We as a polity are not big on evidence based policy. We rather form an opinion, then seek evidence for it, or better yet stay silent. This leads to suboptimal decision making, to put it mildly. The emergent debate on tax shows this in spades.
A big plank of the government plan to win reelection is to cut tax. Time and again we are told that we are a high taxed economy, that the tax burden is driving people out and preventing people from coming in, that the tax burden is crushing, etc. Much of the debate revolves crudely around the rates and incidence of personal taxation – there is an emerging shibollethic consensus that an all in marginal rate of less than 50% is the sign of a modern economy, with the unspoken assumption that rates above that are the mark of godless communism. Presumably in the USA of Eisenhower when the top marginal tax rate was 90% (admittedly on a very high threshold) this was a dystopian hell. Or, not.
Much of this is crude populism at its worst. Modern nations require state services. Modern societies demand them. What mature modern societies realise is that to have these requires someone pay for them. Having tried over the decades to pay for them on the cheap (by outsourcing such fripperies as education and health to the charitable instincts of the churches) or on the never never (by borrowing from foreigners who, unreasonable divils that they are want the money back) we might now perhaps have realised that only WE can pay for these things. And that requires tax. Its not even as though we are overendowed with government spending. Again, the casual listener to the radio might imagine that the economy is like Cuba or North Korea. In reality we have a modest enough government sector. As a percentage of GDP in 2013 Irish general government spending was equivalent to 40.5% of GDP.
GDP is the correct measure. We have decided on a national policy to have a GDP/GNP mismatch unheard of elsewhere. That is our problem. The world over uses GDP as the measure of national income. They are not out of step with us. We are with them. The chart below shows the variability of the GNP/GDP ratio over time. Look at Ireland. Look at the nations with whom we share the distinction of highest variability in this ratio…. The best little country in which to not have a clue what the economy is doing.
So, back to Big Brother. The 40.5% in Ireland in 2013 compared to an EU28 average of 48.6%. In 2006 it was 34% against an EU28 average of 45%. The United States figure is 40%. Much of the increase in spending is down to social welfare and recession related spending plus the use of government spending as a quasi-counter cyclical balance to plummeting private sector spending. We are the fifth lowest in the EU in terms of the size of government. Strike one myth. We do not live in the belly of Leviathan.
A glance at the tax structure also suggests that we are not an especially burdened state. And a glance at the taxation of wages suggests that the incidence of tax on wages is not especially unusual. Not that mere evidence will stop a nation with a debt/GDP ratio north of 100% from deciding that reducing potential state revenue is a good thing. Inverting Charlie McCreevy, we apparently have decided that “when we dont have it we wont get it but will spend it anyhow”.
Take first the overall incidence of taxation. The 2014 Eurostat taxation database makes this abundantly clear. We rank 23rd of the 28 for total tax as a % GDP. If in 2012 we had taxed GDP at the European average we would have taken in 12b or some 25% more tax than we did. Imagine what we could have done with that…The next time a politician comes to your door ask them what we would do with a 25% increase in total tax revenue. Watch their eyes glitter and their lips quiver at the scent of pork. Taxing at the level of that awful place Denmark we would have taken in a whopping 30b more tax. Examining the tax structure we see why we have low tax. As a % of GDP we rank amongst the lowest for indirect tax take (yes, VAT…) and social insurance contributions. The result is that the burden of tax take has to fall on wages and corporate incomes.
This is where the problem lies. We collect, proportionally, much less tax than our European partners (from whom we have borrowed and to whom we give the poor mouth) but we get much of what we do collect from people’s wages. And herein lies the rub. Our levels rates and incidences of personal wage taxation are also out of line with our perception. To listen to the political classes we would imagine that we paid unusually high percentages of tax, and that these came at us at unusually low wage levels.
While the Eurostat data gives us the overall tax picture the OECD gives us the wage tax burden. Across the board, whether we look at a single person on the average wage or a family both earning at and above the average wage, across the gamut we have a lower tax wedge than the OECD average. The tax wedge is the difference between gross pay and takehome pay as a % of total cost. Here it is lower. And it has been lower for decades. Simply, we take home more than the typical oecd worker, regardless of our family and wage structure, and this has been the case for years. It is only when we get to levels of 175% or so of average wages that the Irish tax wedge even begins to get to average OECD levels. Compared to the typical oecd worker we do not pay high tax rates at low wage levels. Even at the highest level, 250% of average wages we do not compare badly. The average tax wedge for single persons in Ireland at that level is 39% while for the OECD as an average it is 42%; for a single earner family with two children at 250% of average wages the percentages are 37% and 39%. Again there is a key issue here – we have a higher marginal tax wedge at high levels. That is down again to the low level of social insurance contributions taken.
This is not new. We have been below the OECD average for a long while. With cold reflection it is a wonder we were not given the door when we went looking for help from Europe.
We have chosen a low tax policy while fooling ourselves that we have the opposite. And we are continuing to fool ourselves. We need to stop. We need to consider replacing the dreary strains of Amhrán na bhFiann with this
A longer version of an Irish Examiner column.