Thursday, April 3, 2025

Reciprocal Tariffs; My Eye – and how it might even have been 42% for Ireland

The Trump administration has announced “reciprocal tariffs” on practically every country in the world, bar Russia, North Korea, and a few others, and some entities which barely register as entities.  However, the tariffs are not in any way reciprocating tariffs, or even non-tariff barriers, that other countries may be placing on U.S. goods.

Instead, as the Office of the U.S. Trade Representative has summarised the:

“tariffs are calculated as the tariff rate necessary to balance bilateral trade deficits between the U.S. and each of our trading partners. This calculation assumes that persistent trade deficits are due to a combination of tariff and non-tariff factors that prevent trade from balancing. Tariffs work through direct reductions of imports.”

An approach that seeks to balance all bilateral trade, and only such trade in goods, is bizarre at best. There is no reason to target such outcomes.  It is more than 200 years since David Ricardo set out The Theory of Comparative Advantage. 

In our personal lives most of us run deficits with almost all economic actors we engage with, bar our employers. Why should I consider it a problem if I give my local shop money and get to take home goods in return? Now, in overall terms I may wish to ensure that I am living within my means but that’s more a concern with what I do rather than the activities of my local shop.

Regardless, the approach of the Trump administration is apparently one of eliminating bi-lateral trade imbalances.  Continuing, the Office of the U.S, Trade Representative sets out, what this might mean:

Consider an environment in which the U.S. levies a tariff of rate τi on country i and ∆τi reflects the change in the tariff rate. Let ε<0 represent the elasticity of imports with respect to import prices, let φ>0 represent the passthrough from tariffs to import prices, let mi>0 represent total imports from country i, and let xi>0 represent total exports. Then the decrease in imports due to a change in tariffs equals ∆τi*ε*φ*mi<0. Assuming that offsetting exchange rate and general equilibrium effects are small enough to be ignored, the reciprocal tariff that results in a bilateral trade balance of zero satisfies:

This formula is then used to calculated the tariffs “imposed” by other countries on the U.S.  A value of –4 was chosen for ε, the elasticity of imports with respect to import prices and a value of 0.25 was chosen for φ, the passthrough from tariffs to import prices.  Multiplying these gives an answer of -1, so that just gives –mi in the denominator.

In simple terms, the "tariff" that country i is said to be imposing on the U.S. is the trade balance (xi – mi) divided by the negative of the level of imports, –mi.

We can do this for the E.U. using 2024 goods trade figures from the BEA.

  • U.S. Goods Exports to the E.U. = $372,439m 
  • U.S. Goods Imports from the E.U. = $609,192m

Thus the calculation becomes ($372,439m – $609,192m) / (–$372,439m) and we get an answer of .389.  This then becomes the 39% tariff that the E.U. is apparently imposing on the U.S., though actual tariffs feature nowhere in the arithmetic.  

Then for reasons of “generosity” the reciprocal tariff is put at half of this and, after a bit of rounding, we get the announced 20% tariff to be placed on most U.S. goods imports from the E.U.  Of course, this is nothing more than a reverse-engineered methodology, with some half-baked approach devised to best fit the intended results.  

Indicatively, this would have resulted in tariffs of $118 billion if imposed universally in 2024 on all U.S. goods imports from the E.U. ($609.2bn x .20 = %118.4bn).

From an Irish perspective, it is worth looking at what would have happened if the tariffs were imposed by individual E.U. Member State, rather than treating the E.U. as a whole.  Again, we can use BEA data on goods trade to see this and note that a minimum tariff of 10% will be applied regardless of the outcome from the above formula.

The countries are ranked by the size of the U.S. balance of goods trade deficit with them.  The goods deficit with Ireland in 2024 was the largest. Applying the formula and halving the answer gives a “reciprocal tariff” of 42% on U.S. goods imports from Ireland. 

This is one of the highest rates shown, but not the highest. Even though they have significantly less trade with the U.S. higher “reciprocal tariffs” result for Slovakia and Slovenia.

If universally applied to all U.S. goods imports from Ireland at 42%. the amount of additional tariffs due in 2024 would have been $43.4 billion.  Of course, Ireland’s largest export to the U.S. are pharmaceuticals and, for the time being at least, these remain exempt from the newly announced tariffs.

The total amount of additional tariffs due on U.S. imports from E.U. Member States would have been $160 billion if a “by country” approach was applied. This is because the large goods surplus the U.S. has with The Netherlands is not included when we go by country, as a minimum 10% tariff is imposed regardless of the trade balance.

Finally, it is worth considering why the US runs a trade deficit: it is mainly because, as a whole, the spending of the economy exceeds the income it generates.  We can see this with the Net Lending / (Borrowing) positions of the economies sectors.

The large government deficit exceeds the net lending of the private sector (domestic business plus households) resulting in the U.S. economy as whole being a net borrower.

If I am spending more than my income I could blame the local shop and demand I be given a job there. Alternatively, I could try other means to raise my income, perhaps in something I may have a comparative advantage in. Or, I could adjust my spending to bring it in line with my income.  

Or, if people are willing to lend to me, should I not just continue to enjoy the benefits of the goods I am able to buy? Not if I am the U.S. economy it seems. Will the U.S. Congress step in to stop all this? That would seem like their job. Checks and balances and all that.


Monday, February 10, 2025

Ireland’s Inequality of Market Income moves towards OECD average


One of the notable features of the distribution of income in Ireland in the decade after the crash of 2008 was the unusually high level of inequality of market income.  See this previous post for some discussion of definitions.

Using estimates from the OECD, the gini coefficient for the distribution of market income reached almost 0.60 in the years after 2008 and was the highest in the OECD (and also the EU). However, since then the gini coefficient for market income has declined and the latest update from the OECD shows the estimate falling below 0.50 for the first time.


The distances between the ginis are indicative of the impact of transfers on income inequality (from market income to gross income) and of taxes (from gross income to disposable income).

The impact of transfers rose considerably in the crash, as 300,000 jobs were lost and many became reliant on unemployment-related and other transfers.  With the onset of the recovery, the impact of transfer reduced as the numbers working rose with a related fall in the numbers on unemployment supports.

Using OECD estimates for 2010, it can be seen from the difference between the gini coefficient for market income and for that for gross income, that transfers reduced the gini coefficient by 0.21 points. By 2016, this had fallen to 0.16 with a further reduction to 0.13 in 2022 which is the lowest it has been put at in the series.

On the other hand, looking at the difference between the gini coefficient for gross income and that disposable income,  the impact of taxes on income inequality is estimated to have increased in the past 20 years, from 0.05 points in 2004 to 0.08 at the latest estimate.

Here is where the estimate of the gini coefficient of market income for Ireland sits relative to the 41 other members of the OECD. 

It can be discerned how much of outlier an estimate close to 0.60 would be.  But the latest estimate for Ireland below 0.50 moves Ireland relative position towards the middle of the OECD ranking.  Ireland is now 13th of the 42 OECD member states and converging on the arithmetic average for the OECD of 0.47.

Ireland remains below the OECD average for the gini coefficient of disposable income with a 2022 estimate of 0.29 compared to an OECD average of 0.32.  This means the impact of transfers and taxes in Ireland remains high in EU terms, with their combined impact the fourth highest in the OECD (and also in the EU).

The impact of transfers on the gini coefficient in Ireland is now close to the OECD average, 0.13 in Ireland versus an arithmetic average of 0.12 across the OECD.  It is for the impact of taxes that Ireland continues to stand out.

In 2022, Ireland’s gini coefficient for disposable income was 0.075 points lower than that for gross income. No other country showed a reduction in inequality due to income taxes and social contributions as large as this.

Finally, given the impact of demographics, old-age dependency ratios and pensions, here is the gini coefficient for market income for those who are most likely to be in receipt of it – the working age population from 18 to 65 years.

Ireland is eighth-highest in the OECD, though the gap to the OECD average is modest. Among EU member states, only France and Greece have higher estimates but is within a couple points of five or six more.

The CSO use a slightly different definition of market income (and also report gini coefficients as percentages) and their latest estimates from the 2024 SILC (which will be used for 2023 by the OECD) point to a further recent reduction in the gini coefficient for market income.

If this reduction is reflected in due course in the OECD estimates then Ireland’s gini coefficient for market income may very well have moved to OECD average.



Friday, January 10, 2025

CT disappoints–but only relative to elevated expectations

When Budget2024 was published back in October 2023, the forecast was for €24.5 billion of Corporation Tax to be collected in 2024.  The recent end-year Exchequer Returns show that receipts came in at €28.1 billion, giving an overperformance of €3.6 billion or 14.7 per cent. 

Note that everything here excludes any receipts linked to the CJEU ruling in the Apple State-Aid case.  The overperformance relative to the Budget2024 forecasts was greater than the total amount collected in 2011. Yet, still, the final outturn was somewhat disappointing.

This was because as 2024 progressed, a strong performance early in the year gave rise to expectations that this would continue into the second half of the year.  This was particularly true of June which serves as a useful bellwether to what might be collected later in the year and June 2024 was 38 per cent higher than the same month in 2023.

By the time of Budget 2025 last October, the expectation was that total CT for the 2024 would be €29.5 billion.  This was not an unreasonable expectation given what was known at the time.  However, the upward trajectory of the 12-month sum as shown above, which was very strong in the first half of 2024, stalled not long after the Budget.

And while the key month of November was strong, it was not by as much as the June figure might have indicated.  On a monthly basis June 2024 was 38 per cent higher than the June of the previous year.  Given the links between payments a similar increase might have been expected in November, but November 2024 was “just” 15 per cent higher than the same month of the previous year.

However, as we recently pointed to, even with this lower growth in November, a key reason for failing to reach the most recent 2024 CT forecast was because of a weak October.

The monthly October receipts are a pin-up to highlight the concentration and volatility of Ireland’s CT revenues, with large, and seemingly unpredictable, swings from year-to-year.  And it is possible, even likely, that a single firm may be responsible for the volatility shown.  If October 2024 had matched 2023, never mind the peak of 2022, then total CT receipts for 2024 year would have fairly close to the most recent Budget forecast. 

As it turned out, both November and December set records for monthly receipts, with December being particularly strong.  Here are the individual monthly receipts for November and December for the past 15 years.


There is really no reason to combine November and December, other than to show that the receipts across the two months reached almost €10 billion in 2024.  We should not become immune to the scale of these numbers.

The strong December receipts may be a pointer to strong receipts next May – these are months six and eleven for companies with a June year-end. The relationship isn’t as strong as that for the June and November receipts but still a record in December 2024 points to next May being strong as well.

To conclude here is the cumulative annual chart for recent years.  It is now up to 11 pretty much non-overlapping lines.  There are so many lines, value labels for all of them can’t be easily accommodated so only those for even-numbered years are shown.

And there is nothing to suggest that 2025 will break the pattern and give a line that drops below the previous year.



Thursday, December 5, 2024

Corporation Tax motors along - even if the state-aid payments muddy the waters

Corporation Tax revenues continue to motor though with some minor bumps in the road.  An issue in recent months is that the underlying changes have been clouded by the transfer of funds linked to the CJEU finding in the Apple State-Aid case.   For example, at first glance October’s receipts appear to have been very strong soaring ahead of the previous peak from 2022.

However, it has been suggested that around €3 billion of October’s CT receipts were transfers from the Apple escrow account and are one-off in nature. Taking these out presents a somewhat different picture:

Now it is clear that the underlying receipts in October this year were well down on their 2022 peak.  In and of itself this is not a major cause for concern.  There is no overall trend in October’s receipts with volatility the main feature. Even if lower than recent years, October 2024 was significantly higher than October 2020.

October would not typically have been considered a key month for CT receipts.  Large companies make the bulk of their payments in month 5 and month 11 of their financial year. October is month 11 for companies with a November year-end.

This is not a common financial year so the changes are linked to a small number of companies, probably one.  A manufacturer of COVID vaccines which has seen its profit drop substantially since 2022 would fit the bill.  This is a useful illustration of the concentration of Ireland’s CT revenues.

November is a key month for CT – being month 11 for companies with the much more typical December year-end.  We previously looked at what might be expected in November with the June receipts (month 5) and by and large receipts were broadly in line with the expectations set out there.

Again, though, there is the muddying of the underlying picture due to the Apple transfers. In total, November’s CT receipts were an incredible €13.7 billion.  Of those, it has been suggested that around €6 billion is due to the state-aid case. It would be helpful if more precise figures were provided but this does not seem to be case.

Anyway, here are the monthly receipts for November (less the state-aid money in 2024).

The picture is pretty clear: onward ever upward.  Back in July, we projected that €8.2 billion would be collected in November and, though we don’t have the precise figure, it looks like the outturn was maybe €0.5 billion or so below that.  Incredibly, we are at the stage where that would be considered a “small” error.

Even with the softening of October’s receipts and November seemingly coming in a little below what might have been expected, 2024 is on track to be another record year for CT.  With a month to go, the €26 billion collected so far (excluding the money linked to the Apple case), is already well up on what was seen in last couple of years.

Indeed, the near €8 billion collected in November alone is almost double the €4.2 billion that was collected in the entire year in 2013. 

A few months ago, it seemed 2024 was on track to get close to €30 billion.  This won’t be achieved. December is not typically a major month for CT, but the monthly receipts in recent years have been not far off €2 billion.

If December 2024, brings in €2 billion then 2024 will see CT revenues of €28 billion or thereabouts.  The amounts are enormous.

Perhaps we will get away without having to extend the scale of the vertical axis on the chart of the rolling 12-month sum of CT receipts. 

We might get away with it in December, but if the trends are anything to go by another revision to the scale will be necessary sometime in 2025.

Friday, October 25, 2024

Decline in FTB purchases of existing dwellings

Recent months have seen a decline in the volume of purchases of existing dwellings by first-time buyers (FTBs).  The volume of FTB purchases of new units has continued to edge up but the fall for existing units has pulled the total down slightly, which can be seen below.

In the 12 months to the end of August, 17,066 stamp duty filings flagged as FTB market transactions were made with the Revenue Commissioners.  At the start of 2024, this 12-month total was running at 17,500, so it has fallen just over 400 as we the year has progressed.

On a 12-month basis, FTB purchases of existing dwellings were running at 12,250 this time last year. The latest figures from the CSO show that there were 11,408 FTB purchases of existing dwellings in the 12 months to August, a decline of 850 units or seven per cent.

FTB purchases of new dwellings were 5,658 in the 12 months to August, up over 400 on what it was at the start of the year. This is a new high in the CSO series though this monthly data is only available since 2010 and the current levels are well down on what would have been seen in the early 2000s.

While there has been a recent fall in total FTB purchases, at seven per cent, it is still pretty modest, and purchases of new dwellings continue to edge up. Since Census 2022 in April of that year, there have been a little over 41,000 FTB market purchases. With non-market transactions, self-builds and bequests the number of first-time owners will be somewhat higher again.