Michael Taft: Raising Tax Revenues Without Raising Taxes

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From top: Paschal Donohoe, Minister for Finance, Public Expenditure and Reform, at a Covid-19 press briefing last week; Michael Taft

The Sunday Independent headline was certainly dramatic:

Reality bites: Watchdog warns on tax hikes and pension age as recession kicks in

The article featured comments by the Chairperson of the Irish Fiscal Advisory Council Sebastian Barnes which, on closer reading, weren’t as dramatic.

But it nonetheless raises the issues of how we are going to fund the economic and social repair job once this emergency is over; never mind the increase in investment necessary for not-for-profit housing, a fully universal health service, affordable childcare and, not least, a Green New Deal.

Here I just want to focus on one issue; how we can increase tax revenue without increasing taxes. For this we need to go outside the usual fiscal box and look into a recent paper written by Paul MacFlynn of the Nevin Economic Research Institute, ‘The Impact of Collective Bargaining on pay in Northern Ireland’.

This is not a paper about raising taxes. It concerns industrial relations. But the implications of the findings could have a positive benefit on public finances.

Paul shows that there is a pay premium for those workers who bargain collectively with their employer; that is, those who bargain through a single agency – usually a trade union. These workers earn, on average, 13 percent more in pay than those employees who bargain on their own with their employer. He writes:

‘ . . . workers negotiating as a collective are able to mimic or replicate the unity that employers have when they negotiate with their workforce. The market logic is that in any transaction, the power lies on the side with the least number of participants.’

Of course, the situation in the Republic could be different. A similar study might not find a similar premium level. A significant difference is the presence of multinationals, though Eurostat reports that in the multinational sector the average wage, including employers’ social insurance, is lower in the Republic than in any EU country in our peer group.

The OECD estimates that 33 percent of Irish employees are covered by collective bargaining agreements. Approximately half of this would be in the public sector. So we would find only a small proportion of private sector workers covered under collective agreements – certainly fewer than one-in-five.

Let’s assume there is a premium of 10 percent, the level found in this study. Were collective bargaining to be extended throughout the private sector, the level of wages would rise.

This is all pre-crisis but the point is nonetheless valid even if the magnitude is different: collective bargaining raises wages. And with that, tax revenue.

This can be seen in the labour share – wages as a percentage of national income. In this measurement Ireland comes up short.

Were the wage share to rise towards the average, we should expect tax revenue to rise. In 2018, Irish employees paid, on average, 28 percent of their wages in income tax, USC and PRSI. If this held as wages rose, a one percent increase in the labour share would increase personal tax revenue by €400 million.

This should be seen as indicative. One would have to factor in the distribution of the wage increase (towards the low-paid or the high-paid); and the impact on profits and investment.

However, this doesn’t take account the positive impact on consumption taxes (VAT). And as Paul and Tom McDonnell point out, there is a link between collective bargaining and productivity, which means that rising wages are not zero-sum. Companies engaged in collective bargaining benefit from the increased productivity. They write:

‘Seeking these types of pay increases is more likely to be associated with agreements on upskilling and innovation, which provide benefits to the firm as a whole. In this sense, collective bargaining provides a route for firms to boost wages without suffering competitive loss to firms who do not follow their lead.’

Another way the economy would benefit would be the ability of collective bargaining to reduce precariousness in the workplace. Precariousness costs the individual worker and the economy at large.

Workers with uncertain, intermittent income find it hard to forward-plan their expenditure, limiting their full participation in the consumer economy. This leads not only to in-work poverty, it also leads to reduced tax revenue and higher social protection income supports.

Coming out of the lockdown we will need every fiscal edge we can find. Extending collective bargaining to every workplace where employees so wish can help maximise the gains of the recovery and the substantial subsidies that will be provided for business.

The last thing we should do is squander public subsidies as we did with the VAT reductions for the hospitality sector in the last crisis.

Collective bargaining is a win-win-win process – higher wages and tax revenue, higher productivity and reduced precariousness.

Providing every worker with the right to bargain collectively with their employer would have a verifiable and beneficial impact on public finances. Paul makes the point that:

‘Collective bargaining thus represents one of the few policy levers that government has in order to increase wages and ultimately the labour share of income.’

The same could be said for increasing tax revenue. And this without increasing taxes.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday.

Rollingnews

37 thoughts on “Michael Taft: Raising Tax Revenues Without Raising Taxes

  1. Rob_G

    So, when we come out of all this, with businesses in the services in the hospitality and services sector having had zero revenue for several months, you want them to be hit immediately with a higher wage bill straight off the bat.

    “… collective bargaining raises wages. And with that, tax revenue.”

    If that’s the solution to our problems, why not set the minimum wage at €50k?

    1. Michael Taft

      Rob_G – I don’t understand how you equate a negotiated pay outcome with ‘hit immediately’. It is likely that were there sectoral bargaining in the hospitality sectors, there would be emphasis on re-employment conditions (but that would be a matter for employers’ and employees’ representatives). If, in other sectors where the damage was not as acute or long-lasting, pay increases would actually benefit hospitality businesses since employees would have more cash to engage in discretionary spending. The ‘hit’ comes when one side has all the power to impose an outcome. Collective bargaining is about sharing that sharing that power to achieve a negotiated outcome.

  2. Cian

    Michael, your graphs are lying.
    Employee Compensation as a % of Net National Income – it reads as if France has 10 times more than Ireland.
    If you are going to use a bar-chart you need to start all the bars at zero as the lengths should be proportional to the values that they represent. In which case all the bars would be much, much closer.

    If you want to zoom into that level of detail you should use a Scattergrams (just the top of each line) or a line graph (where all the end points are linked together).

        1. Cian

          It’s a bit better now – but still isn’t going to 0. Now it looks like Ireland’s % is half of France. It is still misleading.

          If you are going to use Excel for charts – and not modify – them I suggest you shouldn’t used bar-charts.

  3. fluffybiscuits

    I wouldnt term it Keynesian nonsense. If we raise taxes then its going to be on those who are left working or who have returned to work and less money in the economy leads to less being spent in the locality. Throwing extra money at job creation programmes gives us a chance to build more jobs, keep taxes as they are and then to bring more money into local and national economies. Collective bargaining might have to see a slight drop in wages (but this would mean a lower tax take);

  4. Ronan

    Speaking as an employee of multinationals for the past 15 years, you can keep your collective bargaining, I’d rather take a hit through income tax!

    Why? Because I get paid according to be ability and efforts, and in some cases much more than a supposed peer who is a passenger in the organization, not someone driving success.

    I work in technology, and a poor performer actually costs productivity when you have to carry them and clean up their work. Most people in my industry feel this way.

    Those that would sign up for a union in any employer I’ve worked for are those who don’t get raises because they’re poor/lower performers. An attempt by poor to average employees in technology to collectively bargain would we laughed at by their peers earning more than them, and the employer. I’m not taking a pay cut so I can average out onto a scale with the incompetents.

      1. Ronan

        Any colleague I’ve had in 12 of those 15 years made a minimum of 50k per annum. What solidarity do they need from me exactly? Why would I collectively bargain with them for more pay and limit my own negotiation standing? Why would I eschew performance based increases so that a group of us can have increments when I know my contribution is more significant than theirs?

        What motivation would anyone have to challenge themselves and pick up complex problems when they could soak increments and hit cruise control?

        The multinational wouldn’t be very competitive for long with everyone cruising.

    1. scottser

      ‘Those that would sign up for a union in any employer I’ve worked for are those who don’t get raises because they’re poor/lower performers.’

      This is just speculation, hearsay, conjecture and fallacy.
      I wouldn’t employ anyone in a tech capacity who can’t base an opinion on fact.

      1. Ronan

        That’s cool, any employer or client I’ve had is more interested in my skills than my opinions and views.

        It might surprise you to know that I’m not anti-union, they have a place in labour. I just don’t fundamentally believe I am selling labour, I sell expertise that scales.

        So IMO collective bargaining for electricians = good. Collective bargaining for electrical engineers = bad. Bus driver good, Volvo automotive engineer designing buses bad. Etc

    2. kwikster

      Don’t worry Ronan, they won’t force a pay cut on you. That is not the way it worked in the past, they didn’t go into companies and say all the DBAs get 55k now or all the network engineers get 123k now. It was an agreed percentage increase across the board for all. So happy days if your company signs up to be involved in the negotiations then you get an increase and you still earn more than the poor performer on your team, plus the gap between you and her widens as a percentage increase is always of more benefit to the higher paid .

  5. MaryLou's ArmaLite

    If everyone gets paid more, that raises inflation, the cost of living and the cost of our old friend housing.

    What then?

  6. V'ness

    I wouldn’t have a problem raising taxes
    in the main

    and there are some – particularly stamp duty on family homes under .5m that should be scratched altogether
    and both VAT and PRSI need to be completely overhauled, restructured and rebuilt

    My problem with any interference in our Tax Collections, is this Acting Government and any Government they will be part of going forward, so you can assume I am including the eFFers Greens and Labour in that, and the usual Suspects that call themselves independents
    Just won’t do the money they take from my pocket any justice

    They are 100% incapable of extracting value for money from any spend,
    even fixed overhead spends like Payroll

    in the last Dail Term, Rural Broadband and the National Children’s Hospital are just two
    Two of the 100s of fiscal decisions they’ve made

    I really don’t know where Fine Gael got the reputation of financial prudence
    they’re f’in useless when it come to public money
    and their doting elders and supporters, the eFFers are no better

    1. Cian

      Fine Gael got the reputation of financial prudence because they have had to clean up the mess that Fianna Fail regularly make of the economy.

      1. scottser

        you call it fiscal prudence, i call it saddling the nation with bondholder debt, trying to enforce water charges in a time of austerity and systematically reducing worker’s wages and protections.
        tomayto, tomahto

        1. Rob_G

          FG increased the minimum wage, and, I think, every social welfare payment – whose wages/protections have been ‘systematically reduced’?

          1. fluffybiscuits

            They raised wages perhaps slightly but no where near in line with inflation. If it was to be proper they would have given a living wage in line with inflation. Should we happy we got scraps from the masters table?

          2. Rob_G

            It’s unclear from your post if you mean the minimum wage, or wages in general
            – both have outstripped the rate of inflation, btw

          3. GiggidyGoo

            Doesn’t get away from the facts in Scottser’s post though. And actual disposable incomes reduced due to various levies, extra taxes, fees, even if the minimum wage increased.
            Any cushion to those taxes was provided by the likes of the Lidl’s and Aldi’s of this world.

          4. Rob_G

            That all sounds suitably vague; which “…levies, extra taxes, fees” do people earning minimum wage have to pay?

          5. Rob_G

            Unable specify one of these mysterious additional “levies, extra taxes, fees” supposedly levied by the government on minimum wage earners – quelle surprise…

          6. GiggidyGoo

            LPT (which increases in a lot of areas every year) for one
            USC – The ‘temporary charge’
            Increased Student accommodation fees
            Increased rental costs
            Increased house purchase costs (from which the State gets a good old income from the various taxes)
            Banking fees
            Carbon Tax increase a couple of weeks ago
            Varadkar’s tampering with the Health Insurance – people who cancelled while out of work were then penalized when they regained employment and re-insured.

            Many more examples, but you can look for them yourself. Point is that whatever small crumbs that are thrown our way are eaten up and outweighed by increased costs, many as outlined above

          7. Rob_G

            You are just listing a load of charges that you don’t like, mainly by private businesses (bank charges… private health insurance… )

            Only one of the things you mentioned (LPT) is an actual new tax introduced by FG, and it is only paid by people well-off enough to own property, so the burden of paying it is unlikely to fall on the shoulders of people earning minimum wage…

          8. Cian

            USC wasn’t introduced by FG.
            USC wasn’t introduced as temporary.
            USC, has since its introduction, has replaced both the Health levy and Income levy.

          9. GiggidyGoo

            Cian. 2015, Noonan said that the USC would be abolished. 2020 now.

            Don’t forget the temporary pensions levy either by the way

          10. Rob_G

            The pension levy wasn’t FG either XD

            If having public servants, who used to be on funny money during the boom, pay for a small, little proportion of what their defined-benefit pension scheme will cost the exchequer constitutes the worst of how people’s wages and social protections were allegedly being rolled back under FG – well, they must not be doing too badly.

        2. Cian

          I was thinking as much Fitzgerald in the 80s and Burton in the 90s.
          Crashes have happened under FF leadership… leading to an election and FG getting the tidy-up role.

      2. V'ness

        You see Cian, this is more of it now
        More of you making a complete show of yourself

        If the eFFers were that bad at Government and managing Public Finances, why would ye be anxious to form another Government with them?
        Especially now when we’re in a bigger jock than ten years ago

        SF FG and the Greens would do it you know
        and its more diverse
        which promises a very broad spectrum of representation

        And might even be a healthier option

        1. Cian

          You said you didn’t know where FG got a reputation for financial prudence. I gave you one reason for it.

          I didn’t say it was true, or if I believed it. Just how I think that reputation arose. Nothing more.

          I don’t understand the rest of your post. Write proper English.

          1. V

            Shur’ why’d I start doing that at this hour of me life

            In Frilly’s time lads were onto a hiding when t’was the writing they moaned about
            C’mon Cian
            Get it together lad
            You’ve had years now to get better at this

  7. Clampers Outside

    Nice post Mr Taft.

    Looving the comments everyone else.

    Much to think on.

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