Chapter 4: Taxation and National Debt
Chapter 4: TAXATION
AND NATIONAL DEBT (M
Collins)
1 Introduction
Why taxes?
 To finance PSE the main reason, but
unintentional effects on behaviour
 To influence behaviour (e.g. tax on
plastic bags or on tobacco)
2 Principles of a Good Tax System
Efficiency
 Minimise disincentive effects
 Income v substitution effect
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Chapter 4: Taxation and National Debt
 Wedge between producer and
consumer price
 Savings
 Labour supply/demand: see later.
 Elasticities and deadweight effects
 Intentional
incentive
effects,
corrective taxes (tobacco, alcohol,
‘fat’ taxes, etc): externalities or
paternalism again?
Equity
 Ability to pay principle (DMU)
 horizontal v vertical equity
 ex ante v ex post equity.
 Equity v efficiency, e.g. taxation of
food, female labour supply
 Transitional equity (e.g. stamp duty)
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Chapter 4: Taxation and National Debt
Simplicity
 Administration and compliance
costs: latter lead to evasion
3 Irish Taxation System
Concepts/Issues
 Direct v Indirect taxes (e.g. income
tax v alcohol tax)
 Marginal v average rates (e.g.
income tax)
 Tax base v tax rates (e.g. income tax
or VAT)
 Tax expenditures
 Tax Incidence
 Avoidance v Evasion
 Tax amnesties
3
Chapter 4: Taxation and National Debt
Historical
Comparisons
and
International
 Tables 4.1 and 4.2
 Table 4.3: income tax (31%), PRSI
(17%), VAT (22%), Excises (11%),
Companies (9%), Local Govt (6%),
Other (14%)
Operation of Personal Income Taxes
(Table 4.4)
 Gross income v taxable income
 Deduct credits, some expenses (e.g.
payments
on
health),
and
exemptions (e.g. U2 royalties)
 Low and high rates, 20% and 41%;
multiple rates in past
 Tax bands
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Chapter 4: Taxation and National Debt
 Must also add PRSI and USC: can
bring marginal rate to 52% or higher
 Effective or average rate v marginal
rate
Other Taxes
 Consumption taxes.
 Different
VAT
rates
plus
exemptions.
 Special or excise taxes apply to
tobacco, petrol and alcohol.
 Environmental taxes apply to
carbon products, plastic bags, etc
 Corporation taxes: rate of only
12.5% (see later)
 Capital taxes: CGT and CAT
 Property taxes: stamp duties,
business rates, homes
5
Chapter 4: Taxation and National Debt
 DIRT, BIK, VRT, plastic bag levy, land
windfall tax, development levy
4 Evaluation: Taxes on Income
Effective tax rates and progressivity
(Table 4.5)
Tax base
 Different for income tax, PRSI and
USC
 Narrowness of income tax base
 Different rates depending on
income source
Tax wedge and employment
 Hypothetical example
 Table 4.6
 L demand effects
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Chapter 4: Taxation and National Debt
 L supply effects: work less; exit
employment, through emigration,
black economy or no work.
Reliefs and exemptions
 Tax reliefs or tax expenditures
 Provide incentives: pension funds,
charitable donations, investment
property
 Favour well off
 Dubious benefits: e.g. holiday
homes
Simplicity
 System progressive but undermined
by exemptions
 Complex especially for small
business and some individuals
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Chapter 4: Taxation and National Debt
5 Evaluation: Other Taxes
VAT
 Heavy reliance
 Narrow base
 Inequity: Fig 4.1
Excise taxes
 Externalities
 Revenue
 Simplicity
 ‘Voluntary’
 Severe
distributional
effects:
horizontal and vertical (Table 4.1)
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Chapter 4: Taxation and National Debt
Corporation Taxes
 Tax competition issue and mobility
of capital
 Nominal v actual rates: France v
Ireland!
 Transfer pricing issue
 Common tax base in EU?
 Race to bottom?
 Incidence: shareholders, workers or
consumers?
Property Taxes
 Less disincentive effects
 Base
 Revenue stability
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Chapter 4: Taxation and National Debt
6 Deferred Taxation: Public Debt
Buy today pay tomorrow!
 Future income flow from capital
 Does not apply to current
expenditure
Trends
 Dramatic improvement: from 105%
1987 to 30% of GDP in 2007
 But, mainly due to growth of GDP
 Huge rise since 2009 and not yet
peaked: maybe at 120%
 Also in US, UK and most of EU
Stability and Growth Pact
 Fiscal policy critical in EMU but
largely ignored till now
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Chapter 4: Taxation and National Debt
 Danger of one country not able to
pay debt out of taxation and
bringing down whole project (e.g.
Greece)
 External discipline: can blame
someone else for strict budget!
 ‘Golden Rule’: only borrow for
capital, but capital v current issue
 3% and 60% rules: warnings and
fines if breached but not applied
 German constitutional check on
deficits: others to follow?
 Banking union, fiscal union, euro
bonds, etc
 Back to Monet and work that
should have been done at formation
of euro
11
Chapter 4: Taxation and National Debt
7 Conclusion
 Tax increases in last two years and
more to follow: back to 1980s
 Euro dimension: deferred taxation
may have to be paid by others (e.g.
Greece, Ireland)
 EU dimension: corporate tax and
VAT/excise, carbon taxes in
particular. Also taxing mobile highworth people
 Impact on employment the key
12
Chap. 6 POPULATION,
EMPLOYMENT AND
UNEMPLOYMENT (T.
McIndoe-Calder)
1 Introduction (Table 5.1)
 Growth in E: Table 6.1
 Down to 1.82m in 2012
 UE = 15.7% 1993, = 4.2% 2007, =
12%, 2009, = 14.6% 2013
2 Population
 P (2025) depends on: P (2013), plus
natural increase, plus net migration
13
 Natural increase (Table 6.3)
 Huge variation in net migration
(Table 6.3).
 Composition (Tables 6.4 and 6.5)
 Net and gross migration.
 Nationality (Table 6.4)
 Age profile (Table 6.5)
 Population (Table 6.2)
 Absolute size
 Geographic distribution
 Density, etc.
3 Labour Supply
1.
2.
3.
14
L = (P) . (Pa/P) . (L/Pa)
L = E + UE
(E/P) = (E/L) . (L/Pa) . (Pa/P)
Working Population
 Pa/P (Table 6.6)
 L//Pa (Table 6.7)
 Trends re females
 Married with children (Table 6.8).
 Immigrants
4 Employment:
Composition
Growth
Overall (Table 6.9)
 Small scale
 Failure to grow in 1980s
 Staggering growth 1995 to 2007
15
and
 Dramatic decline 2008-10
 E/Pa still only 63% here
 Due to higher UE and
participation rate for females
low
Part-time and temporary work (Table
6.10)
 Most of E increase in full-time work
 Gender difference striking
 Not involuntary though
 Temporary work
Sectoral Composition of E (Table 6.11)
 Dominance of services
 Construction ‘story’
16
 Growth areas
5 Unemployment:
Features
Extent
and
 International comparisons (Table
6.12
 Dramatic changes since 2007
 Measurement: valid over time and
between countries?
 Invalidity v unemployment benefit
 Germany v UK,
US v Spain,
Netherlands v Ireland
 QNHS v LR: huge differences
 Long-term UE (Table 6.13):
 Extraordinary swings
17
 Flow from STU and time in LTU
6 Adapting to New Technology and
other Global Factors
Single Market, Trade and Technological
Change
 They affect ALL countries
 Trade alters composition of E
 Increases living standards and
reduces working year (Table 6.15)
 Investment going to low-wage
countries (e.g. China and Poland)?
 Globalisation
technology
and
spread
of
 Tractors for horses, computers for
people: the Luddite debate!
18
 Technology affecting all sectors
 US v Europe: adaptation costs
Labour Market Integration
 Immigration from Eastern Europe:
complements or substitutes?
 Effect on unemployment and wages
 Political issues
Skills Adaptability
 Adaptable labour markets key
 Early school drop-out
 Choice of subjects
 Employer involvement
 On-going education/training.
19
7 Flexibility in Labour Market
 US/UK v Nordic v Rhineland Models
 Wage and price flexibility essential
Industrial relations (Table 6.16)
Competition in product markets
Membership of euro zone
Minimum wage (Table 6.17)
Wage is an
person/family
income
Flexible labour supply
- Hiring and firing rules
- Labour mobility
- Work sharing
 Tax/Social Welfare Systems
20
for
a
Hiring and Firing Regulations
 Benefits to employees
 Decreases demand for L
 Strictness indicators (Table 6.18)
 Short-term contracts and
labour market (e.g. nurses)
dual
Taxation
 Employer PRSI and Demand
 Employee PRSI, income tax and
Supply
 Unemployment and poverty ‘traps’
21
Long-term Unemployment
 Key problem in past and today
 Hysterisis effects
 Outside labour market
 Screening device used by employers
 Why drift from STU to LTU?
Social welfare payments
 Undoubted benefits
 May cause UE though (Table 6.17)
- leisure for work
- bargaining power of unions
- favours black economy
 Payments v enforcement
 Evidence of effects on UE
22
 Enforcement the key
- verification checks for fraud
- availability for work
- active labour market policies
Active labour market policies
 LTU an economic and social issue
 Cannot depend on market
 Withhold benefit
 US v Nordic experience
 Irish experience and OECD critique
8 Conclusions
 Full employment 1998 to 2007
 Re-emergence of high UE and outmigration 2007 to 2013
23
 Still E 80% higher than 16 years ago
 Migration patterns central to ‘story’
 LTU the core of any UE problem
 Increase E through immigration?
 Or reduce UE by emigration?
 Employment growth v increased
inequality
24
Chapter 8: Social
Justice, Distribution,
Poverty and Policy
Responses
1 Introduction
 Want social justice in terms of Ui
 Global dimensions
 Outcome v Opportunity
2 Causes of Inequality and Poverty
 Between countries
 Kuznets curve
 Market forces drive up incomes
25
 Age/work/past savings: acceptable?
 Different abilities or education or
home background
 Chance factors
3 Benefits and Costs of Reducing
Inequality
Why care about inequality?
 Horizontal v vertical equity
 DMU argument for vertical equity
 ‘original position’ and Rawls
 Possibly increased overall output
 Externalities: crime, social unrest
Why not?
 Nozick
26
 Disincentive effects of taxation
 Welfare dependency
 Cannot measure Ui
 Leave to voluntary actions
4 Inequality and Poverty in Ireland
 Remember Ui = F (A, B, C and D)
 C and D: different inequality issues
Measurement of A
 Income and/or wealth?
 Lifetime or current income?
 Geographic unit
Evidence
 Lorenz curves
 Gini coefficients
27
 Table 8.2
 Table 8.3 (corrected)
 Regional and life cycle inequality
 Poverty: definitions
 Relative poverty
 Access to basic necessities
 Table 8.5
 Measuring opportunity
 Ui (and Sen)
5 Political Context
 Variation across similar countries
 Scandinavian v Ango-Saxon v
Southern European models
 Policy impact in Ireland (Table 8.6)
 Preferences over time
28
6 Policy Focus in Ireland
 Legislation
 Universal v targeted benefits
 Transfers in kind v cash transfers
 Social welfare system: Table 8.7
 Children: child benefit
 Children: lone parents
 Elderly: pension provision
 Intra and intergenerational issues
 Looming pensions crisis
7 Conclusions
 What type of society do we want?
 US v German model v Latin model
 Self reliance v welfare dependency
29
 Disincentives v genuine hardship
 Inequality at core of many policy
disputes
Chapter 9: Manufacturing
and Traded Services Sector
(Carol Newman)
1 Introduction
 Continuous evolution
 Definition of services (see earlier)
 Impact of crisis
2 Role and Evolution of Industrial
Policy
Rationale
30
 Regional or equity dimension
 Provision of broad infrastructure
 Pooling of information
 Productivity spillovers
 Ensuring competitive environment
 Infant industry argument
Policy in Ireland
 1950s; tax breaks/grants introduced
 Outward-looking policy in 1960s
 EU 1973 and euro 1999
 Exploiting links to Irish-America
 English-speaking emphasis
 Low corporation taxes
 Capital Grants.
- IDA (foreign companies) and
Enterprise Ireland (domestic)
31
- Stategically focussed
- EU competition policy
 Regional policy: economies
agglomeration though
of
Future Policy
 Developments in Euro zone
 Rise of China, India and Brazil
 Increasing trade in services
 Importance of innovation
 ‘Knowledge’ or ‘Smart Economy’.
3 Manufacturing Sector
 Employment: 223K; 90K ‘modern’,
133K (Table 9.1)
 Employment: supplying companies
 E levels not growing
32
 High productivity sector
 Contribution to exports (Table 9.2)
 New innovation and management
practices
 95% modern sector in Xs: euro area
main market by far. Decline of UK
 Traditional sector: 64% in Xs, 26%
per cent of total to UK
 Irish firms in traditional sector
 Only 33% exported, mostly to UK.
50% E.
 Sterling problem.
4 Internationally-traded Services
 Shift to traded services
 IT, outsourcing, blurred distinctions
33
Modes of Service Delivery:
 cross-border trade (call centres)
 consumption abroad (tourism)
 commercial presence
 foreign presence
Contribution of Traded Services
 Exports: 9th in world, 1/3rd of total
sales (Table 9.5)
 Intra-firm trade
 Sectoral and net exports picture
 Case study (pp 253/54
5 Foreign Direct Investment
Inward
 Dominates modern sector, strong in
traditional sector (Table 9.6)
34
 Most FDI intensive sector in Europe:
but linked to size (Table 9.6)
 Not just jobs and Xs but...
 New work practices and innovation
 Productivity spillovers
 Measurement
 Corporation tax issue again
Outward (Table 9.6)
 Stock accounts for 87% of GDP
 B of I, CRH, Greencore etc
 Mainly in UK and US
 Portfolio diversification
 Move into high-value production?
 State encouragement desirable?
35
6 Conclusions
 Competitiveness the key: just like in
sport
 How to define (Ch 2)?
 Banking crisis and credit
 Future of free-market capitalism
 Dependency or inter-dependency?
36
Chapter 12: Education Sector
Ch 13: Education: Market
Failures and Government
Interventions (Carol
Newman)
I
Introduction
 Pre-school, primary, secondary,
third, and ‘fourth’ levels
 Huge importance
2 Economic Perspectives
 Compulsory up to aged 16
 Why state beyond this?
Private v Social Returns
 Positive externalities for others
37
Chapter 12: Education Sector
 What are these though: leadership?
 Empirical evidence mixed
 Screening device simply?
 Creative economy literature
 Better democracy
 No consensus
 On job training more important?
Other Market Failures
 Credit market failure
 Information failures and hyperbolic
discounting
 Local monopoly
 Equality of opportunity
3 Policy in Ireland
 Schooling in 19th century
38
Chapter 12: Education Sector
 1967 free secondary education
 Rise of third level: now ‘fourth level’
 Growth v equal opportunity v selffulfilment
Growth
 Knowledge based
 Expert Group on Future Skills Needs
 Cannot have good 3rd level though
without good 1st and 2nd levels
 Science and IT emphasis
 Lifelong learning
 Third level
 Reform of universities
 Modularization, targeted funding,
new governance/management, etc
 Diminishing returns to h as for k
39
Chapter 12: Education Sector
Equity
 Free secondary education in 1960s
 Targetting of disadvantaged schools
 Long-term unemployed of future
 Integration of immigrants
 Pre-school issue
 Abolition of third level fees in 1996
 Maintenance grants
4 Delivery and Effectiveness
Levels of Expenditure
 Expenditure: (Table 13.1)
 Per student (Table 13.2)
 Pupil/teacher ratios, expenditure
and staff pay: E/N= E/T. T/N
40
Chapter 12: Education Sector
 Payment: teachers/lecturers (Table
13.5)
 Mean v standard deviation
Efficiency
 ‘Real’ demand: Wagner’s Law
 Baumol’ disease
 E-learning though
 Difficulty of measuring
 efficiency in terms of outputs
 School evaluations
 Proportion
with
3rd
level
qualification (Table 13.3)
 International skill tests (Table 13.4)
 How to evaluate research spending?
 Other indicators
- early school leavers
41
Chapter 12: Education Sector
- literacy rates
- % science/technology subjects
- lifelong learning
Equity
 Costs of early school leaving
 Disability and ethnic groups issues
 Universities still for better off
 Educational attainment and LTU
5 Conclusion
 Education key to high-value jobs
 Major role for state, at all levels
 Ireland performs well
 Equal opportunity the major issue
 On-the-job training and life-long
learning crucial
42
Chapter 12: Education Sector
 Becoming ‘tradeable’ especially at
3rd and 4th
 E-learning challenge
 Economies of scale in scientific
research;
implies
mergers?
43
Chapter 9: Physical
Infrastructure, Energy and the
Environment
1 Introduction
 Links between three
 Transport
dominated
in
infrastructure
 Energy demand, role of state,
energy
supply,
pricing
and
competition,
environmental
concerns
44
2 Importance of Infrastructure
 Roman times, canals in 18thC, roads
today
 Input to production and final
consumption: e.g. roads for freight
and leisure
Contribution to productivity growth
 Difficult to quantify impact
 Diminishing returns
 Cause and effect
 Irish case: little doubt
 Whole greater than sum of parts:
e.g. web
 Composition of expenditure
 Funding of capital cost
45
 Operation once built
Role of the State
 US rail network built with private
money: but state regulation and
subsidies needed
 Huge fixed costs and low running
costs imply monopoly provision
 Collection costs of tolls
 Network externalities
 State bureaucracy and corruption
possible though
PPP
 Administrative
efficiencies
46
and
operational
 Fiscal restraints
 Gauging demand better
 How to account for network
externalities and externalities in
general
 Conflict between public and private
sector business ethos
Further Issues
 Valuing benefits, e.g. time savings
and saving of a life
 Costs/benefits not possible to value
 Costs/benefits way into future
 Nuclear energy a classic example
 Environmental damage prevention
 All alternatives considered
47
 Disruption during construction
 Asymmetry in public reaction
 Tough decisions though have to be
taken
6 Transport and Communications
 NDP ‘history’
 Dominance of Transport
 Annual Competitiveness Reports
 International perceptions: Table
10.1
 Low ranking overall
 Big improvement transport
 NDP outlays
 IT: poor ranking again
48