budget 2011 income tax measures but as they do not include receipts from the USC, they allow for a comparable year-on-year analysis to be made. PAYE receipts in the first four months of the year amounted to €2.8 billion, a 4.9% increase on the same period in 2010.

It would be good if the Department provided the breakdown of Income Tax revenue that they obviously have but they give us this little titbit. This suggests that PAYE receipts are up about €130 million on the year. This is not because of any labour market or employment improvements.

In last December’s Budget, tax credits were reduced to bring more people into the tax net and tax bands were reduced so that people begin to pay the top rate of 41% at a lower level. All told these changes were expected to bring in over €850 million in extra revenue in 2011. It is pretty much a guess on my part as we do not know how much of this €850 million would derive from the PAYE sector, but I would guess that after a third of the year it would be more than €130 million.

I think it is pretty clear that once we account for the reclassification of Health Levy receipts, the once-off bounce in DIRT receipts and the expected changes in tax credits and bands that Income Tax is performing worse than it was last year and that any rise in receipts is illusory rather than reality.

Wednesday, February 2, 2011

€6 Billion From A Wealth Tax? Not with these sums

Only a dope could have this hope.

One suggestion from the United Left Alliance is that €6 billion can be raised annually from a 5% wealth tax. This proposal has no grounding in reality and is populist poppycock.

The figure of €6 billion is attributed to analysis by an old friend, Tom O’Connor. The article which contains the analysis can be read here: Wealthy Irish have €121bn and should be taxed more. Here is the only accurate calculation of this loony proposal from the ULA: 5% of €121 billion is €6.05 billion. The rest is nonsense.

Let’s start with Mr O’Connor’s “analysis” where the conclusion that “33,000 millionaires hold €121 billion”. The numbers used come from the 2006 report by Bank of Ireland Asset Management on The Wealth of The Nation. You can read this short report here.

Much of the basis for the proposition comes from the numbers in this table from page 13 which the report admits are “very approximate estimates”.

From here things get messy. Tom O’Connor, in his piece, starts with

Firstly, the report estimated that there were 330 individuals whose wealth well exceeded €30m. If we take a very conservative estimate of each holding €40m, then the collective wealth of these 330 individuals was €13.2bn

The report also stated that there were 3,000 millionaires whose wealth ranged from €5m-€30m. Taking the midpoint value of €18m, this means that that these 3,000 individuals held €54bn in wealth. The remaining 29,670 millionaires held between €1m-€5m each. If we take the midpoint here of €3m, then these 29,670 millionaires were worth €89bn in total.

Of course the figures in the table are 330, 2,970 and 29,700 and not the 330, 3,000 and 29,670 used by Mr O’Connor but that is not his worst crime. Extrapolating the total wealth from the crude figures given in the table is difficult (impossible?) but why should we let the facts get in the way of a good story. In Mr O’Connor’s article we are told that the wealth of these 33,000 millionaires in 2006 was €156.21 billion.

The smallest part of this comes from the 330 people with a net worth of €30 million or more. An average figure of €40 million is plucked for these people giving the total of €13.2 billion. We have no basis to argue against this figure as it is a pure guess. The other two categories can be scrutinised in a little more detail.

It is clear that the shape of the distribution of wealth has little influence on this analysis. Amazingly, for the groups with net worth of between €1 and €5 million and between €5 and €30 million the midpoints are used to provide an average. Only if the distribution of wealth were uniform would this be appropriate. The figures themselves show how skewed the distribution of wealth is. There are estimated to be 10 times more millionaires in the €4 million range from €1 to €5 million than in the €25 million range from €5 to €30 million.

The distribution of wealth is a hugely skewed distribution and there is no way that the mean value of a group of people within a particular range will be the midpoint of that range. The mean value will undoubtedly be closer the the lower end of the range. The figures of €18 million and €3 million chosen above are nonsense. The total of €156.21 billion is nonsense.

The next bold move is to translate this 2006 figure to a 2010 equivalent. Cue Tom:

Fortunately, we can update the 2006 figures to check this out: the original report tells us that these millionaires held 71% of their wealth in property; 3% in bonds; 10% in cash and 16% in equities. The breakdown of the original €156bn is thus: €112.4bn in property; €15.5bn in cash; €4.7bn in bonds and €23.4bn in equities.

Unfortunately the report tells us nothing of the sort. The breakdown provided above is in the report but refers to ALL households and not the 33,000 millionaires. See top of page 9 of the report. And actually the proportion of assets held in property in 2006 was 72% (not 71%) and in equities was 15% (not 16%). The figures in brackets are the ones used by Tom O’Connor but they what they were estimated to be in 2005 and had changed for 2006.

It is likely that the asset mix of millionaires is substantially different to the asset mix of the entire population. It does not take too much work to find the report confirm this (page 12).

The focus on the asset base excluding residential property of the top 1% of the population is because residential property is only a small component of their overall assets.

We can be fairly sure that a “small component” is somewhat lower than 72%, or 71% or whatever makey-uppy figure you want to use. How is it plausible for someone to suggest that nearly three-quarters of the wealth of Ireland’s millionaires is attributable solely to property?

Anyway using these erroneous proportions and some estimated value changes since 2006 we get the following conclusions.

There is an asterisk beside the 2010 property assets total as a 33% drop from the suggested 2006 figure of €112.5 billion would actually bring this to €75 billion. But who’s worrying about two and a half billion. Now even, these assumed changes in values are way off. Property values are down by more than 33% and somebody should tell Sean Quinn that Ireland’s 33,000 millionaires have lost a total of €1.5 billion since 2006. I think he managed twice that all on his own (though it was through CFDs rather than equities) and surely our millionaires took a bit of a hit as part of the huge drop in equity in the banks which must be around €40 billion or so.

That aside, the fact remains that this total net worth figure of €121 billion for Ireland 33,000 supposed millionaires is nonsense. Even if the weights are appropriate (they are not), the value changes used are also pretty weak (and net worth does include residential property unlike the claim made in the O’Connor article).

Actually, I’m not quite sure why he went to all this trouble. Maybe, it was to try to give some legitimacy to the analysis but this clearly did not work. However, there is a figure that is frequently quoted in the Bank of Ireland report (see pages 1, 2, 12, 13 and 14) and it is that:

The asset base (excluding residential property) of the top 1% of the population increased from €86 billion in 2005 to €100 billion last year, an increase of 16%.

Wouldn’t it have been so much easier to say this rather than go through all the rubbish above. So 1% of the population had €100 billion of assets in 2006. This €100 billion figure looks a little to much like trying get a nice round attention-grabbing number. These is little basis for this (or in fact any of the numbers in the Bank of Ireland report) and it is largely based on guesswork with little or no reference to actual data.

If this supposed €100 billion of assets from 2006 had just stayed still, the proposed 5% wealth tax would yield €5 billion. Of course wealth does not stay still and would have shown significant declines since 2006. I can’t say by what amount but it would reduce the yield on this proposed tax. A 20% reduction (plausible?) would bring the yield down to €4 billion. So another €2 billion gap needs to be filled from the €6 billion they claim it would yield.

Anyway, at €100 billion, a 5% tax would yield €5 billion in the first year. If there was zero growth in values, the next year there would only be €95 billion in assets to tax. This means we would be down to a yield of €4.75 billion. After 10 years in this zero growth scenario there would be just €63 billion of the €100 billion assets left and the wealth tax would be yielding €3.1 billion a year. The only way to keep revenue stable would be to keep increasing the rate.

Of course, the wealth isn’t just going to stay around here to be eroded down to nothing. Wealth does not stay still and this applies to location as well as value. A 5% wealth tax would mean assets in Ireland would need to generate 5% to just to hold their value. Any positive inflation would require a higher rate to hold their real value and then they would need to match the equivalent return from investing elsewhere to make it worthwhile to keep the asset in Ireland. This suggests that double-digit asset growth is needed (every year!) in order to avoid wide scale capital flight from Ireland.

A 5% wealth tax on a tiny proportion of the population might make for good electioneering but it makes for bad economics. But then we knew that before we started. And to be fair to Tom O’Connor his piece is an argument for a 1% wealth tax which is a plausible suggestion. It is the loony left who made the jump to 5%.

Thursday, January 6, 2011

2010 Exchequer Returns

The end-of-year Exchequer Returns have been released and we can update our analysis from November. Also remember that the Exchequer Account is not the Public Finances!

For the full year tax revenue came in at €31.75 billion, ahead of both the Department’s forecast and my own, but still down on the 2009 tax take.

As has been the trend since September the annual rate of decline eased again in December and for the full year tax revenue was €1.3 billion or 3.9% behind last year’s level. However, when compared to the same month last year, tax revenue in December was just under 1% lower than in December 2009. This is the first time this comparison has been negative since August.

Somewhat worryingly most of the €1.3 billion decline in tax revenue relative to 2009 can be attributed to two of the ‘barometer’ tax headings – Income Tax and VAT. Both of these for more than €500 million behind their 2009 levels.

Of the four main tax heads, only Corporation Tax came in ahead of the 2009 number and that was by a paltry €24 million. The picture is not quite so bleak if we do a fourth quarter comparison across the two years. Q4 tax revenue is actually €242 million ahead of the equivalent 2009 figure.

However, this is directly attributable to a 33% surge in Corporation Tax receipts. Although slightly moderated the decline in Income Tax and VAT continued with no other significant gain outside of Corporation Tax. But at least it is better than this.

Although December isn’t a hugely significant tax month, accounting for only 7% of annual tax revenue, for completeness we will isolate the monthly figures.

You can track the performance during the year of the four main tax heads by clicking on the list below.

December was only the second time in 2010 when monthly Income Tax receipts were ahead of their 2009 equivalent. December is not an important VAT month but monthly receipts were still down over a quarter on 2009. More important, as can be seen by clicking the link above, VAT receipts in all of the main VAT payment months (Jan, Mar, May, Jul, Sep & Nov) were behind their 2009 equivalents.

The late increase in Corporation Tax receipts meant that December was the first month when the cumulative comparison was positive. By August Corporation Tax receipts were €582 million behind the amount collected at the same time in 2009. However, the monthly increases seen in every month since then has meant that this deficit was completely wiped out (even if the swing to positive was only by €24 million).

Excise Duty did not display much volatility. The monthly comparisons to 2009 were positive for five months and negative for seven, and for the year as a whole Excise Duty was only €24 million or 0.5% behind the 2009 level. This was likely aided by the introduction the Carbon Tax on different fuels throughout the year and the increase in new car sales throughout the year that would have boosted Vehicle Registration Tax receipts.

Here are the graphs. Click smaller images to enlarge.