| Tax myths and statistics |
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| Myths: The Irish tax system is biased to favour the rich and companies. Facts: An EU survey shows that Ireland taxes business more heavily than its EU partners, and taxes labour less than its EU partners. Myths and facts coincide on one point only: Ireland is more lightly taxed than the majority of the high unemployment fellow members of the EU. |
EU survey
What is the image of Ireland popularised by Left Wing demagogues and by some of the social partners? It is that Ireland imposes too light a tax burden, has too many well off people and its taxes fail to redistribute wealth. The EU have published a detailed statistical analysis of the taxation systems of the 25 EU Member States, covering the period 1995-2003. The factual description given in the survey of the Irish tax system makes for interesting reading.
High taxed?
Comparatively, Ireland is indeed less heavily taxed than the average EU Member State. The total tax to GDP ratio in Ireland in 2003 was 29.9 per cent. This compared to an EU average of 38.2 per cent and to the average of 50.8 per cent, in the top taxing State. On a GNP basis however Ireland is almost at the EU average.
Put in another way, in Ireland all work done on Mondays and up to lunch time on Tuesday is unrewarded, and akin to forced labour for the State. In Sweden all work done on Monday, Tuesday, and up to lunch time on Wednesday is forced labour for the State. When the level of forced labour for the State is taken to an extreme, as in the Socialist States of the pre-1990 Eastern Europe, the philosophy of citizens becomes ‘we pretend to work and the State pretends to pay us’. The result was near universal poverty.
Increase taxes?
So, there is truth in the view that taxation in Ireland is relatively low, compared to the EU average. But if taxation were to be increased, where should the burden of the increase fall in order to bring it into line with our EU fellow members? The EU report shows the statistics in table 1.
The report states ‘The tax structure by economic factor in Ireland (consumption 37 per cent, labour 34 per cent, capital 29 per cent) differs notably from the EU average (33 per cent, 48 per cent, 19 per cent) with the tax system deriving the smallest proportion of tax receipts from labour of any EU country. It takes a notably large proportion from capital, exceeded in this only by Luxembourg’.
It seems that if the demands from the poverty industry that taxes be raised in line with our EU partners were to be heeded, it is taxes on labour and in particular PRSI, that should be raised.
But what of the call for higher taxes on companies? The EU report states ‘direct taxes absorb the same amount of GDP as is the average for the EU (12.3 per cent) but the revenues rely to a greater extent on corporate tax (3.8 per cent of GDP, EU 2.9 per cent) and on capital gains tax than elsewhere.’
It would seem that Ireland already milks the business sector more than do our EU neighbours and is already more lenient in taxing labour than our neighbours.
Surprised? You should not be. The McCreevy era was one when the CT rate for many companies increased by 25 per cent, going from 10 per cent to 12.5 per cent. It was one where tax breaks like roll-over relief were abolished. It was when there occurred what the EU report refers to as ‘the startling reduction in personal income tax (from 10.4 per cent to 7 per cent of GDP) as a result of the lowering of rates and the expansion of allowances and credits, and the heavy rises in corporate income tax and capital gains tax, as a consequence of robust economic growth and despite substantial reductions in the rates’.
The McCreevy era was one of the greatest periods of income tax give-aways in our taxation history. It was an era in which, according to the EU report, ‘the Government - - since 1997 has succeeded in removing almost 460,000 income earners from the personal income tax net’. It is ironic that the McCreevy era ended with Mr McCreevy exiled to Brussels, and the poverty lobby week-ending with the Government in West Cork.
Do the rich pay?
For some years, rhetoric on tax policy has centred on a small handful of high earning individuals alleged to have availed of tax incentives to the extent that they paid no income tax at all. The number in question in 2003 was recently stated in the D?il to be 40 individuals. This irrelevant side-show has been used to divert attention from the true picture. That is that 25,373 income taxpayers account for 33 per cent of income tax receipts.
Ireland is not only an economy where labour is lightly taxed, but it is also one where the burden of tax falls disproportionately on the better off. Most Irish personal taxation is already steeply progressive.
Income tax: The top rate of tax at 42 per cent is more than twice the basic rate of 20 per cent. Most tax allowances have been converted into credits so that they are effectively available only at the 20 per cent rate. The most common form of investment income for the less well-off, DIRT on deposit interest, is taxed only at a rate of 20 per cent compared to the 42 per cent rate which the better-off are likely to experience on their dividend income.
CGT: The most significant asset of the less well-off seems to be their home. Principal private residence relief ensures that capital gains tax applies almost exclusively to the better-off.
CAT: Since most gifts and inheritances are taken from parents, the exempt threshold amount of E466,725 ensures that the less well-off rarely encounter CAT.
Stamp duty: Stamp duty rates rise steeply from 0 per cent to 9 per cent as the value of the transaction increases. The higher rate applies not only to the increase in value but to the entire consideration. Stamp duty at the 9 per cent rate is unlikely to be ever experienced by the less well-off.
VAT: Those purchases which are presumed to represent a high proportion of the spending of the less well-off (food, clothing) are taxed at either a zero rate or a 13.5 per cent rate in contrast to the 21 per cent rate applying to all other supplies. The lower rates are designed to ensure that the burden of VAT falls least on the less well-off.
PRSI: PRSI is an insurance scheme with the peculiarity that you pay according to your means, but the benefits drawn out are the same for everybody, no matter what they have paid in. Better paid workers heavily subsidise the benefits given to the less well-off.
Conclusion
A dispassionate look at the facts suggest that the Irish tax system has got the balance right. It manages to extract relatively more from business than our EU neighbours, while at the same time not disincentivising business. It manages to lighten the burden of taxes on labour, giving an incentive to all to join the labour force and to increase income by greater effort. It is heavily progressive and places the greater burden of tax on those most able to bear it. And it has delivered good living standards, full employment, and a balanced budget. There are few of our fellow Member States of the EU whose tax systems can claim any of this.
There is a lesson to be learned by comparing the Irish tax system to that of our fellow Member States. But the lesson is not that we should emulate them. Rather the lesson is for them and would suggest that they should emulate us. There if food for thought here for the Minister for Finance, as we approach yet another Budget. |
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| Article appeared in the November 2005 issue.
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