Notes on the Front

It was a listless budget, a thin budget, a budget without
narrative or direction, without reform or innovation.  And, of course, it was another austerity
budget which took from the economy and did not give.  Or did it? 
The Irish
Times headline says: 

Tough budget tempered by €500m jobs stimulus plan

Did I miss something? 
I went in search of this job stimulus plan – the programmes, the number
of jobs that would be created, etc.  I
found it, sort of – in this little
infograph produced by the Department of Finance.  There is a rake of proposals to create jobs –
they’re called tax breaks.  The
Government estimates that these tax breaks will cost the state€500 million. 

Tax breaks are an opaque and uncertain way to ‘stimulate’
job creation.  It depends on the take-up,
the translation into employment and a calculation of the cost of the relief
versus the benefit of increased economic activity.   I fear that on past practice, we won’t know
if these are successful and, indeed, if we just burned up money to no effect.

Let’s take a look at a few
‘job stimulus’ tax breaks:

Home Renovation
Incentive: this will provide a tax credit to homeowners who carry out home renovation.
The credit will be calculated at a rate of 13.5% on expenditure over €5,000 up
to a maximum of €30,000.  A nice little
touch is that the credit will only be provided for registered tax-compliance
builders, to combat the shadow economy.  So
if you do €20,000 of works on your house, you can get €2,600 back from the
state in the form of a tax credit. 

The Government estimates that this relief will cost €62
million.  Assuming an average renovation spend
of €17,500, this would mean that over 26,000 households will take up this
credit generating over €450 million in extra activity.  How did the Government estimate this –
especially as a household would (a) need to have a relatively high tax
liability to make this attractive (this would be of no assistance to those on
low-paid), and (b) would still need to make up 86.5 percent of the cost.

Further, has the Government estimated the ‘deadweight’ of
this scheme; in other words, how many households would have carried out this renovation
works even without this tax credit.  If a
household would have carried out this work even without the tax break, then the
tax break they get is not an incentive to new activity but a wasted
payment.  Has the Government estimated
any of this?  If so, they’re not saying
(at the very least, a background paper with estimates based on real data should
be introduced on every measure such as these).

Start Your Own
Business (SYOB):  this is an
exemption from income tax up to a maximum of €40,000 per annum will be provided
for a period of two years, to individuals who set up a business, having been
unemployed for a period of at least 15 months. 
The Government estimates that this will cost €1 million.

I’m dubious about this one. 
By definition, the long-term unemployed are one of the least likely
groups to have the resources (money, access to capital, etc.) to set up a
business.  Further, is it the case that
paying income tax is a barrier to people setting up a business?  Are there thousands of long-term unemployed
saying that they would set-up business but for the income tax they would have
to pay?  I wonder.

If we assume a new business would realise an income of
€28,000 for the individual in the first two years (and that is probably on the
high side for such start-ups), then the incentive is €3,950 – the income tax
liability.  This means the Government is
assuming that 250 long-term unemployed will set up businesses.  And, of course, we come up against our old
friend, deadweight – how many long-term unemployed would have started up a
business without this tax break (very few in my humble opinion).

CGT entrepreneurial
relief:  From next year there will be
a Capital Gains Tax relief to entrepreneurs who reinvest the proceeds from the
disposal of assets, on which tax has previously been paid, into a new investment
in productive trading activities.  This
is estimated to cost €20 million by 2018. 
Again, how many businesses did not re-invest prior to this year because
they didn’t have this relief?  A business
will re-invest if there is an opportunity to get a return.  Is it really the case they stopped
re-investing into a new activity because they didn’t get relief on a tax that
they already paid?  Is there an
estimate?  And what about those
businesses that would have re-invested anyway without this relief – how much
money are we burning?

* * *

None of the above is an argument for not proceeding with
these tax breaks.  But it is an argument
for conducting an analysis of the issues involved.  Otherwise, the Government is just throwing
around money and announcing programmes that give a sense of doing something but
in fact does little at all.

I went in search of evaluation of past tax breaks to the
business sector.  Couldn’t find
much.  We don’t do evaluation.  We don’t assess past programmes to see what
worked and what didn’t, or benchmark them against targets.  But I did find these little items.

You may remember the debate that emerged back in Budget 2012
when the Government gave a generous income tax breaks to high-income executives
who came from abroad to work here in Ireland (they also had their children’s
private education subsidised as well). 
It is called SARP – the Special Assignee Relief Programme.  The Government, especially the Minister for
Jobs and Enterprise, were very enthusiastic about this relief and criticisms
were dismissed on the basis that this would create jobs, jobs, jobs.  The Government put aside €5 million for the
cost of this programme.  So how has this
programme fared?  Michael
McGrath, TD asked the Minister the question.

• In the first year of operation, 2012, six people availed of
  this programme.  Six – and one of them received
  a €2,500 subsidy for private schooling.

• Of these six, only two received the tax break.

• Instead of costing €5 million, the scheme cost €16,000.

Apparently there may be more recipients in the system but
may not be declared until the 2013 returns but you get the point.  On these ratios, the Government was
estimating that over 600 people would take up this relief but in actual fact
only 1 percent of this target was achieved. 
And, of course, we don’t know how many of those ‘six’ would have come
here to work even without the scheme.

Michael McGrath also asked about the foreign earnings
deduction for individuals who temporarily carry out the duties of their office
or employment in Brazil, Russia, India, China or South Africa.  This was part of a plan to extend our export
base to BRICS countries.  The Government set
aside €1.5 million to fund this tax relief. 
How did that fare?

• 12 individuals took up the relief at a total cost of
  €61,000.

On this basis, the Government was expecting 295 to take up
this relief.  Only 12 did so. How many of
these 12 would have worked abroad anyway without this relief?  We don’t have an estimate.  And in Budget 2013, this relief was extended
for people working temporarily in Egypt, Algeria, Senegal, Tanzania, Kenya,
Nigeria, Ghana and the Democratic Republic of the Congo.  Will update on this as info becomes available.

The point of the above is that tax relief schemes are
announced – with targets that are well in excess of what actually emerges.  And we don’t know how much of this money is
burned because it is subsidising activity that would have occurred anyway.

This is the problems with tax-break incentives and the way
the Government (and to be fair, this applies to past Governments as well) rolls
them out.  It looks like something is
being done but in fact very little is being done.

But there is one thing we can be certain of.  The Government cut capital investment by €100
million in the budget.  That is
clear-cut.  And according the Nevin
Economic Research Institute, this cut will cost 1,800 jobs. 

It remains to be seen whether this loss of jobs will cancel
out any gains made from the multitude of tax breaks announced in Budget 2014.

I have my suspicions.