First, nearly half of all tax revenue comes from indirect taxation – VAT, excise, etc. In 2010, 47 percent of all our tax revenue will come from these sources. Ireland is somewhat unique in the EU for its over-reliance on indirect taxation. In 2008, the latest data year, indirect taxes made up 34 percent of all taxation in other EU-15 countries; in Ireland it made up over 42 percent.
Second, indirect taxes are highly regressive. The ESRI-Combat Poverty Agency found that households on the lowest incomes – the poorest 10 percent – paid over 20 percent of their gross income (social welfare, work income, etc.) on indirect taxation. Households on the highest income – the top 10 percent – paid 9.6 percent. While this data is somewhat dated, the proportions are still relevant; after all, taxes on consumption are regressive throughout the EU and the US.
Let’s pause here for a moment. In our biggest tax revenue stream old age pensioners living alone, lone parents, the unemployed and disabled, casual workers, part-time minimum wage workers pay more than twice the tax ratio as those on the highest income. Hmmm. And yet, we have commentators urging the Government to take the ‘bold, courageous’ decision – and bring the low-paid into the tax net. Hmmm.
But it gets more weird and creepy. A Department of Finance survey found in 2007 that of high-income taxpayers earning up to €500,000:
- One-fifth paid less than 5 percent of their income in income tax
- Over a third paid less than 10 percent
This tax avoidance is due to the proliferation of tax breaks. We have to be cautious about putting two different studies together (different methodologies, different source data, etc.). However, if only as an exercise, let's combine the ESRI-Combat Poverty Agency study with the Finance survey, We still find that that the poorest in society pay a higher tax ratio than many making hundreds of thousands of Euros a year. The Government tightened up slightly the ability to avoid tax in the last budget but it will be interesting to see what numbers the next tax survey produces (even so, none of this includes income streams which are exempt such as income from woodlands profits, artists, etc.).
The issue therefore, would seem obvious: how can we bring the highest income earners into the tax net, how can we increase the tax ratios of high income groups above that of the unemployed and the low-paid.
Then there is the economic ignorance of arguing for hitting low income earners – whether that hit comes via increased taxation or reduction in income supports. What happens when you hit such groups? You reduce consumer spending which in turn reduces tax revenue, hits domestic business which in turn reduces payrolls (either laying off staff, cutting hours, cutting wages) which in turn cuts revenue even more while increasing unemployment costs.
Of course, our economic ignoarti don’t get this simple ‘1-1-1 = -1’ equation. They keep shouting for more courage, more boldness, more ‘tough-love’ policies - without the love, of course. And when consumer demand falls by more than 10 times the Eurozone rate, when tax revenue collapses, when employment keeps falling – what is their response? Hole-shovel-dig-more.
So are such policy demands based on misinformation, laziness (looking up facts to back-up one’s argument can be such a drag) or plain ideology? Is there a connection between the demands to ‘bring the low-paid into the tax net’ and the warning that ‘if we tax high-income groups too much they’ll (a) leave the country, (b) go on an investment strike, (c) have a hissy fit, etc.’?
I’ll leave that to you. Whatever the reasons, the demand to increase taxation on the low-paid is a recipe for further bleeding the economy of demand – a low-growth, high-debt future in which unemployment will remain high, poverty will grow and the proceeds of any minimal growth will be concentrated among high income earners.
It’s time we got a bit angry about all this.