July 11, 2011

Default without defaulting..

Posted in Your Ideas · 2 comments ·

Here is just a probably wacky idea, but I’d like to throw it up in the air, just to see how it falls back to the earth, for the sole benefit of my own wisdom.

How to default “in style”, in an employment-friendly way:

In short: Apply a haircut on bank bond holders (guaranteed senior or not), but compensate them if they create new jobs in Ireland.

In more details:
Apply a haircut on current nationalized bank bond holders, but offer them a transferable tax credit equal to at least the individual bond holder’s loss on the investment, if any. Or at most, equal to the haircut (full face value compensation). Or somewhere in between.
This tax credit would only be applicable after 2013.

This differs from David’s idea of swapping bank bonds for bank shares (most of them currently in state ownership), in that to an extent it would ultimately make the state take less tax (or the taxpayer “pay”) for bondholders losses, but Ireland would keep the ownership of the banks, with a view to privatize them later in any case.

In essence, it equates to forward-selling future (post-2013) tax take, provided jobs are created in between, thereby partially or fully offsetting the impact on future budgets, and giving employment a lift.

This tax credit would have to be transferable: Senior bond holders, like banks, pension funds and institutional investors cannot be expected to all have a sudden passion for directly creating employment in Ireland.
In order for the tax credit to be acquired and used by the most relevant parties, it would need to be freely traded on an OTC market, just like equity or a kind of “parallel” currency.

The seller would incur some loss selling the tax credit, as the buyer’s interest would be to buy the tax credit at a discount, and apply it against liabilities to the Irish State at full face value, thereby synthetically reducing his overall Irish taxation costs.
This in turn would make foreign direct investment and job creation in Ireland even more attractive:
Say if a corporation (willing to create jobs in Ireland) acquired such a tax credit at 50% discount, it could apply it against its corporation tax liability, halving it from 12.5% to 6.25%!

The Tax Credit would need to be
- At the minimum: equal to the individual bond holder’s loss on the investment if any
- At the maximum: equal to the difference between the bond’s face value and its haircut price.
- Applicable against any liability to the Republic of Ireland,
- Applicable after 2013: precise date to be determined, but obviously preferably after the EU/IMF budgetary targets are due to be fulfilled.
- Applicable only if the holder/acquirer of the tax credit has been a net job creator in Ireland over the past so many years — to be determined
- Applicable to the tune of x jobs per million of tax credit — ratio to be determined -so that the negative effect of tax credits on the budget is offset by the positive effect of additional jobs on the economy.

Let me know your thoughts!

  1. fod


    I am writing a essay on a second republic. It’s a collection of my thoughts on how we can improve our country for the future. It is at the moment for myself but I would eventually like to get it out there for more considered opinion when I finish. I am not an expert on everything so in some subject where I am somewhat experienced I have some of more thoughts than others where I am just shooting ideas however when writing this I did have a thought on a certain matter and this is what I want to hear from you about.
    The subject is VAT.
    Now, VAT is a stealth tax applied to nearly everything regardless. It is used by the government now as a staple supply of money into the exchequer and they look with great interest on vat receipts every quarter.
    But, What if we reduced VAT on Irish produced products to 0%.
    And increased VAT on non- Irish produced products to 40%.

    Imagine Irish products suddenly dropping 20% in price. More Irish products being bought has certain benefits.
    - It means business have to expand to cater for demand. More expansion means more employees.
    - More employees means more income tax.
    - More employees also means less social welfare payments.
    - More business for Irish based companies means more corporation tax.
    - More money in the system means more money spent and the cycle gets a kick start.
    An increase to 40% in non-Irish produced products has certain benefits also.
    - Companies see a drop in income will be more inclined to set up production of their products here. This of course sees the benefits above, even if it’s only domestic production. If we play it right with the corporation tax rates and keeping the wages to sustainable levels means it makes more sense to increase production to include the EU.
    - 40% will in the short term increase the vat to the exchequer as we do not have a production/manufacture industry anymore due mostly to high wages and therefore we import a lot of items that will be increased in price.

    Now that may seem a rather simplistic version of reality but who says simple is not right. In most cases it is. There will be a strong reaction against any such proposals from the lobby groups who have an interest in keeping the status quo but as we have seen over the last few years and I personally have felt the affect of ( I am currently an ex-pat) the status quo is not and does not work.
    From what david has been speaking of for a while now, we had a bubble in one industry and due to lobby groups stroking the fire a lot of people were sucked in. we lost our manufacturing industry because it was told to us that we can’t lose on the roulette wheel of property. Well, we lost and now we must regain our composure. A lot has been said about multi nationals and help from abroad. While good in many ways why must we go cap in hand. Why can we not think for ourselves and find our way out of this.

    • Hi Fod,

      I can see your VAT solution is a clever idea. I’d imagine the competition authority might have an issue with it.

      However I don’t think your idea would change much in the sense that it wouldn’t tackle the root of the problem.

      The root of the problem being that it is banks who create all our digital money whenever they process a loan. This is why ever euro has a corresponding debt.

      Encouraging existing money to be used in different transactions can help from an Irish point of view but we can’t solve the debt crisis without a second source of digital money, created debt-free.

      Paul Ferguson
      Sensible Money

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