Overcrowded A&E, lack of nursing home places, seasonal factors, under-investment in community health, emergencies in public mental health services, large classes, limited public childcare supports, limited public transport, rural areas under pressure, homelessness growing visibly on the streets every night, a direct provision system that will be the subject of high-level apologies in the 2040s…Might there be a link to the taxes we pay (or don’t pay?). Yes, a lot of tax revenue is going to pay off public debts (including private debts that were nationalised). But that is only one part of the story.
Public services cost a little over 35% of GDP in the Republic of Ireland not counting the interest payments on public debt. That 35% comes from income taxes, social insurance, VAT, corporation tax and other taxes. We get what we pay for or don’t pay for. Of course, there is always scope for ‘getting more out the same or less’ in any organisation. But, there are limits to this in sectors such as education and health. Moreover, even if there were further efficiency gains of say 10% over a period of 10 years (and this would be challenging to achieve given economies already made) the fact stands that we have a low tax, low revenue economy. Income taxes – in the aggregate – are not noticeably out of line with other EU States. Add to this the pressures of an ageing population over coming decades as well as the inexorable rise in some medical equipment and treatments. However, social insurance paid by employees, employers and the self-employed is out of line.
Last week’s Monday Blog focussed on trends in income tax (including social insurance) paid by different types of households in the Republic of Ireland. This week, I extend the analysis to explore differences between ‘average’, ‘below average’ and ‘above average’ workers as well as to compare Ireland (the Republic of) with other EU countries. And just to add to the picture I include some English-speaking OECD countries where, it is suggested by some commentators, young Irish persons are emigrating because, among other factors, high taxes are driving them away from Ireland.
Really?
Let’s start with the OECD tax benefit modeller 
that I used last week and that is extended here to a range of household/taxpayer types. Starting with single persons on the average wage as calculated by OECD, Chart 1 shows that those on the average wage in the Republic of Ireland pay the lowest amount in taxes (including PRSI, USC and ‘ordinary’ income tax). Single persons on the average wage contribute 17.9% of their income on taxes. As pointed out last week, this does not include payment of VAT and excise duties (which as a percentage of income is higher for lower income households and individuals). Neither does it take into account the lower actual effective tax paid as a result of non-standard tax reliefs and exemptions (that is reliefs other than personal tax credits, PAYEE tax credit or tax reliefs for married or jointly assessed couples).
What is the situation in regard to the lower paid? Let’s take a single person on 67% of the average wage (the OECD modeller does not allow us to go lower than this threshold). Chart 2 shows that the Republic of Ireland leads the way in the lowest tax take (at 11.5% and, once again, including USC, PRSI and ‘ordinary’ tax).
What about relatively well-off tax-payers (those on 200% of the average wage)? See Chart 3. In this case, we are probably looking mainly at the top 10-15% of taxpayers. The estimated tax paid is 34.9%. Again, it must be emphasised that the actual tax paid is somewhat less than this due to various reliefs (and it is very likely that such reliefs benefit disproportionately those on higher incomes because of the interaction of tax liabilities on pension, health and property tax reliefs). Even allowing for the distortion introduced by tax reliefs (that is other than the usual credits for singles or couples) the broad picture remains the same – for high income earners the amount of income tax paid is not much above the average for other EU/OECD countries. It is well below what is paid by high-income individuals in Germany, Netherlands, Belgium, Denmark and Sweden
So much for comparisons based on single persons paying tax. What about couples? The Republic of Ireland is even more out of line. Taking a couple with a combined income equal to 167% of the average wage estimated tax paid is 25.5% in 2012 and is below the equivalent rate paid in Boston USA, Brisbane Australia and Belfast Northern Ireland (Chart 4).
The evidence becomes even more stark in the case of couples on a combined income of 67% of the average wage (Chart 5).
Finally, in the case of couples on 200% of the average wage the estimated tax paid is 32.7% (Chart 6)
Does all of this evidence argue for lower taxes on low-income or low-paid workers? No, for two reasons:
Everyone – regardless of circumstances – should, in principle, make some contribution to the ‘social wage’ (a modest levy or tax could be compensated for by a payment to bring incomes up to a living wage level)
It is not clear how a shortfall in tax revenue could be made up under other revenue headings (there are limits to which corporate incomes and upper income households can be taxed in a small open economy even though there is a case for the better off to pay more tax as suggested by Chart 6 above and is argued for in various editions of the NERI Quarterly Economic Observer since the summer of 2012).
Does the evidence argue for more taxes on low-income or low-paid workers? Probably not in the short to medium-term given the overriding need to restore living standards and boost domestic demand. How can a raising of living standards be achieved? Through a growth in quality employment and a recovery in wages with priority for those on low pay.
As pointed out in last week’s Blog, The Irish Social Contract involves low taxes, poor social wage and high wage inequality. Chart 7 illustrates the issue in regards to wage inequality which is very high in the Republic of Ireland. And has grown in the decade to 2012. The other side of the wage inequality coin is heavy lifting by the State through income taxes and social transfers to even out disposable income.
Source: OECD Employment Outlook
* Data for Ireland refer to 2003
So, in summary, Ireland is a low tax economy as measured by income tax payable by different households at different points in the income scale. At a more global level the Republic of Ireland is distinguished as having, at 34.8%, the third lowest overall government revenue take as a percentage of GDP (Chart 8)
Source: Eurostat Online Database gov_10a_main
Yes but …..I hear someone objecting: ‘what about GNP’. If total Government revenue is divided by GNP in 2013 the ratio comes to 41.2% - still below the EU28 average. However, it must be pointed out that taxes – corporate, income, VAT etc. are levied on all taxable households and corporations in the jurisdiction of the republic of Ireland regardless of where some of that income might be transferred subsequently. True, some of the profits and income ‘earned’ here are bogus to the extent that companies dodge taxes and shift profits on their books. But, GDP remains the reference of income in international comparisons because all incomes counted by the CSO in deriving GDP are liable to tax (even if some are exempted or subject to very low effective rates by reason of tax policy).
Last week I showed how there was a dramatic fall in taxes paid by representative households between 1997 and 2014. Putting this in context, the total amount of government revenue (as % of GDP) fell from 37.9% in 1997 (when the tax-cutting neo-liberal doctrine took off in earnest) to 34.8% in 2013. That was the third biggest fall among EU 28 countries (only Slovakia and Sweden had higher falls but these latter two countries have a higher government take in GDP to start with).
Little wonder that the Republic of Ireland is the darling of low-tax doctrines. The alarming aspect of this situation is that very few (any?) acknowledge the facts or want to do so. Worse still many (most?) see no connection between low taxes and very inadequate public services. And in the competition for the next phase of economic development it would appear that cutting taxes is priority item number 1 on the list.
‘We mustn’t take the eye off the ball of the social wage’
I will return to the issue of the ‘social wage’ in a future Blog.