In this weeks blog Dr. Tom McDonnell, NERI Co-director explores some of the key findings from his NERI InBrief 'How heavy is the weight of tax in the Republic of Ireland - Some high-level facts'.
Does tax bite particularly hard in Ireland? It depends.
In the latest NERI InBrief I set out some high level facts about overall tax yields in 2019 in Ireland and in the EU relative to the size of the various economies and their tax bases.
Overall, Irish government revenue from taxes and social contributions is lower than the EU average as a proportion of output (GNI* basis). Revenues from consumption and capital are above the EU average, whereas revenues from labour are below the EU average.
The relatively high yield from capital is explained by Ireland’s extremely high receipts from the income of corporations, whereas revenues from other capital sources such as stocks of capital and especially incomes of the self-employed are below the EU average. The relative ‘under-taxation’ of labour income is explained by the low yield from employer social contributions. The implicit tax rate on employer contributions is just 54% of the average for the EU as a whole.
Consumption
Ireland’s revenue yield from consumption taxes (mainly VAT and Excises) is marginally above the EU27 average. Consumption taxes are generally regressive when considered in isolation unless they are targeted at luxury goods and services. Even so, their net impact can contribute to an overall reduction in income inequality and poverty to the extent that such revenues contribute to funding social transfers and basic services. For example, the Nordic economies of Denmark, Sweden, Finland, Iceland and Norway all have high taxes on consumption but generally low levels of income inequality.
The implicit tax rate (ITR) is the tax yield divided by the tax base. We can think of it as an economy-wide average effective tax rate on a particular type of economic activity (e.g. consumption, income from labour, or income from capital). Ireland has a relatively high ITR on consumption of 19.4%. The EU27 average was 17.4% in 2019.
Capital
Ostensibly, Ireland’s yield from capital taxes (e.g. taxes such as corporation tax and local property tax) is high relative to the EU average. This is a function of the relatively large proportion of income accruing to capital within the economy, and the commensurately elevated receipts from corporation tax. On a percentage of output basis corporation tax receipts were €4 billion in excess of the EU average. It is unclear whether this high level of yield is sustainable over the long-term. In contrast, the level of tax on income from self-employment and the level of tax on stocks of capital are both lower than the EU average when measured on a percentage of output basis.
Labour
As it happens, Ireland’s low overall revenue yield relative to the EU average is an outcome of the ‘under-taxation’ of labour income (income tax and social security contributions). This under-taxation of labour as a percentage of economic output amounts to €10 billion. If we decompose labour taxation into its various bases we find that tax revenue from employees exceeds the EU average, whereas employers are ‘under-taxed’, on a percentage of output basis, by €8.3 billion.
Finally, Ireland’s ITR on labour income, at 33.5%, is below the EU average of 38.1%. The ITR paid by employees in Ireland, at 24.3%, actually exceeds the EU average of 21.1%. Instead, we can see that Ireland’s low overall ITR on labour arises because employer contributions in Ireland have an ITR off just 9.2% compared to 17% for the EU as a whole.