We need an honest debate on tax

This is a version of my irish examiner article published 4 may 2013
The recent publication by the EC commission of a report on the level, incidence and amounts of taxation across counrties should give pause for thought to many sides in the tax debate here. Sacred cows happily munch away in the tax fields of Ireland, but many of these might well feel the butchers gaze, a foreign butcher, before too long.

We have a general perception that as a nation we are taxed to the hilt and beyond, and that there is no more room for increases in the level, range or incidence of taxes levied. This is not borne out by the facts as presented. We should be extremely cautious of attributing special status to our economic circumstances. Just as there was a herd mentality about the property bubble so alos there is a worrying consensus about tax. If we have learned anything it should be that where consensus exists we need to seek contrary views.

Overall we are not that heavily taxed. This may come as a shock to many of us. The shock we feel is that having been relatively lowly taxed we are now being asked to become used to being slightly more taxed. This is painful. But it’s the direction things are going. As a percentage of GDP (more on this later) our tax take, in total, is 28.9%. This is 22nd of the EU 27. The only countries lower than us are those in the recent accession wave – Latvia, Romania, Bulgaria etc. Countries that rank in the top 5 are the Scandinavian countries – Sweden Finland and Denmark, and France/Belgium. None of these are hellish places to live – quite the opposite. None are known for their economic backwardness – quite the opposite. High tax takes, quality services and economic prosperity can go together.

It is sobering to realize that if we collected the same percentage of GDP in tax as did Denmark we would be collecting 60% more, some 75b euro plus this year and running a massive surplus. This would not make much sense in a recession, but if we contented our self with collecting the average EU 27 tax take we would still take in about 24% more and be in budgetary balance. It is hard to see how we can expect much sympathy from our partners when we don’t reach the same levels of tax take as they do.

Some, most, will argue that this is an incorrect metric, and we should use GNP and not GDP. This argument is fallatious to a great extent. Even if we measure our tax take against GNP we still are only on average in terms of tax burden. We have decided, over decades, to become heavily dependent on a particular structure in our economy. We have a business model that at its most benign is open to the charge of tax led economic predation and at worst to being a full scale tax laundry. We have seen in the case of Cyprus that the new approach can involve the center dictating the appropriate economic model for a country. That this may scupper decades of democratic decision making is irrelevant. Is the 12.5% tax rate on corporation tax and associated tax reliefs, shelters, dodges and so on on international trade any more special than the Cypriot banking model? I would not imagine that it is seen as such in Europe. We should wish very hard that our banks are fixed for good and all and that they will not need us to go back cap in hand to Europe. We choose how to structure our economy. We cannot then complain when those that choose a more balanced approach baulk when asked to pay for our (and their) mistakes..

On most tax areas we compare poorly to our European partners. Our corporation tax rate is at the bottom end, and as a percentage our tax take from business and cororates is 18th out of the EU 27. Our energy taxes are low – 23rd out of the EU 27 as a % of GDP and within that our taxes on transport and fuel is 21st out of 27. These may surprise some but the facts do not lie.

More problematically our social contributions, PRSI and related, are also low by European standards, even with the USC. Employer social contributions are the second lowest as a % of GDP; employee social contributions are third lowest. It is this low level of social contributions that is to a very large part contributing to the overall low level of tax take. Were we to take the average European social insurance contribution we would double our rates. This would provoke howls and would be a major imposition on companies and individuals.

The above are not arguments for increased tax. They are however facts that should be part of the debate. We have chosen a particular tax and economic structure that is not in the European mainstream. Pretending otherwise ill serves us

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8 thoughts on “We need an honest debate on tax

  1. Jeremy Taxman

    The commission only looks at headline rates, there are many, many incentives, exemptions, rebates, etc which operate in many of the so-called high tax countries which bring down the effective rate to lower than ours. Take, for example, the income tax rate in france. the more dependants you have, the lower your effective tax rate is. An argument on tax must take account of these hidden factors, or else it is useless.

    Reply
      1. Jeremy Taxman

        levels of what? tax, subsidies, exemptions, rebates, what? Having worked in international tax for twenty years, the one thing which is invariably true is that the published rate is never the effective rate.

  2. Seamus Coffey (@seamuscoffey)

    Denmark is an important example for the amount of tax revenue they raise but how they do it is equally important. Obviously there are differences in almost all tax areas but the main reason explaining the 19 percentage point in GDP difference in tax revenue is personal income tax.

    Denmark taxes unemployment and other benefits which generates about 5% of GDP in tax revenue. There are also large differences in the income taxes levied, particularly on low/middle income. At 100% of the Average Wage (using OECD figures) the total deductions in Denmark are 38% of gross wages. In Ireland, the equivalent figure is around 18% (Income Tax, USC and PRSI).

    At 200% of the Average Wage the deductions in Denmark are 47% of gross wages; in Ireland they are around 35%. Irish tax rates are lower and are also much more progressive.

    The OECD’s definition of the Average Wage results in an income of €32,500. The current deductions on this in Ireland are around €6,000. The deductions on twice the average wage, €65,000, are €23,000. (Assuming no pension contributions are other deductions in both cases.)

    Moving to Danish rates would result in an extra €6,500 of tax being levied on incomes of €32,500, up to nearly €12,500. At €65,000 the extra tax would be around €8,000, up to €31,000. These levels might be considered ‘fair’ in Denmark but moving to them from the current Irish levels would be decidedly ‘unfair’.

    Of course, extra tax revenue can be raised in a huge number of ways and does not have to follow any particular model. The point is though that countries that raise more tax revenue than Ireland largely do it by levying much higher levels of taxation on low and middle incomes than we do here.

    Reply
  3. bossbutteringbee

    This discussion of tax seems a bit blinkered to me.- Jeremy Taxman has it right. The comparative tax take figures dont mean a lot in isolation without considering the effect of charges for services which citizens must pay in lieu of tax. The costs of childcare, schooling, third level education, health treatments and emergency services are levied directly on service users in Ireland and the UK to a greater extent than most other EU countries, while the polluted Irish GDP and GNP figures make use of those metrics to normalise personal tax take figures fallatious.
    The points about the Irish enterprise ‘business model’ are very serious and should be creating a great deal of concern. We need to drop the delusional ‘knowledge economy’ stuff and face up to the countries strategic options before we befall a fate similar to Cyprus. In my opinion it is time to seriously grapple with industrialising Ireland and shifting over a couple of decades to a BM based on exports of light engineered goods, third level training of international students, high value food products and professional services.

    Reply
  4. Pingback: Ireland can’t indefinitely have it both ways on MNC tax | Brian M. Lucey

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