Do They Know What They're Talking About? The Recession Diaries - September 7th

As we head into ‘budget season’ we’ll get a lot of nonsense. One of the biggest is that we must extend the ‘tax system’ to those who don’t pay any tax (one Minister described this situation with outrage: ‘50pc of people are not paying a bob of tax. That is not sustainable’). No, the commentators pumping out this line are not talking about the high-income earners who pay as little as 4 percent income tax on their earnings. They are referring to the low-paid – those whose income are so low they are exempt from income tax.

Interesting how the phrase ‘pays no income tax’ slides easily into the phrase ‘pays no tax’. This compounds the ignorance of the Irish tax structure. Let’s set one record straight.

Ireland relies disproportionately on indirect taxation. It always has. In 2000 indirect taxes made up 43 percent of all tax revenue; in 2008 it made up 42 percent. Given that indirect taxation is more regressive than almost any tax, we should find the Irish taxation system more regressive.

It is difficult to measure the impact of indirect taxation on different income groups. Unlike tax or social insurance, it is hidden. We may know how much tax we pay out of our pay packet, we have don’t know how much VAT or excise we pay.

A new paper published in the Journal of Policy Analysis and Management puts some new light on this issue. They compare the impact of indirect taxation on different income groups in five countries – Belgium, UK, Greece, Hungary and Ireland. Their findings are provocative but not unsurprising.

As can be seen, in all countries the poorest 10 percent pay a far higher percentage on indirect tax than either the national average or the highest 10 percent income group. What’s noteworthy is that the gap between the lowest and highest is greater in Ireland and Greece. This is consistent with the findings of the ESRI and Combat Poverty Agency for Ireland.

The paper goes further – combining all taxes (with the exception of social insurance contributions). What do we find?

We find what I have extrapolated in the past (using EU – SILC data): that the top decile pays a higher average tax rate – but not that much higher than the national average (the gap is the lowest of all countries in the study) and not disproportionately more than those on low incomes. Compare with Belgium where there is much greater progressivity in the tax system.

Though this study was published this year, as part of a microsimulation model of assessing the impact of tax changes in the system, the data they have to rely lags considerably – particularly in the case of Ireland, where the data comes from 2000. This is the problem with so much data – to get at the numbers below the headlines means waiting a long time.

I would suggest, however, that though this data lags, it’s still relevant.

First, as pointed out above, Ireland has always relied disproportionately on indirect taxes. So it is doubtful that the regressive edge has been taken off of low incomes.

Second, high income groups have benefited in the pre-recession years from the reduction in income tax. According to the Revenue Commissioners, in 2000, income earners with over €150,000 paid an average income tax rate of 33.4 percent; by 2008 this had fallen to 29.7 percent. Given that increases in income are likely to result in a decline in the percentage paid on indirect taxation, we could find that the average tax rate had fallen considerably by 2008 for the top 10 percent.

So, today, with the increase in levies, we may find the situation settling back into 2000 levels.

All this to say that any argument premised on the completely mistaken presumption that the low-paid, and low income groups generally, do not pay tax is flawed from the outset. Given that they pay tax (at least 20 percent of their gross income, if not more) the argument must turn on the following.

If you increase taxes on those who have a high propensity to spend, how many businesses will close as a result of lost consumer spending?

How many more people will be made unemployed from the fall in disposable incomes and, so, consumption?

And, as a result, how much tax will be lost – and how much more unemployment benefits will we have to pay – from continuing to hammer domestic demand?

In short, do people who advanced this flawed argument know what they’re talking about?

Comments

[Jason]

Jason
An unrelated matter, but
Important none the less.

Mature students unfairly hit by changes to grant scheme

http://www.labour.ie/press/listing/128429725164710760.html