Tipperary Farmland

The Irish have a lot of learning to do about property taxes.  Following the 1903 Land Acts, the new largely Catholic landowners who displaced the largely Protestant absentee landlords, immediately sought to deny their obligation to the people of the nation that had helped them win their fine farms.  The worst fears of the hero of the Land Struggle Michael Davitt, were realised as the newly minted nation of small freeholders turned its back on the landless labourer, the urban dweller and the poor.  Fianna Fail, the Political Party of the small freeholder grown to encompass the developer and land speculator, went on to first reduce, then abolish and then relieve with capital allowances every fiscal obligation on property owners during their years of uninterrupted power.  Town and country planning became an oxymoron as scattered mansions pimpled the hills and rural villages sprouted suburban dead-end appendixes.   Infatuation with the land’s ability to capture an easy slice of others’ productivity led to the culpable ignorance and over weaning confidence of a whole cohort of Irish politicians, bankers and professional class.  Still they sit on their hands – reluctant to take the first steps to redress the damage to economy and society of the ‘free rides and free lunches’ enjoyed by land ownership.  While a Site Value Tax is in the Programme for Government  as demanded by the IMF, ECB and ESFS, the Irish Department of Finance has made no move to undertake the research and preparatory work needed to implement it.  Word has it, the Department has not been given the political instruction to do so. No Fine Gael nor Labour politician has the ‘magairle’ for the popular backlash.  Translation here.

It is hard to credit that the only research currently being undertaken to prepare for a fair property tax is by a tiny underfunded NGO.  You guessed it -  Smart Taxes.

That long introductory rant  introduces Michael Hudson’s brilliant new piece in New Economic Perspectives on how the gradual reduction of US  property taxes has lead to a form of debt slavery for millions of Americans.  How much worse then it is for the Irish…

Untaxing real estate has served mortgage bankers by freeing more rental income (the land’s site value) to be paid as interest. Property taxes have not absorbed anywhere near the rise in debt-leveraged housing and commercial prices. However, this has not lowered the cost of housing for most people. New buyers must pay a price that capitalizes the property’s rental value. Less and less of this payment has taken the form of local property taxes. More and more has been paid to mortgage lenders as interest. So cutting property taxes has simply left more revenue to be capitalized into higher debt-financed prices.  (link to article)

Current policy responses continue to support the same repressive fiscal policies that again look to be driving the otherwise prosperous euro zone into negative GDP growth.

The glimmer of hope may be that they have discovered the sector balance approach.

The next step in the right direction would be a recognition of the actual causations.

From Professor Tezi:

The August 2011 Monthly Bulletin of the European Central Bank presents an interesting chart of financial balances of different sectors in the euro area.

The figure shows how rising deficits in Europe in 2008 and 2009 have produced higher net financial savings in the private sector. This is evidence that automatic (anti-cyclical) stabilizers worked as usual: as growth declines, or goes negative, tax revenues fall, government deficits increase, and this stops the economy from falling further. This can only work, however, until market-constrained governments in the euro area begin acting pro-cyclically. Governments acting pro-cyclically during recessions means that deficits reductions will reduce private savings below the desired level, and this means a further fall of demand and incomes. Looking at 2010, and considering that the euro area’s current account balance is marginally negative, there is evidence of this pro-cyclical effect, as government deficits declined, and net private lending inevitably declined.

What is remarkable is how the ECB interprets the chart:…

Full article in the Centre of the Universe

The Bank of England Quarterly Bulletin for Q1 2009
has an interesting analysis of the hypothetical impact of deflation.
For the UK, the prospect of deflation remains just that, something that
might happen since consumer
prices there are still rising at 3.0%. Here in Ireland we are already
experiencing deflation, the annual Consumer Price Index fell -1.7% in February. Recent forecasts from Ulster Bank
project annual deflation of -4.0% for 2009, the first time we will have
had a full year of deflation since the Second World War, as illustrated
in the chart from their quarterly report. Link to article

Thursday, March 5, 2009

The Green Party wants to put a 1c tax on texts. The Labour Party wants to remove tax breaks from landlords. Some politicians have clearly never heard of incentive effects. Generally if you make something more/less expensive to do then people will do less/more of it. Like increasing the vat rate in December (the biggest month of the year in retailing) … and seeing vat revenues fall in January and February.

Politicians are supposed to have superhuman powers of empathy (all those chats in their clinics every weekend must surely demand it) and yet they cannot put themselves in the shoes of the people they want to tax and ask themselves ‘what would I do if it got more expensive/less rewarding to do something because of this tax’? But they’re going to have to extend their empathy to taxpayers pretty soon because the gap between government spending and taxes is yawning widely – as illustrated in the chart from a recent post on The Irish Economy blog by Patrick Honohan.  Link to article

Ireland’s huge exports to GDP ratio and privileged position in global supply chains helped it grow rapidly in the 1990s, but are now amplifying its downturn. This column argues that Ireland’s looming banking and public finance crises can be fixed. The government must find new sources of tax revenue and craft a package in which all social partners can claim ownership.

The increase in secondary-market spreads on Irish government debt in the past five months is symptomatic of the sudden emergence of a twin crisis in the banking sector and in the public finances.

Ireland’s exposure: Blessing in the 1990s, curse in the global crisis

It was always to be expected that Ireland would be particularly exposure to a global downturn, considering the exceptionally large contribution of exports to GDP and the vertical integration of much of Ireland’s manufacturing sector into the global production chains of major multinational firms. These characteristics contributed to a sustained output boom during the 1990s but now act to amplify the downturn. Moreover, the Irish export sector must cope with a trend loss in wage competitiveness since 2000 and the sharp slide in sterling over the last six months. Link to article

…I do not hear Ireland‘s trade union leaders saying that under no circumstances will they accept a lowering of their members’ living standards. I do hear them saying that they resent public sector workers being singled out; and (more worryingly) that they are opposed to an attempt to simulate devaluation by cutting wages. However, their objection there is that while wage cuts only hurt workers, devaluations hurt everyone. Again, it is being singled out that bothers them.

Surely there is a political deal to be struck here. We do need to lower the cost of labour in order to save jobs. That does not mean that workers should bear a disproportionate share of the burden when it comes to reducing the ballooning budget deficit. We can’t afford a government that long fingers crucial decisions by subcontracting them to commissions: get the politics wrong, and the economic consequences will be disastrous. The time for comprehensive action is now.  Link to article

The remarkable barrage of calls for pay cuts, from both orthodox economists and the “pop economists”, as the the solution to (most of) our economic problems, in the mainstream media, without any alternative views, demonstrates that real solutions to our immense economic problems are further away than we thought. It demonstrates a very limited view of the complexity of competitiveness and the focus on one element of cost competitiveness is misguided.

Competitiveness is very complex covering costs, quality of infrastructure, services, public services, credit etc (see for example, NCC report contents which gives an overview of some issues around the subject on page 7). The list of “12 pillars of competitiveness” in the World Economic Forum’s World Competitiveness Report (page 3 of Chapter 1) can be found here. Some economists have even posted charts with rising costs and labour costs as THE indicator of overall competitiveness!  Link to article

I was intrigued that David Begg would identify a specific paper as the inspiration of the ICTU position and decided to check it out. I suggest that others check it out too. It is called “Ten Lessons About Budget Consolidation” and was published as part of the Bruegel Essay and Lecture Series in 2007. It can be downloaded (after a little bit of search activity) at  http://www.bruegel.org/Public/Section.php?ID=1157

Link to article