How can the Left argue the case for taxation to fund social and economic development and not get annihilated at the polls? That is the challenge posed by a recent commentator on this blog, Aidan. I suspect most progressives would rather try their hand at conquering inter-stellar space travel. That would be a snap compared to Aidan’s challenge. But there is little doubt that if the Left wants to be taken seriously it will have to address this. So I’m jumping in. However, before I embark on that let’s first lay out the facts in an objective manner. Hence the ‘1’ in the title. I’ll come to the ‘2’ in my next post – which will propose a way forward.
So, is Ireland a ‘high’ or ‘low’ tax country? Depends on the comparison. If you’re one of those Thatcherite ‘no-such-thing-as-society’, all taxation-is-robbery types, then any taxation, by definition, is too high. To get some grounding, there, let’s compare Ireland with its peer group (the other EU 15 economies), courtesy of the magisterial Taxation Trends in the European Union 2007 (for those who enjoy poring over hundreds of tax tables this is the report for you).
[NOTE: Almost all Irish economists use GNP as the defining measurement, since our GDP is skewered by the profit repatriation of multi-national companies. I’m dubious about this distinction. GDP is the measurement of total wealth created in an economy by employers, workers and the self-employed. If state policy outsources that process to multi-nationals it still doesn’t change the fact that we created all that wealth here. So I will use two measurements – GDP and GNI. The latter is a slight refinement of GNP as it is net of all EU transfers – this measurement is increasingly being used by our own statistical agencies.]
Even when using the more flattering GNI measurement, Ireland hovers at the bottom of the table, only fractionally ahead of much poorer Portugal.* What does this equate to? If Irish tax revenue were at the EU-15 average, we would be raising between €6.5 and €16.5 more per year, depending on which measurement you use. That’s a lot of hospital beds and free GP centres.
Let’s delve further and see which particular taxes are higher or lower than our peer group.
On personal income taxes we’re approaching the EU-norm – at least using the GNI figure.** Still, to get to the EU average we would have to raise approximately €1 billion more in GNI terms (or close to 2% on the standard rate of tax, or the equivalent on the higher rate).
What about VAT and indirect taxes? We hear a lot about high rates and how they contribute to high prices. Are we a league leader?
What about the corporate and business sectors? I addressed this issue previously and found that, despite our ridiculously low corporate tax rate, the amount of revenue we receive is actually higher than most other EU-15 countries (as a proportion of GDP and GNI).
So, if we combine income, VAT and corporate taxes, we actually find that Ireland is slightly above the EU-15 average, which seems curious given that we trail so far behind general taxation levels. So where is the problem?
Here is where Ireland really falls down. We are bottom of the EU-15 when it comes to social insurance (PRSI). And all sections – employees, employers and self-employed contributions – are equally below average. Using GNP, we would have to raise over €9.5 billion in PRSI just to get to the EU average. ** Given that in most other countries social insurance is the main delivery mechanism for social expenditure (e.g. Germany delivers over 2/3 of its social expenditure through social insurance), we can better appreciate why Ireland fails so miserably in terms of social protection expenditure, inequality and relative poverty.
Local government is another area where Ireland bottom-dwells. We trail the EU-15 average by over €6 billion. Of course, addressing local authority finance is a little more involved than just raising tax levels. The over-reliance on highly regressive service charges, combined with a lack of powers and democratic accountability. suggests that any attempt to raise local government taxation would have to be done in the context of overall local government reform.
In summary, Ireland falls well behind the other countries in the EU-15 in terms of tax revenue but the shortfall can be accounted for almost exclusively by two categories: social insurance and local government. This gives the debate over resources for social and economic modernisation a little more focus. That’s not to say there aren’t problems in other categories:
- In income tax we still have the problem of regressive tax expenditures and widespread tax avoidance. Further, there is the problem that taxpayers enter the higher tax bracket at far too low an income.
- Regarding VAT, a highly regressive tax, the problem that would confront any tax-reforming government is to ensure that lowering tax VAT rates would result in lower prices. When it was last tried in 2000 (when the standard VAT rate was reduced by 1%) there was little evidence that price reductions were passed on to the consumers. Rather, businesses pocketed the difference.
- In corporate and capital taxation, leaving aside the vexed question of increasing the corporate tax rate, there are still issues of diverting investment and activity away from unproductive sectors, namely property development (though whether such diverted money finds its way to enterprise development is another vexed question).
However, by focusing on social insurance and local government, we may find that the prospect of arguing for greater tax revenue might not be as difficult as we first imagined. And that issue I will address in the next post. But here’s one more little fact. How does Ireland compare with the EU-15 countries that rank in the top 5 of the World Economic Summit’s Global Competitiveness Index?
Yes, even in GNI terms Ireland would have to increase tax revenue by nearly €17 billion to reach the average of those EU countries that are ranked as the most competitive economies in the world: Sweden, Denmark and Finland. Now I wouldn’t be so audacious as to suggest that, if only we increase taxes we, too, would become as competitive. But please don’t suggest that a high tax economy is antithetical to a successful economy.
By the way, low-tax, low-spend Ireland ranks 21st. Most other EU-15 countries rank higher than us.
* I use EU-14 because I omit Ireland. No sense in comparing ourselves with ourselves – this is a comparison with other countries in the EU-15. It only changes the numbers fractionally. All figures are unweighted.
* * In compiling personal income tax and social insurance I have omitted Denmark since it effectively does not have a social insurance system and therefore receives much higher revenue through income tax.