IBEC has published a paper entitled ‘Debunking Irish income tax myths’. At its core it contains misleading, highly selective and ultimately disingenuous arguments. In short, it is bunk. Let’s go through one of their main arguments and see where they are misinforming the debate.
1. Personal Taxation – It is Lower than the EU Average
IBEC puts forward two graphs (Figures 2 and 3) to show that Irish personal taxation is much higher than in the EU-27. This is an audacious presentation. They use data selectively and exclude large parts of personal taxation.
(a) Using GDP and GNP
IBEC produced the following calculations.
According to IBEC, this proves that Irish personal taxation is higher than the average of the EU. They further claim, that on these numbers, Irish ‘taxpayers’ are paying €3 billion more than the EU average on a proportional basis. The problem is that they are not comparing ‘personal taxation’; they are comparing income tax.
They exclude a large portion of personal taxation; namely, social insurance or PRSI. In almost all other European countries, PRSI plays a much greater role than income tax. In the EU, PRSI makes up 37 percent of total personal taxation; in Ireland, it makes up only 12 percent. In seven countries, revenue from PRSI is higher than revenue from income tax. In the Netherlands, income tax raises €46 billion; social insurance, however, raises €63 billion.
Not only did IBEC ‘mould’ the data around the conclusions they wanted, they also mixed the measurements to suit their argument. When comparing GDP, they used an ‘arithmetic’ average for the EU. However, when using GNP, they used a ‘weighted’ average. The difference is that in the former, you average the individual percentage of each country; in the latter you add up all countries together and calculate the average. It allows IBEC to claim that income tax makes up 7.8 percent of GDP (arithmetic) whereas using the weighted measurement gives a figure of 9.4 percent.
Here’s the actual data – using the weighted average. All comparative data below is from Eurostat's Taxation Trends in the European Union 2014.
On all these measurements, Ireland is well below average. On GDP we’re below, but we know that much of our GDP is multi-national froth. Using the Fiscal Council’s hybrid-GDP (which compromises between GDP and GNP), we’re still below average. Even when using GNI which is essentially GNP, we remain below, though less so.
If we use adjusted GDP we’d have to pay €3.6 billion more in personal taxation – income tax and PRSI combined. However, this isn’t the best measurement.
(b) A More Robust Measurement
There’s a problem in using GDP and GNP. If, after years of recession and austerity, GDP and GNP are depressed, then you will probably not be comparing like-with-like with countries that didn’t have such an experience (or not in the degree we had).
There is a better measurement: the effective personal taxation rate. This is the total amount of personal taxation revenue as a percentage of total wages and salaries. The following is for employees (measuring the tax rate for self-employed is difficult as the data on self-employed income is limited) though it covers 83 percent of all those in work.
The effective Irish personal tax rate is about mid-table – below the EU average. PAYE workers would have to pay more than €1.9 billion more to reach the EU average. However, coming off a recession, it’s not a bad outcome. It shows that workers are carrying their weight. As we will see below, the same cannot be said for employers.
Are Social Insurance Comparisons Meaningless?
IBEC would counter this by claiming you shouldn’t compare social insurance across countries.
‘ . . international comparisons involving social insurance are next to meaningless.’
I have to hand it to IBEC – that is an argument I’ve never heard before. First, social insurance is a mandatory payment based on your income – just like income tax. You could have a system which is biased towards income tax (like ours) or a system that is biased toward social insurance (like the Netherlands) – at the end of the day it doesn’t matter; you still pay both taxes. That’s why it is part of personal taxation.
Second, they claim that such comparisons are meaningless because in some countries you get additional services and income supports that you don’t get here. Well, yes, that’s exactly the point. For instance, in other EU countries workers get free health care, free GP care, heavily subsidised prescription medicine, pay-related unemployment benefits, pay-related sickness benefits, pay-related state pensions, stronger maternity benefits and paid paternity benefits, etc. They get a range of services and income supports that promote living standards – especially for those on low incomes who can’t afford to obtain many of these services on the private market (e.g. GP care, prescription medicine, etc.).
If social insurance is low, then the benefits you will receive will be low. Just like taxation. IBEC compares Irish social insurance contributions with those of the UK, where they are higher:
‘Social contributions in the UK, however, fund the NHS system; as a result less than 10% of adults in the UK have private health insurance. In Ireland social contributions are marginally lower but 45% of the adult population have private medical insurance meaning the cost is eventually borne by companies and households elsewhere in the system and the cost to an employee is effectively the same. These kinds of anomalies exist throughout the social insurance system in Europe and mean that international comparisons involving social insurance are next to meaningless.’
Here’s the problem.
- We have a two-tier health system where having private insurance bumps you up the queue; in the UK’s NHS everyone is treated on the basis of need.
- In the UK, primary care costs are far, far lower (GP care, prescription medicines); these are not covered by basic private insurance in Ireland.
- While 45 percent have private health insurance, 55 percent don’t. They don’t get the benefit of queue-jumping.
- And – and this is a big one – in the UK, you pay according to your income; in Ireland, you pay a flat market rate which means that buying a basic health insurance package (e.g. €700) may cost you a lot, as a proportion of your income, if you are low-paid but far, far less if you have a higher income.
Social insurance can provide greater services on a more egalitarian basis (since everyone pays) – and do so by ensuring that you pay according to your means.
That’s the comparison which IBEC claims is meaningless.
What IBEC Doesn’t Want you to Know – the ultra-low-tax on Employers
IBEC bangs the tax-cutting drum because they want to keep out of the debate the fact that employers and businesses (their members) pay ultra-low tax rates compared to other EU countries.
Irish employers pay the lowest rate of social insurance in the EU – only ahead of Denmark which doesn’t have a social insurance system. Employers’ PRSI would have to nearly treble to reach the EU-average – or an extra €8 billion. Now you know why we don’t have the public services and income supports that other countries have.
In fact, in the EU more revenue is collected from employers PRSI than from employees’ income tax. In Ireland, however, employees’ income tax raises more than twice as much as employers’ PRSI.
This is why IBEC is keen to exclude social insurance – because if the spotlight was turned on this social solidarity payment we’d find a profound lack of both social and solidarity.
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IBEC uses data selectively and, in so doing, misleads the debate. They don’t want any focus on the low levels of social contributions that employers make. While workers are carrying their weight compared to workers in other countries, Irish employers contribute very little.
That’s the real story behind a document that purports to debunk myths but actually perpetuates