Is the pension levy a tax on the savings of one generation to spend on a younger generation in the form of employment generation? If so, this is progressive and I support it. In principle, the new pension levy is a progressive public policy. For almost ten years Ireland has implemented successive tax breaks to encourage workers to save for their future. Given Ireland’s low tax, low spend model, the state recognised that it would not be able to afford to pay for future retirees. This is a real crisis of fiscal democracy and the real problem confronting the state (which I will not tackle now). In response to this crisis of fiscal democracy the state introduced a whole series of measures that enabled people to put their earnings into a tax-free savings pot. And this is precisely what most people used it for; tax-free savings for the future (of course, it will be taxed at some stage in the future).
Most who benefited from this were high income earners. A whole variety of accountancy and consulting firms were established to advise high earners on how to avoid paying tax. Private pensions were almost always top of the list. I remember working in a firm some years ago and we received a detailed presentation by a pension-insurance body on how much tax we could avoid paying if we invested our earnings with them. Needless to say, it was those earning over €80,000 who showed most interest. The lower-income earners did not have enough surplus to invest. The high earners (mainly managers) did. They all flocked to the wine reception afterwards to seek the best tax-free deal. On RTEs ‘the Week in Politics’, an analyst estimated that the average private pension tax-free pot of savings is €150,000 per person. The levy will take, over four years, approx €4,000 out of this. Thus, the individual receives €146,000 instead of €150,000. Given years of tax-free contributions, this is hardly ‘breaking the bank’.
Taxing wealth assets such as domestic savings in the form of a pension levy is progressive if it re-distributes that wealth in an egalitarian fashion. Raising revenue by taxing domestic assets/wealth to support investment in employment is egalitarian in that it is an inter-generational transfer. I am not entirely convinced the governments minimalist job creation initiative will work simply because it seeks to improve ‘supply’ when Ireland is facing a crisis of ‘demand’. But, in principle, it is a good idea. The problem is that it is inconsistent with the wider tax and spend policy of government. Irish public policy is still premised on a low tax regime. The general pensions policy of government remains wedded to a philosophy of tax breaks to incentivize future savings. Furthermore, the existing pension levy is not wide enough. It does not capture the highest income earners across the public and private sectors nor does it make explicit that it intends to tackle an industry that has benefited from years of financial de-regulation and tax breaks (make no joke about it – the private pensions industry is deeply embedded in the politics of financial de-regulation that has destroyed our economy).
Thus, I would go further than the pension levy and propose the introduction of capital controls to limit investor choice in Ireland. The government could also introduce policy innovations to tax dormant wealth in a variety of other ways if this is used productively to create employment rather than to pay debt. The pension levy and a direct levy on high incomes would raise significant amounts of revenue for public investment. The same logic, however, could be used to generate funds to pay existing debt. This article by Gillian Tett in the Financial Times last week draws attention to the fact that between 1930-1980 all western governments operated capital controls to limit investor choice (i.e. those with lots of capital in Ireland could not invest it in the Carribean so easily nor could they take their money out of banks and put them in an investment fund in the Cayman islands). These controls facilitated the productive use of capital but also had a significant fiscal impact on government debt. It captured a domestic audience to invest or buy government bonds. This enabled governments to reduce public debt as they paid a yield lower than inflation. National governments were not subject to ‘abstract international money markets’ as Ireland is today. The state had some autonomy and influence over who could buy and sell their bonds. It is high time that we began to speak about ‘capital controls’ in the interest of the wider economy/society.
This financial ‘repression’ will, of course, horrify those schooled in free market orthodoxy, in the same way, the ‘tax’ on private savings via a pension levy does. It is an interference in the ‘free’ movement of capital and investor choice. Unfortunately it will not happen. This is not because of any rational economic argument on free markets but because the finance industry (including private pensions and insurance) wield significant veto power over Irish, US and European public policy. It is power not rational argument that is blocking the rational use of capital controls.