A Modest Forecast: The Average Real Growth in Ireland will Exceed 10% a Year From 2012 to 2014
by Mike Kimel
A Modest Forecast: The Average Real Growth in Ireland will Exceed 10% a Year From 2012 to 2014
You read the title correctly: the Irish economy will grow by more than 10% next year. Now, hearing that, you might be asking yourself: “Is this guy for real? He must be nuts.”
Because I’ve looked around and nobody is predicting that sort of growth for Ireland for the next few years. So let me lay out ten facts that should make it obvious to just about everyone:
1. According to the Central Statistics Office of Ireland, real GDP (measured in 2009 Euros) peaked at 45,583 million Euros in the fourth quarter of 2007. It bottomed out in the fourth quarter of 2010 at 39,403 million Euros. That is, real GDP fell by 13.5%. Since then, GDP has barely budged. So its safe to call 2011, four years after the peak, as a year when the bottom out process was ongoing.
2. According to the OECD, Ireland’s all in top marginal tax rates are about 52.1%.
3. According to the BEA, real GDP (measured in 2005 dollars) was 976.1 billion in 1929. It reached a nadir of 715.8 billion in 1933, amounting to a drop of 26.6%. Note that while growth was negative in 1933 (four years after the peak), it was just a small drop. The bulk of the decrease occurred from 1929 to 1932.
4. According to the IRS, the top Federal marginal tax rate was 63% in 1934, and it rose to 79% in 1936. Note that this wasn’t an “all in” rate.
5. According to the BEA, real economic growth in the US in 1934, 1935 and 1936 was 10.9%, 8.9% and 13.1%. The annualized rate of growth from 1933 to 1938, years which I’m cherry-picking to show some relatively poor growth, was 6.7% a year.
6. FDR instituted a number of large scale programs. For instance, [b]y March, 1936, the WPA rolls had reached a total of more than 3,400,000 persons. For comparison, according to the BEA’s NIPA Table 7.1, the entire population of the US in 1936 was 128.181 million. Thus, 2.7% of the US population was employed in the WPA alone. Throw in the CCC, the Rural Electrification Administration, the TVA, and I think we can all agree that the Federal government was playing a big role in the economy.
7. Many eminent worthies, too many to name, in fact tell us that the rapid growth in the economy from 1933 to 1940 was due to the bounce-back in the economy. They also tell us that the economy would have recovered much more quickly if FDR had not followed socialist policies.
8. Ireland doesn’t have as far to bounce back from as the US did in 1934, implying slower growth in Ireland today than in the US in 1934.
9. On the other hand, taxes are much lower in Ireland today than in the US in 1934, and nobody is accusing the Irish today of following socialist policies, implying faster economic growth in Ireland today than in the US in 1934.
10. Facts 8 and 9 probably cancel each other out, leaving us to expect, on average, about the same growth rate in Ireland over the next few years as we saw in the US during the New Deal years when FDR ruined the economy.
As the eggheads say, QED.
What’s nice about this is that we will see rapid growth in other countries too. Taxes are much lower in the US now then they were during the New Deal years, and for all the cries of socialism and whatnot, there is WPA or CCC or Rural Electrification Program. Heck, even the Fed doesn’t seem to want to do anything about jobs and that’s part of its mandate. Back to the eggheads for a moment.
There’s a bunch of them who think the New Deal helped the economy, that lower taxes don’t generate faster economic growth or that its a good idea for the government go out and buy stuff to boost demand at times of economic weakness. Boy are those folks about to be surprised by the magic of the free market and low taxes. — Disclosure:
I profess, in the sincerity of my heart, that I have not the least personal interest in endeavoring to promote this necessary work, having no other motive than the public good of my country, by advancing our trade, providing for infants, relieving the poor, and giving some pleasure to the rich.
Oh yes, well done, how amusing.
And you’re making the same mistake you always do: not looking at tax thresholds. I think we would all agree that the top tax rate for perhaps three people is going to have a different effect than the top tax rate for 10% of the population?
Well, if we don’t then we should.
The 1934 top threshold in the US was $1 million in income. This is, depending on how you measure it, $15 million (CPI) or $49 million (production worker wages) inc 2010. The later one, 1937, was $5 million, or $75 million to $210 million in current money.
The current Irish top rate applies to 4.4 times average income. Or, in current US numbers $190,000 a year.
I put this forward just as a proposition you understand: tax thresholds starting at $190,000 will have a different effect from a tax threshold that starts at $210 million. That first would hit a California prison nurse maxing out her overtime (her name being Jean Keller), the second would only hit Stephen Speilberg and above. You know, maybe 200 people tops?
Mike,
Your making an assumption that 1) Ireland is not effected by what’s going on around it. The EU will have far more effect on Ireland’s GDP than anything the Irish gov does. 2) Even if (1) is favorable, you once again forget the ‘fill in the hole’ effect as an economy rebounds. And (3) 10% growth rate is not out of the ordinary for Ireland
10% growth starting in 2012 through 2014 (assume 1/2% growth in 2011) will put you at a GDP of 52,700 M Euros at the end of 2014.
This equates to roughly a 2% steady growth rate from your 2007 peak of 45,583 M Euros.
Considering that from 1986-2005 (see attached chart from WSJ) Irish GDP growth has about been almost always above 5% and 50% of the time over 10% growth , attributing this growth to Ireland’s current tax rate is, well funny. (Another chart takes this to the peak in 2007 with continued 6-7% growth until the crash). A three year 10% GDP growth rate would be not out of the ordinary for Ireland and would not even ‘fill-in-the-hole’ caused by teh crash. That would need you to get to roughly 73,000 M Euros by 2014. (Based on a Irish growth rate of 7% pre crash). At 10% that would take you into 2018. To fill the hole by end of 2014, be where you would be without the crash, would need a GDP growth rate of almost 50%…
Basically your betting that Ireland will recover from the current slow-down and get back to the rapid growth its seen over the two decades before the crash. Then making the logical error that this was caused by Ireland’s marginal tax rate.
Bottom line: Ireland’s marginal top tax rate will have no effect on its recovery one way or another, unless as Tim pointed out its actually punative, which would hurt growth.
Islam will change
Tim Worstall (and buff to a lesser extent),
Tim Worstall,
Glad you enjoyed it. If I understand correctly, you are saying that if Ireland raised the threshold on taxable income subject to the top marginal tax rate (effectively cutting tax rates for a lot more taxpayers), then yes, we would see Ireland popping along at 10% a year or more.
But let’s move on. The table to which I linked to shows the top and bottom marginal rates and exemptions for the US. I tried finding intermediate rates for the period but failed.
I did do some quick and dirty math and make some quick and dirty assumptions. Let’s assume that there are a few gradations, say five marginal tax rates. The exemption for a single taxpayer that year was 1,000, and the lowest tax bracket was 4% on the post exemption incomes up to 4,000. Let’s say its 8% on the next level up, for taxable dollars numbered 4,001 to 15,000. Let’s say its some other percentage (unknown) for taxable dollars from 10K to 25K.
Then… we can conclude the following…
income 0 – 1000 tax = 0
income 1,000 – 5,000 = 4% on 4,000 = 160
income 5,000 – 16,000 = 8% on 11,000 = 880
Thus, on the first 16K of actual income, a total of 1040 is paid in taxes assuming a single individual with no dependents.
Note that I tried to make these conservative assumptions.
I did find some income tax data in table 189 of this (http://www2.census.gov/prod2/statcomp/documents/1940-03.pdf) old statistical abstract of the US. It shows, among other things, number of taxpayers and average tax burdens in different income ranges.
It indicates that in 1935, the average tax burden for people in the 25K to 50K range was over 12%.
Now… let’s assume there’s just one more tax bracket from the 15,000th taxable dollar to the 25,000th dollar. What does that tax rate have to be to get to a 12% average tax assuming a single individual with no dependents? I get about 20%. Not that far away from Latvia’s top rate. And they’re a poster boy for doing it right – low taxes, not much regulation, plenty of austerity. So would you expect Latvia to start growing at double digit rates any time soon?
I agree with buffpilot that the EU has the potential to drag down Ireland. Even if Ireland is ready to bounce back based on its own timeline, it is not a large enough economy to be insulated from a major downturn in the EU. Mike, do you think fears for the EU are overblown?
Mike,
I’m not actually argueing with your prediction. If the EU recovers its probably a good bet. But your betting on a EU recovery, not on the marginal top tax rate of the Irish gov. My data points out that a 10% growth rate is not out of the ordinary for Ireland regaurdless of the top marginal rate. The idea that a high marginal rate will cause this kind of growth is not supported by the data.
Bottom line even if your correct in the prediction (a good bet if you think the EU recovers), there is no way to then say that proves a 50% top marginal rate caused it.
You also continue to assume that the US economy of the 1930s has any correlation with the US economy of today or (even more of a stretch) of Irelands economy. More apples to space shuttle comparisons.
Islam will change
heart of flint,
This post was just another way of coming back to a point I’ve been making over and over… there are a lot of people who insist that low taxes and a laissez faire approach are the keys to faster economic growth and there is no evidence of that. I’m pointing out that someone who believes that should believe that countries like Ireland and Latvia are going to really rocket in the near future. I personally don’t expect it.
buff,
Let’s be clear… this was tongue in cheek, as per the disclosure which is literally a quote (the second to the last sentence) from Swift’s A Modest Proposal.
I’ve noted in the past that the US economy of the 1930s, apparently, bore little resemblance to the supposed economy of the 1930s of legend, and the economy of the 1920s even less. So I’m not surprised if you don’t think the economy of the 1930s bears much resemblance ot the economy of the present. But the point remains… if low taxes and small government are the key to rapid growth in the long haul, tax havens (and let’s be clear, Ireland is precisely that) should lead the world in just about everything. They don’t.
(Always click on the link, always click on the link….)
OK. I’m with you now, very nice. I didn’t recognize the Swift!
So, you are actually saying that Ireland will not experience 10% growth, and this is because the free market and low taxes do not create growth, and not because of problems in the EU or for any other reason?
heart of flint,
As I’ve pointed out time and again, in US history, at least, we don’t see lower taxes leading faster economic growth. And of course, there is always a reason for it and it never has anything to do with taxes. Similarly, we tend to see faster growth occurring when tax rates are higher (provided they’re not much higher than 70%). That too is always credited to a reason that has nothing to do with tax rates. Which always leads me to note – if just about every observation is a special case, the model sucks.
Now we’re looking at Ireland. It seems most everyone is agreement that Ireland won’t be growing all that fast in the future (much less imitating, say, the US when it was in similar circumstances). Once again, though, the reasons for this are anything but taxes and laissez faire… which is interesting because not long ago the same folks were telling us that Ireland was growing quickly because of taxes and laissez faire.
I’m just trying to impose some rigor on the storyline, that’s all.
BTW, we;come heart_of_flint. Nice to see what I hope is another regular commenter!
Islam will change
Has the Irish population declined to less than before the famine, which brought a branch of my ancestors to America?
One response to Eire’s austerity was emigration to the US, Oz and Canada.
Prof Krugman has been on the “recovery” in austerian Eire.
He has used it to support the harm austerian policy can do, and possibly use it as test case for what following Keynes might have done better.
A point with Eire is that its GDP is uncommonly larger than its GNP because a lot of the productivity of Eire’s pharma industry is sending profit off shore.
This may have an issue with recovery being linked to eurozone impetus, as well as US.
Mike, I get your point, but Eire not reaching better growth has more causes, although “low” tax rates go along with austerian policy.
People in Eire exceeded the numbers in 1845 sometime in the early 2000’s.
ilsm,
“Mike, I get your point, but Eire not reaching better growth has more causes, although “low” tax rates go along with austerian policy. “
Yes. But as I noted upthread, the good times were attributed to low taxes, and nevermind the transfer pricing games and the subsidies from the rest of the Euro area. I’m just trying to impose a bit of rigor here.
Thanks for the welcome, but I doubt I will continue to have time to post here often.
As Latvia’s GDP growth rate was 10% (ish) in 2005, 12% in 2006 and 10 % again in 2007, yes, quite possibly.
But you are still entirely missing my point.
You are not comparing like with like because you are not adjusting these thresh holds for inflation, and thus comparing the actual effects of the tax rates on behaviour. That 5,000 in 1934. That’s $80k now (straight CPI inflation) or $250k now (production worker equivalent).
Do I think there would be more economic growth if the marginal income tax rate up to $250k was 4%? Sure I do.
Or your $16,000 in income. That’s $803k in today’s money (production worker equiv). Using the tax rates you do that’s a tax bill of around $50k in today’s money.
And your $25k to 50k range. Upgrade that by wage inflation and we’re talking $1.25 million to $2.5 million in today’s money (production worker equiv). Or CPI, $400k to $800k. 12% average tax rate?
That’s lower than today’s average tax rate for those income groups.
Tim W,
But all that raises a different problem. Essentially, it makes it awfully hard to explain how the Great Depression started. In the US, there were eight straight years of tax cutting (top marginal tax rates, which as you note, applied to very few people) fell from 76% to 24%, and the government was as laissez faire as any American government in history. There was no social security, or unemployment insurance, or any sort of a safety net provided by the government. Yet during that time the economy never went more than 27 months out of recession, and it all culminated in the Great Depression.
There’s no difficulty in explaining all of that. Bust follow booms, just as night does day.
When you’re in the bust what you don’t want is an idiot central bank allowing the money supply to shrink. Because that leads to depression. Unfortunately the Fed in 1930 etc were idiots.
Nothing at all to do with tax rates.
“Similarly, we tend to see faster growth occurring when tax rates are higher (provided they’re not much higher than 70%).”
And as I keep pointing out you’re always forgetting about tax rates are higher *upon whom*.
Unless you incorporate thresh holds in to your analysis you’re going to get nowhere.
Let’s take the 92% (first year it was this high) tax rate of 1952. The lower limit for this was $400,000. In 2008 money that’s (using the production worker comparison) $5.6 million.
In 2008 the top tax rate was 35%. But the lower limit for that was some $350,000.
Effective tax rate equals tax rate times tax base. If you try and compare taxes over time without looking at changes in the tax base then you’re just not comparing like with like.