We know what one of the big battles will be in 2014. Ministers are making declarations. Demands are being made. Analysis (after a fashion) is being put forward. Its tax cuts. Daily we are being fattened up for tax cuts.
Let’s cut to the chase. Wages will be depressed as part of the ‘wage-competitiveness’ strategy. To compensate for this, taxes will be cut to give some increase in disposable income (take-home pay). And with tax cuts, public spending will also be cut – public services, social protection, investment. If this sounds familiar – tax cuts in compensation for low wage rises - that’s because it is; back to the future with a low-tax, low-spend, low-resourced economy. If nothing is learned, nothing changes.
To clear the ground for this it has to be shown that Irish public spending his high. We had this last week with a highly misleading analysis. Now we have, courtesy of Chris Johns in the Irish Times, an article with the sub-heading: ‘Evidence does not support view Ireland is low tax economy’, Johns makes some incredible statements:
‘The data on international income tax comparisons do paint a very clear picture: we are at, or very close to, the top of the league tables in terms of effective tax rates . . . those who do pay tax and social insurance in Ireland shoulder a disproportionate burden, at least compared with other countries . . . if you are paying income taxes as well as PRSI and USC, you are amongst the hardest hit in terms of EU and OECD tax league tables.’
It would be nice if Johns put forward some evidence for this but, alas, that is missing. He only refers to the fact that there are a lot of people who don’t pay income tax. Therefore, he assumes that those who do are high-taxed. This is pretty thin (and that’s putting it mildly).
Fortunately, we have some evidence – and, surprise, it doesn’t support the ‘low-tax’ argument.
First, let’s look at the overall ‘effective’ tax rate. This measures how much tax (income tax and social insurance; in Ireland this would include USC) is actually paid out of wages. Therefore, this excludes the self-employed. What does it tell us?
Ireland is right down there at the bottom end – even below Greece which is supposed to be incapable of collecting taxes (but higher than France? See below). We would have to increase the total tax/social insurance take by over 30 percent, or €4.1 billion. That looks pretty low-tax to me.
When we look at total taxation on labour we really fall well behind other European countries. The following includes not only taxes and social insurance paid by employees, but social insurance paid by employers as well.
When we factor in employers’ PRSI Ireland falls to rock bottom. We’d have to increase total tax and employees’/employers’ PRSI by over 50 percent just to reach the average of other EU-15 countries – a massive €9.7 billion. That looks really low-tax to me (and in France, employers pay 29 percent PRSI - most of the taxes on labour; that’s why the employees’ tax rate is so low).
A counter-argument that some might use is ‘yes, the overall is low, but because so many are exempt from tax, this means the tax take is particularly onerous on those who do pay tax.’ That’s where Johns' argument comes in – that if you pay tax, it’s particularly high. The implication is that if more people were brought into the tax net, then we could reduce the level of taxation for all the others.
Well, let’s play this game, courtesy of the Revenue Commissioners estimated 2013 tax distribution table supplied in a Parliamentary Question. Income earners between €10,000 and €20,000 (and this includes couples counted as one tax unit) had an average income of €15,200 and an average tax bill of €120, or 0.7 percent of income (I’m going to assume that Johns is not arguing to tax those below €10,000).
- If the average tax bill of these low-income earners were increased to 5 percent (up from 0.7 percent), the total amount of tax raised would be €259 million.
- If that extra tax revenue were used to reduce the average tax rate of all other taxpayers, the average tax bill would fall by 0.4 percent of income, or about €2.80 per week.
It’s not much of a gain. If the entire proceeds went into reducing the standard rate tax band, it would only fund a half a percent reduction in the standard tax rate.
So there’s not much in the argument that ‘those who pay tax are overly-burdened because there’s a lot of people who don’t pay tax’. But what about the international comparisons? After all, Johns says Irish tax/social insurance levels are one of the highest in the EU-15.
We can turn to the OECD Benefit and Wages database and compare tax levels by various income levels. Let’s take the average Irish wage for a single person - €36,000. This is a particularly useful comparison because this earner would be hit by the top rate of tax – and it appears that the Government is preparing to increase the standard rate threshold. The reason offered is that we have one of the lowest high-tax rate thresholds – meaning that workers enter the top rate at a lower income level than almost anywhere else. So how does this comparison stand?
First, let’s point out one major caveat. The above table, taken from the OECD, refers to headline rates. It doesn’t factor in tax reliefs which can reduce the actual tax rate. For instance, it doesn’t factor in relief for mortgages, pensions, insurance, children, etc. So we don’t know what the effective tax rate is for other countries.
But the headline rates above are strongly indicative. And Ireland is once again at the bottom of the table (Portugal and Greece are excluded because €36,000 would be considered a very high income). At a headline level – just factoring in tax credits, tax rates and tax bands – the average income earner in Ireland would see their tax rate rise by 44 percent to reach the average of the other EU countries.
So while some commentators focus on the entry rate into the higher rate of tax – which is low – they ignore the fact that the overall tax rate itself is very low. And yet they demand more tax cuts.
This is going to be a terrible debate. All sorts of numbers and misdirection will be thrown about. What do people need? They need a pay rise, they need affordable childcare and truly free education (in other countries schoolbooks and transport are free), they need free GP care and heavily subsidised medicine, they need proper pensions with guaranteed incomes in retirement, they need higher social protection payments if they become temporarily unemployed, sick or pregnant (and partners of pregnant women need paid paternity care), they need cheaper public transport and low-cost, high quality rental accommodation.
There are so many things that people need to improve their living standards, their life-chances, and social security.
But the only thing on offer will be tax cuts.
Like I said, a terrible debate.