Notwithstanding the highly significant events of recent days and the fall out from the recent UK referendum on EU membership this week’s Monday Blog is focussed on personal taxation trends over time in the Republic of Ireland. (Attention will be given to the implications of UK exit from the EU in the forthcoming NERI Quarterly Economic Observer. Users of the NERI blog site may also refer to a recent working paper on the economic implications of Brexit).
At this time of year myth-busting is important. Last week, I looked at some international examples of average tax rates for single persons across a range of OECD counties. The results are clear. The Republic of Ireland is a low-tax country no matter what way you measure it. We get a relatively poor ‘social wage’ in return (it is a lot more complicated than taxes but taxes are part of the story). This week I look at trends in taxation over time. Fortunately, the OECD provides estimates of tax payable by different household types from 2001 to 2014 inclusive.
Myth Number Five
“The recession crucified us all with high taxes; now is the time for pay-back so we can get back to where we were”
Really?
Have a look at Chart 5 which shows the average effective tax rates (including income tax, PRSI and the much dreaded USC which replaced the ‘Health levy’ in 2010) for single persons at different levels of income vis-à-vis the average wage in any given year. Yes, the Great Recession of 2008-2010 and the accompanying fiscal crisis in Ireland did lead to various tax-increasing measures (but these were greatly outweighed by spending cuts). However, the tax raising measures neutralised some of the damage done through untimely and unnecessary personal income tax cuts in the period 1998-2007. It should be noted that the impact of tax cuts in the 2015 and 2016 budgets are not taken into account in these charts.
Unfortunately, the OECD data source do not allow inclusion of trends before 2001. However, my colleague Dr Micheál Collins has plotted “effective Income Taxation Rates, 1997-2016” in the NERI Research InBrief “ Income Taxes and the Earnings Distribution ” (January 2016). The comparison shown in Table 2 of the latter shows a particularly sharp reduction between 1997 and 2001 in average personal tax rates across all income categories (both for single and jointly assessed earning couples). The position in 2014 is that average tax rates on personal income were only modestly above those in 2001 and certainly significantly lower than those applicable in 1997 for given points in the income distribution.
Myth Number Six
“Everybody else is doing it; so we should follow”
But, the world has changed a lot since 1997 and other countries have cut personal rates of income tax and so should we to remain competitive for labour, it may be objected. Notwithstanding a trend towards lower rates of personal income tax over recent decades in many countries reflecting the prevailing ideologies of our time there is no evidence that this is so for earners on the average wage (Chart 6 which compares English-speaking countries). Average tax rates, at this income level, have been remarkably stable in most countries – except the Republic of Ireland where rates fell during the years of the boom after 2001 (and especially after 1997 but not shown here) while they increased during the fiscal crisis following 2008. Average tax rates remain below those in comparator English-speaking countries.
Chart 7 compares some European countries including a number of small, open Northern European countries. Trends are stable in most other comparator countries but the Republic of Ireland stands out as having exceptionally low rates of personal tax even after the modest increases of 2008-2014.
Myth Number Seven
“High tax rates will drive investors and highly-skilled persons away”
The main problem with this line of argument is that it tends to focus on only one thing: cash income after tax deductions. When regard is had to the ‘social wage’ as well as the cost of living defined broadly to include the cost of renting or buying a home then the picture is more complex. Sticking with the narrow focus on cash income after tax deductions (and before any social payments) there is no evidence that the average tax rate for single persons on double the average wage is out of line internationally. Many countries with high performance on productivity as well as competitiveness (judging by the very imperfect measures used in the World Economic Forum competitiveness ranking
WEF) also have relatively high rates of personal income tax – including those well above the average wage or income. Top of the international ‘competitiveness’ league according to the WEF are Germany and the Netherlands (with a rating of 5.5 each). Australia, the Republic of Ireland and France come at the bottom of this particular selection of countries (with a rating of 5.1 in each case). There is no immediate evidence that lower personal tax rates is associated with higher competitiveness.
In conclusion, we need a much more mature and evidence-based discussion about taxation. The sources of productivity, skills and innovation lie in a dynamic partnership of public and private initiative and enterprise and not in a race to the bottom to cut personal (and corporate) taxes.