The High-Tax, Low-Tax Conundrum

It is commonly asserted by progressives that Ireland is a ‘low-tax’ regime.  Therefore, goes the argument, we should focus on tax increases rather than spending cuts – if we aspire to European level of public services and investment.  This doesn’t tell the full story, though.  Yes, government revenue is low by European standards.  However, Ireland is an average taxed economy.   The problem is that we are a woefully low-insured economy.  This should alert us to more sophisticated strategies in the run-up to this and subsequent budgets.  Let’s take a quick survey and see what lessons we might draw.  

Overview

In any comparison we come to the question of the benchmark.  Some use GDP whereas others prefer GNP.  This debate can become almost scholastic and I don’t propose to settle this here.  So let’s use another benchmark – tax revenue per person employed.  After all, income tax, PRSI, etc. is a function of how much those at work pay in taxes.  I’m not suggesting it is a superior measurement; just a different perspective.  We will use Eurostat’s Trends in Taxation which takes us up to 2010.  We will further use the EU-12 excluding Luxembourg, Greece and Portugal.  The small duchy produces outlier results as it contains a significant number of non-resident workers while the latter two are extremely poor in comparison with other EU-15 countries. 

  Overall, government tax and social insurance revenue is well below the EU core-average. 

Ireland would have to increase tax/social insurance revenue by 24 percent in 2010 – or €10.7 billion – to reach the average of the other countries.  Clearly this gives strong evidence for the ‘low-tax’ argument.  However, from here on in it gets more complex.

MAIN TAXES

Looking at the three main taxes – income tax, corporate tax and indirect taxes (VAT, excise, etc.) – we find that Ireland is actually an average-taxed country. 

(a)          Income Tax

Even more surprising is that Irish income tax revenue per employed is higher than the EU-12 average – 9.5 percent higher.

There are a number of caveats here.  First, while the Eurostat data shows lower Irish tax revenue, that’s because they assume that the Health Contribution Levy was part of the social insurance system.  However, it wasn’t – it was collected as part of the PRSI system but it was paid into the Exchequer (more specifically, the Department of Health), not the social insurance fund. I have adjusted for this.

In addition, I have excluded Denmark, which doesn’t have a social insurance system (and, so, has a substantially higher level of income tax revenue) and Sweden for similar reasons, as the data doesn’t show employee PRSI revenue. 

So, for income tax, while there may be distributional issues, Irish income tax is more than adequate in comparison with other EU countries.

(b)          Corporation Tax

Irish corporate tax revenue is also average. 

Again, this requires some explanation.  The reason Irish tax revenue from corporations is higher than its ultra-low tax rate might suggest, is that we are actually taxing profits created in other countries which have been ‘imported’ here via transfer pricing.  This more than flatters the Irish data.  If we could breakdown data for tax on profits actually produced here, we would be well down the league.  However, for the purposes of revenue, Ireland lives well enough on its ‘tax-flexible’ (some might say ‘tax-haven’) arrangements.

 (c)          Indirect Taxes

Again, with indirect taxes (VAT, excise, etc.), Ireland is close to the average. 

Irish indirect taxation would have to rise by approximately 5 percent to reach the average of the other EU countries.  The increase in VAT in the last budget will have brought us closer to the EU average, though the continuing fall in consumer spending will probably mean we are still slightly below average this year.

So, if Ireland – whatever the caveats – is broadly average in terms of the main taxes, why does it fall down so badly when compared with the total revenue of other countries?

SOCIAL INSURANCE

By any standard, Ireland has an anaemic social insurance system.  We don’t have a universal health system or income-related benefits (unemployment, disability, pension, etc.).  Our degraded level of public services and social protection is directly related to our low levels of social insurance.

We would have to more than double (132 percent) social insurance revenue just to reach the average of other EU core countries.  We’d have to treble revenue to reach French levels.  This gap, were it closed, would bring Ireland's total tax/social insurance system up to EU averages.  Below we go through the main elements of the social insurance system.

(a)          Employers’ Social Insurance

Employers not only benefit from ultra-low corporate tax rates, they also benefit from extremely low PRSI rates.  This results in a major gap between Irish and average EU levels.

We can better understand this when comparing basic employers’ social insurance rates:

• Ireland:  10.75 percent
• Austria:  21.6 percent
• Belgium 34.5 percent
• Finland: 23 percent
• France:  40 percent (on the first €100,000)
• Italy:  32 percent (on the first €90,000)
• Sweden:  31.4 percent

If anything, Ireland has been going backward – with the temporary reduction in the low-rate of employers’ PRSI last year.

(b)          Employee and Self-employed PRSI

The gap between the EU-12 average and Ireland is even wider when we come to employee and self-employed social insurance.

We would have to more than treble PRSI contributions from the combined employee/self-employees just to reach the EU-12 average (in this calculation I have excluded Denmark and Sweden since they do not have PRSI contributions for employees and self-employed).

Again, we can see why when we consider the contribution rates.  In most of the EU-12 countries, rates for employees are in double digits, though some have an earnings ceiling.  This compares to our rate of 4 percent.  Self-employed rates are pitifully low here in comparison. 

* * *

Tax revenue is not the problem in terms of European comparisons.  In the three main taxes – income tax, corporate tax and indirect tax – Ireland and the EU-12 average are approximately the same:  €19,400 per Irish employed compared to €19,200 per the employed in other EU-12 countries.  This is not to suggest there aren’t problems within the tax system; but in terms of revenue gathering, Ireland is average by EU standards.

Where we fall down is in social insurance.  Were we to increase social insurance revenue to EU-12 averages, we’d raise €9.5 billion.  But if we see social insurance as merely another mechanism to raise revenue, we can just increase taxes.

For social insurance is not a tax – it is the collective consumption of goods and services; public goods and services.  It is (a)  a contract – whereby an individual pays a percentage of income in return for access to income supports, health care, etc. (just like insurance);  and (b) a social wage, whereby the employers contribution provides workers with access to goods and services (e.g. pay-related sickness benefit, unemployment benefit, pension, etc.). 

For Ireland it would be a transformation in the way we deliver public services, social protection, and income support.  What we currently pay for individually (GP care) we would, under an expanded social insurance system, pay for collectively – though social insurance contributions, thus receiving the GP care  for free or at greatly subsidised rates.

Further, it would involve a significant transfer of expenditure from the Exchequer to the Social Insurance Fund.  Prior to the recession, 35 percent of all government expenditure in the Eurozone came through social insurance funds; in Ireland, the figure was 11 percent.  By transferring more expenditure functions (collective consumption) to social insurance, the pressure on Exchequer expenditure would be reduced. 

There is nothing to suggest that this government intends to move in this direction.  Even their universal health insurance proposal is not ‘social’ insurance as such – it is merely a mandatory requirement to purchase health insurance on the private market.  There is no contribution from employees/ self-employed through the PRSI system (which can be made progressive) or a contribution from employers.

All this can lead us to a new formulation:  the issue isn’t whether we are high-taxed or low-taxed.  After all, we are average-taxed.  What we need is a revolution in insuring society. 

Progressives can raise a new slogan:  ‘a moderate-taxed, high-insured’ economy.   

NOTE:  For a comprehensive survey of the Irish tax system, please see the Community Plantform's 'Paying Our Way'.

Comments

[Desmond O'Toole]

Excellent post, Michael, which underscores the "anaemic" state of our financial contributions to the public good in Ireland. Taken together with the absence of a credible level of local taxation on residential property it just reinforces the lack of funding available for sustainable, high quality public services in Ireland. You also write that there is no government "intention" to increase PRSI contributions, but it is worth noting the extensive media and political commentary in response to Joan Burton's paper to the Tom Johnson Summer School in which she pointed out the growing deficit in the social insurance fund and the lamentable level of social insurance contributions made by BOTH employers and workers to that fund. As I've said elsewhere, if we want European levels of public services we need to pay European levels of tax (inc. higher social insurance and a progressive property tax).

[Michael Taft]

Desmond - thanks for that. I'm aware of the Minister's intervention. However, my fear is that if increasing social insurance contributions (at least on workers) is just a fiscal adjustment measure to overcome the Social Insurance Fund deficit, then it will only be viewed as another 'tax'. Admittedly, the options open to the Minister and the Government are becoming more and more limited (that is what four years of mindless austerity will do). That is why there is a need to roll-out a long-term vision of where we want to be in, say, 10 years. To my mind, social insurance is key - at least for those who desire a progressive European system.

[de Charette]

Michael, you rightly point out that social insurance contributions are well below the European average.

However the most glaring anomaly in the system seems to have completely escaped your notice.

That would be the hundreds of thousands of above-average earners would are either completely absolved of any PRSI liability, or else effectively have their liability paid for them by the state (by virtue of being placed on a higher salary scale than their exempt colleagues, in order to cover the difference in after-PRSI income).

Strange that you didn\\\'t find this bizarre situation worthy of any comment what-so-ever in a post bemoaning \\\"pitifully low\\\" insurance contributions (after all, one can\\\'t get much lower than zero).

[Michael Taft]

de Charette - thanks for that. Can you please be more specific about what group you are talking about - the hundreds of thousands that are absolved of any PRSI liability? Thanks.

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[de Charette]

Michael, is that a trick question?

Surely youre aware of the PRSI arrangements for public servants?

Specifically that higher pay scales for the same work are applied to post-April 1995 entrants, with the effect that the state pays the PRSI contribution on their behalf?

[Ciaran]

I agree with 'de Charette' - let's put these public servants on the higher scale and get them paying PRSI like the rest.

[de Charette]

Ciaran, why not just go the whole hog and award all state employees another pay rise to cover their USC and household charge liabilities?

Obviously youve missed the point of taxes being to raise *actual* funds to run the state, as opposed to window-dressing in order to give the appearance that a tax is being paid, though at no net cost to the supposed tax-payer.

[Mathew]

And what do we do about all this? Post blogs, sit in the pubs (if we can afford it) Bitch and complain but as usual don't get off our asses and actually fight back and let the Gov know we have had enough! I am 71 and I no longer live I simply exist! If I was 20 year younger I would be out there doing something about it. My ancestors stood up against injustice, and NO I am not saying to do it in the same manner but civil disobedience and protests could force this so call gov that is supposed to be working in our best interest that seems to have forgotten they work for us and as such can been sacked. And who says we cannot have another election if we want? When a government lies and taxes its people into poverty (Taxation without representation)we have a duty and right to kick them out or are we still living in the dark ages? When they make promises to get elected and do not keep them( within reason) then they he/she should be removed without a pension or only a partial pension depending on what they have or haven't done. They mean test us with no hesitation and have productivity reports on us, why should they be any different? We may end up with less politicians but at least the ones that would be there would do their job and know what the consequences would be if they did not. I am sick to death of hearing words and more words, my family is spread all over the world, I have one meal a day and consider myself lucky to have that. keep daily track of my electrical usage and keep the heat at a minimum. If it wasn't for my family sending me money from abroad I would have nothing. What the hell happened to the Irish? Have we all turned into sheep being lead to the the slaughter? Where is the honor and dignitary we once had? Do I sound bitter? you are right I am! Most if not all of us worked our whole lives, payed our taxes and looked forward to the day we could relax with a modest income in our old age,that has been taken from us through cuts, taxes. and of course that famous word 'levies' which they impose on us however and when ever they fee like it. Its seems perfectly acceptable for the government to have our children have to leave the country to survive and help the ones left behind or as that (I can't put in print what I would like to call him) the TD that said they made a 'career choice' There I have said my piece, you may not like it or print it, I am at the point I could care less but at least I said it and feel better by doing it. If we do nothing then we deserve what we get!

[Andy]

Ireland is an average taxed economy yet so progressive.