Ireland has a tax problem.. If we were to collect tax at Greek levels, we would take in €8b extra. Greece,…Think about that for a little while and wonder how we could spend that on investment, debt paydown, and increased social services. The chart shows how much more we could raise in taxation if we were to levy tax at the rate of our compeers.
We don’t, really, as an economy pay as much as we should for the services we want. There, I said it. In 2012 we collected 28.7% of GDP in tax. The EU average is closer to 40%. Taxing at the EU average we could have nearly €18b more pa to deploy, taxing at Danish levels nearly €32b. The next time a politician says we dont have resources to prosecute white collar crime, to treat sick children decently, show them the graph here.
The last few weeks have been interesting from a tax front. We have seen the emergence of a new political party, the Social Democrats. The TD’s involved are talented, sensible people, who profess an admiration for the Nordic model of socio-economic management. We have seen the Central Bank outline its forecasts for the economy, with significant economic growth actually beginning to put us in danger of a procyclical fiscal situation. We have seen IBEC fulminate, their base state, at the notion that the minimum wage would rise. All these show how immature remains our conception of economic management and how poor
Take the Central bank. Its forecast for 2016 is rosy. GNP to grow by 3.8%, GDP by 4.2%, unemployment to drop, exports to rise. All round, it looks good. However, when one peers beneath we see a couple of issues. Fixed capital formation, investment, will rise but at a slower rate than 2015 which itself was at a slower rate than 2014. The composition of this will however be much more dominated by our old friend Construction, whose rate of increase is increasing, while investment in machinery and equipment is rising at a slower and slower pace. We are in other words creeping back to the construction led growth approach that has ruined the state. At the heart of the boa constructor that has strangled the economy is the lack of effective tax policy on, in particular, residential property and land. A land value tax with windfall provisions, plus a sensible property tax tied to local school and related, that would in the long-term act as an automatic stablizier for housing related activities. Instead faced with the predicted bulge in residential property tax bills consequent to the recovery in property prices, we have the government moving to cap property taxes. And we have no land value nor effective anti-hoarding taxes, resulting in brownfield development sites being underused in preference to new build greenfield. Nor do we have capital gains on the transfer of homes. In 2012 Ireland raised 1.4% of GDP in tax on property. Denmark raised 2.6%, Iceland 2.5% and on a GDP weighted basis Europe on average raised 2.3%. Rather than cutting taxes in a booming economy we should, at best, keep them steady, building up a reserve for the bad times that will come again.
When we look at water charges, what can be said about the petashambles that is Irish Water? Regardless of how we pay for water, we will have to pay. There are good reasons for a sensible water metering approach. And yet, the structure that has been put in place has resulted in Ireland paying the lowest water charges in Europe. This is the case when one looks at charges per 1000l or as a % of average income. Denmark has charges per 1000l which are 7x those here, the other Nordics 3x-4x here. There is a critical need to invest in the infrastructure, this is undoubted by all. We at present put approx. 1.3b pa into the system and that is not nearly enough. Either we continue to do this from general taxation and charge, or we increase general taxation to cover the need, or we cut spending on other areas to meet the need. There are, despite the wishes of the Social Democrats and others, no easy solutions.
Then we have IBEC. Run by economists who know the facts, they are a trade union, a lobby group, for employers. Like most lobby groups they rely more on polemic than analysis. Thus we saw dire predictions of rains of frogs and so forth were we to have a modest increase in the modest minimum wage. One way to remove IBEC from the lobbying scene would be to induce spontaneous human combustion in their members. This could be achieved by a spreadsheet, such as those produced annually by the OECD or the EU, on tax. We are fairly close to EU averages on the % of GDP collected in direct and indirect taxes. Where we fall woefully off the pace is in social insurance – PRSI- where we collect a fraction of our European peers. This is across the board – employees PRSI is 1.1% of GDP here versus 4% on average, the self employed 0.2% versus 1.5%, employers 3.1% versus 7%. These are facts, not ideological perspectives. Look at the chart, and see how we compare in terms of the tax we do raise.
When it comes to wages, we are also codding ourselves. The OECD provides a wonderful tool, on its Taxing Wages site, which allows comparison across a wide variety of conditions. Lets look at the tax burden. These charts display the total tax burden or ‘tax wedge’ on labour income. The tax wedge measures the difference between labour costs to the employer and the corresponding net take-home pay of the employee. It is calculated as % of total labour costs. When SF or AAA or PBP or any of the alphabet soup of the hard left start to talk about the massive burden on the lower paid, ask them
The reality is that we are not madly overtaxed, compared to our OECD peers and at any combination of income and family structure, For a single person it is only when one reaches 185% or so of average wages that the Irish earner is over the OECD average. Again, this fact will be lost in the auction to gain votes ; there is no constituency, political or social, to address the contradictions between wanting stuff and paying for stuff.
A complaint that is sure to be madeabout this analysis is that “oh, its on GDP”. Well, we are unique in the EU in our GNP usage. We have decided, partially via taxation, to have an economic structure which renders us different to the rest of our peers. There is nothing wrong with that whatsoever but we cannot plead both that we are undertaxed and overtaxed depending on who is doing the measuring when.
We cannot have Nordic style social provisions, in the broadest conception, unless we are willing to have Nordic or even EU style taxation. We are facing into an election where we will be told black (we pay low taxes by EU standards) is white (we are overtaxed) and that we can have our infrastructural and social cake while eating it. And we will believe the lies from our political classes, elect them and then blame them, not ourselves, when it all goes pear shaped.
An expanded version of an Irish Examiner Column