Tuesday, May 10, 2011

Taxing Pensions to Create Jobs?

Joe Brennan and Dara Doyle of Bloomberg report, Ireland to Impose Levy on Pension Funds to Finance Jobs Plan:

Ireland’s government will impose a temporary levy on domestic private pension savings to fund a jobs plan aimed at cutting unemployment and aiding the economic recovery.

The government plans to apply an annual 0.6 percent charge over four years on pension assets, excluding funds providing benefits to non-resident employers and members, Finance Minister Michael Noonan said in Dublin today. The move should generate 470 million euros ($675 million) a year, he said.

The sales-tax rate on tourism-related products and services will be cut to 9 percent from 13.5 percent, while a travel tax may also be suspended, subject to conditions, he said. The government will also introduce a partial loan guarantee program for small and medium-sized businesses.

“There is no escaping the fact that we do not have the resources available at present to fund large-scale policy initiatives to help to generate economic activity,” said Noonan. Still, “I believe that today’s jobs initiative will help rebuild confidence amongst households and firms at home and among potential investors abroad.”

With unemployment close to a 17-year high, Ireland’s new government is seeking to create jobs within spending restrictions set down in the country’s bailout from the European Union and International Monetary Fund. Prime Minister Enda Kenny has pledged that the measures will have a neutral impact on the budget set out in December.

Ireland cut its 2011 economic growth forecast to 0.75 percent from 1.75 percent on April 29, citing weaker-than- expected domestic demand. The country’s unemployment rate was 14.6 percent in April.

Moody’s Investors Service warned yesterday its current Baa3 stance on Ireland, the company’s lowest investment-grade rating, could face “downward pressure” if the ability to restart debt sales is hampered by “adverse sovereign developments in other euro-area peripheral countries.”

The country was forced into an 85 billion-euro international rescue in November as it sought to solve Europe’s worst banking crisis. It has been struggling to convince investors its debt is sustainable after the collapse of a domestic real-estate bubble in 2007.

You can read details of Minister Noonan's Jobs Initiative by clicking here (HT: John). On the pension levy, here is what is proposed:

The various tax reduction and additional expenditure measures which I am announcing today will be funded by way of a temporary levy on funded pension schemes and personal pension plans. I propose that the levy will apply at a rate of 0.6% to the capital value of assets under management in pension funds established in the State.

It will apply for a period of 4 years commencing this year and is intended to raise about €470 million in each of those years. The levy will not apply to pension funds established here and providing services and benefits solely to non-resident employers and members. Further details regarding the proposed application of the levy are set out in the Summary of Initiative Measures.

I am conscious of the concerns of the pensions industry about the impact of a levy in circumstances where the pensions sector, in common with other sectors in our economy and society, is finding the current economic and financial environment very challenging. However, the imposition of the levy is for a relatively short period and its purpose is to improve that environment by providing the means to encourage job creation in areas of our economy most likely to deliver that employment quickly.

The levy is being confined to pension funds because I believe that the alternatives for increases in taxation elsewhere at this time would be more damaging to the economy. I will be glad to consult with the pensions industry on the legislative provisions which will give effect to the levy so as to seek to minimise, where possible, any unnecessary difficulties which this measure may give rise to.

The pension levy represents a very significant contribution by the pensions industry and the many individual savers it represents to our commitment to getting the economy moving again. I am aware that the pensions sector is also concerned, given the temporary levy, about the commitment in our agreement with the EU/IMF to reduce the tax relief on pension contributions starting next year. I will examine this issue in the context of the results of the Comprehensive Review of Expenditure currently being undertaken by the Minister for Public Expenditure and Reform, and any resulting scope for fiscally neutral changes to the EU/IMF agreement.

Reaction to the pension levy proposal is mixed. The Irish Times reports, Hysterical response to proposals by pensions industry, says Noonan:

The pensions industry has been accused by Minister for Finance Michael Noonan of reacting in a “quasi-hysterical” manner to the 0.6 per cent levy imposed in the Jobs Initiative.

At a news conference in Government Buildings last night, he said the Government was “pulling back a very small proportion” of the tax relief enjoyed by the industry over the years.

Accompanied by Minister for Public Expenditure and Reform Brendan Howlin, Mr Noonan said the levy did not have to come from pension funds and the industry could choose to absorb it instead.

“The reaction has been quasi-hysterical by the pension industry,” he said and pointed out that in recent years pension funds had not been invested in the Irish market.

Mr Howlin said public sector employees were already paying a pension levy and the new levy was being imposed “on money that has been put away without paying tax”. The new levy was intended to help in “restarting our economy” and such a development would be good for pension funds.

Mr Noonan said fees charged in Ireland by the industry were “substantially” larger than in the UK and there was scope for reductions. “I’m disappointed by the outcry from some in the pension industry because it is totally exaggerated,” Mr Noonan said.

He said the Government was trying to make the tourism industry more competitive as part of its Jobs Initiative. “You remember the time when you had to take out a mortgage to take your friends out for a meal,” he said.

Mr Noonan said the Jobs Initiative was “not a package of bits and pieces, it is a very carefully thought-out package”.

At an earlier press conference outlining the plan, Taoiseach Enda Kenny and Tánaiste Eamon Gilmore said the Government was looking to specific sectors such as tourism to generate employment.

The Government had inherited an enormous fiscal and economic challenge, Mr Kenny said, and it was meeting that challenge “head-on”. There were 440,000 people unemployed: that was why the Government had “acted so swiftly”; that was why the Government had “hit the ground running” and was announcing the Jobs Initiative after 10 weeks in office.

The Government was forecasting “a net additional 100,000 jobs by 2015” and it would like to go beyond that target if possible.

“The 12.5 per cent corporation tax remains unnegotiable, we have said that now repeatedly and that is the position,” Mr Kenny said.

Mr Gilmore said: “The whole focus of this Government’s activity and our work is to bring about economic recovery and to get people back to work.”

He added: “We committed in the programme for government that, in our first 100 days, we would introduce a Jobs Initiative. That has been delivered upon today.”

The Labour leader described the announcement as “a significant set of proposals amounting to €1.8 billion over a four-year period”.

The initiative was also “focused” on particular sectors where people could be got into work in the short term.

“One of those is tourism,” he said and the Government was conscious that the 2011 tourism season was just starting.

There would be a “huge focus” on Ireland, arising from the visits by Queen Elizabeth and US president Barack Obama.

“Therefore we have decided to concentrate the reduction in the VAT rate on tourist-related activity in order to generate reduced costs and generate some tourist activity,” Mr Gilmore said.

Responding to Fianna Fáil’s claim that the pension levy was “a smash-and-grab raid on the savings of ordinary people”, Mr Kenny said: “The pensions referred to here were built up with massive tax reliefs over the years and most of them are involved in overseas assets.

“What’s involved here is bringing back a very small percentage of this, at 0.6 per cent.”

Asked if the proposal that some of the funding for the initiative is to come from reallocations within departments would affect the prospect of savings from the Croke Park deal being returned to lower-paid public sector workers, Mr Kenny said this was not precluded.

Asked what would be the actual number of new jobs created under this initiative, Mr Kenny said: “It’s impossible to put a figure on the extent of jobs that can be created through a resurgence of confidence.”

I fear that this Jobs Initiative is going to be a major flop. First, taxing pensions is political suicide. In order to avoid increasing corporate taxes, they're going after pensions. Second, even if it's for a short period, how many jobs can Ireland's tourism industry create to make a material difference on historically high unemployment? Finally, once you open this Pandora's box of partially nationalizing pensions, then the temptation will be there to continue with these policies in the future. Not sure Ireland wants to go down this slippery slope.

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