Where is Ireland’s Tax Burden Heading?

In my discussion at Monday’s conference (slides here), I raised the question of where Ireland’s tax burden was going to settle down once the public finances have been stabilized. The Addendum to the Stability Report published last week by the Department of Finance shows how the Gross Budget Balance can be brought back to a deficit of 2.5% by 2013 through an adjustment process in which the revenue share of GDP stays roughly stable so that almost all of the adjustment occurs on the Revenue side. The document itself does not comment on the composition of the adjustment described in this table, so perhaps this isn’t an actual plan but instead an illustrative example. Still, it’s worth starting with as a baseline for discussing where we are heading.

I noted on Monday that the plan projects a government revenue share of GDP of 34% in 2013 and that this is well below the equivalent share for EU15 countries, which has been stable at about 45% for a number of years. A number of observers at the conference questioned this calculation on the grounds that the calculation should be done relative to GNP. In particular, since GDP has been about 17% higher than GNP in recent years, one might want to adjust the tax share upwards by this amount. Doing so would give a figure for 2013 of about 41.5%. This is still a reasonable amount lower than the EU15 average but not nearly as much as the figures I quoted

However, I do not view this higher GNP-based figure as a useful one, for two reasons.

First, I believe that GDP rather than GNP should be viewed as the correct tax base when making calculations of this sort. GDP represents all the income generated in this country and, technically, all of it is available to be taxed by the Irish government at whatever rate it chooses. Of course, profit income generated by multinational corporations is likely to move elsewhere if we tax it at a sufficiently high rate but this is an issue faced by all governments, not just our own.

Second, if one is going to exclude the substantial factor income repatriated abroad (€28 billion in 2007) from the tax base it is not consistent to then include the taxes earned on this income in the measure of the tax burden. Assuming that the €28 billion figure represents corporate profits repatriated after paying the 12.5% corporate tax rate, one comes up with a figure of €4.1 billion in taxes paid by multinationals on repatriated profits. Excluding tax payments of this magnitude would give a 2013 (adjusted) tax share of GNP of 39%. So, even if one agreed with the idea of GNP as the tax base, an internally-consistent calculation of the Irish tax burden would still leave it well below the European average.

The broader and more important point here is that we need a wider debate about the shape of future fiscal adjustment than the one currently taking place, which focuses almost without exception on the need to reduce public sector pay.

6 replies on “Where is Ireland’s Tax Burden Heading?”

Have you ever noticed how it is those who were keenest to present Ireland as a shining example of what low taxes can do for you, who also want to deny that our tax burden is, in fact, low?

Whether low or high, it is now going to go up substantially.

Close reading of the officialese in the Government’s statement suggests that we may be misinterpreting this constant tax share number. A closer reading seems to show that the Government are not projecting any particular path for tax as a share of GDP (or GNP)!)

Thus although Table 5 of the Government’s new 5 year budgetary projection (“Addendum to the Stability Report”) shows a figure for tax take in each year out to 2013, this is merely technical. Just below that row are the additional adjustments to the deficit that the Government now intend to take. These are not broken down into tax, current expenditure or capital expenditure. Indeed see the footnoted remark “for illustrative purposes it is assumed that the adjustment is made on the current side”.

In other words the Government has not announced what its path for either spending or taxation is. Looks like only the borrowing figure is to be taken as an intention.

Tax increases should be part of the multi-annual fiscal consolidation package and they should be announced at the same time with expenditure cuts. While expenditure cuts will hit hard the low-income group the higher taxes will be mainly paid by the high-income group.

The 2009 tax yield as % of either GDP or GNP is not as low as it would be if, instead of VAT on new houses, CGT on property, and stamp duty, we had relied on something else. Imagine that in say 2003 these taxes had been scrapped and replaced with something stable. Think of a poll tax. This would have yielded in 2006 maybe €5bn instead of the €8bn reached by the three transactions taxes (these are Rossa White’s figs). In 2009, the three will yield only about €2bn, so €6bn has gone missing since the revenue peak, and maybe €3bn as against a stable alternative. This means that the deficit in 2006 was really €3bn worse than it appeared, and of course that it would now be €3bn better if we had gone for the stable alternative. We did’nt and it is’nt. This also means that we have had (accidentally) a big tax cut.

It is fatuous to pretend that Karl’s €28bn factor flow gap between GNP and GDP is somehow available to be taxed on the same basis as personal income or consumer spending. Some of it is a transfer-pricing book-entry and may not exist at all. I am certain that much of it would vaporise in the face of tax rate increases. The reason European countries express things as % of GDP is because GDP and GNP are nearly the same for all EU countries bar Ireland and Luxembourg, so it does’nt matter. The €28bn belongs to foreigners and is not ours to tax.

More generally, there is a different Laffer curve for the various different taxes (visit Newry if you don’t believe me) and particularly in an open economy with an endogenous labour force and capital stock, you have to be careful. The Laffer curve for Karl’s €28 bn. must be the least Exchequer-friendly of the lot, bar maybe betting tax.

I hate doing policy recommendations based on EU averages – there are too many non-comparabilities. Most continental countries do not have private sector occupational pensions, for example, and run that particular show through the State budget. So State revenue looks bigger as % of whatever. They also have large armies and so forth. Would Karl recommend EU-average academic salaries?

There is a Commission on Taxation sitting and due to report in September. The extreme volatility of recent Irish tax revenue is surely on the agenda.

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