Monday 7 September 2009

How can we afford such a low tax take?

Slí Eile: Like the Curates Egg, the Commission on Taxation Report has many excellent parts. The starting point of any analysis of this 500 pages plus report should be the following three questions:
1 What level of public services is required and feasible in 21st Century Ireland at our current level of wealth and income?
2 How can such a service be best provided, organised and funded?
3 What role has taxation in its various forms in providing such a level of service?

If one starts from the premises of keeping the ‘burden of tax’ as low as possible one is assuming – effectively – that the State is a necessary evil in providing services that should best be provided by the market or individuals and families themselves but have to be left to the State because of failure at lower levels.

So, there are big issues at stake here and the stage has been well set, already, in the Terms of Reference of the Commission – before any recession.
Before addressing these three questions in future posts and going through the entire Commission Report lets deal, today, with one simple question:

Are we a high tax country? Here are some extracts from a recent EU Commission analysis of taxation.

‘….the overall tax ratio, i.e. the sum of taxes and social security contributions in the 27 Member States (EU-27) amounted to 39.8 % of GDP (in the weighted average); this value is about 12 percentage points above those recorded in the United States and Japan.’ The ‘old’ 15 EU Member States generally have the highest tax rates as % of GDP.'
The new accession countries have taken the economically liberal approach. Only in Denmark, Ireland and the United Kingdom are personal income taxes a relatively large part of the total charges paid on labour income.

Before the recession hit, using the latest available EU data sources, total taxes (including social security) came to 31.2% of GDP in 2007 in Ireland. The EU (unweighted) average was 37.5%.
So, at 31.2%, Ireland was about 2 percentage points down on the 1995 figure and over 6 percentage points down on the EU27 average. The total tax take in Ireland reached a low point in 2002 (possibly connected to tenure of a certain Minister of Finance).

It is instructive to note that the only EU27 countries below this level of revenue were Latvia, Lithuania, Slovakia and Romania. OK you might be now objecting to the use of GDP instead of GNP. If, instead, you divide total revenue in 2007 by GNP you get 36.7%. Not that far from the EU average? The cardinal mistake made by proponents of GNP-based calculations when comparing tax take internationally is that they forget to mention Corporation Taxes on profits earned by multi-national companies where. Either you take away such taxes from the numerator (and arrive at a figure somewhat lower than 36.7%) or (my preferred method) use GDP only since that is the total value of production in the jurisdiction before taxes are levied on income, here, and before any part of that income is repatriated.

By the way the ‘burden’ in 2007 was particularly high in Denmark at 48.7% of GDP more or less exactly what it was in 1995. but, then Denmark has a high level of public service provision. We get what we pay for.

5 comments:

Proposition Joe said...

@Slí

Well there's a fourth question: how _much_ should that required level of public services actually cost to run?

The experience in the noughties with large net increases in public spending was that demand for resources within the public service expanded to consume the extra cash, with little impact on the quality of service provided.

So its way too simplistic to say we can decide that a civilized country should have services X, Y, Z and then just increase the tax burden appropriately to fund the desired level of service.

If experience is anything to go by, while the extra taxes revenue would be enthusiastically received by the public sector, incremental improvements in the services provided would be much harder to acheive. At point, the usual tirade of excuses would be trotted out ... its the legacy of historic underinvestment, damaged moral due to the pension levy, skewed organizational structures due to the recruitment embargo, whatever you're having yourself.

Anything but ... look, our budget increased by 10% and our service levels went up the same amount.

Slí Eile said...

@ Proposition Joe What you say is true - that some of the increased public spending was wasteful. Baumol's productivity disease applies. However, this is no argument in my view for keeping the overall tax take low. Lets improve the quality and quantity of public services through a programme of economic development to get Ireland back to work. Whitaker imagination, Lemass courage and Obama leadership content called for. And let use tax to distribute income and wealth as well as provide the right incentives for consumption and production

Brian Woods said...

Taxes are paid out of earned income or some sub-set of earned income.

Question: Are incomes and wages (in total) from all sources rising or declining in Ireland? If the latter is the correct answer then someone had better get back to their 'drawing board'. Do declining employment levels provide an increase in total income? I fancy not.

There is a serious logic deficit somewhere. If this is the level of meaningful intellectual engagement with this problem of incomes/taxes/services, then we are in for a disagreeable surprise in the not to distant future.

If there is no (or little) economically generated surplus there will be no means to either halt the decline in employment, nor to increase incomes and wages.

To me, the problem lies with the economic Model-in-Use: Permagrowth. This model mandates an expansion of credit and debt. Hence you must have a mandatory, parallel expansion in incomes in order to keep the debt at sub-default levels. The Permagrowth model is expiring - its based on virtual wealth. A decrease in incomes will slowly push the debt-default levels towards an irreversible tipping point. The economy crashes.

The solutions: 1. Default the debts; 2. Inflate the money supply. Anything else merely postpones the evil day.

Notice an increase in liquid fuels lately? Read up on The Export-Land Model of liquid fossil fuel production and nett exports.

Brian P

Slí Eile said...

@Brian
Not sure quite what your point is. May be we are talking at cross-purposes. If you are stating the obvious that the economy as a whole
is declining and along with it total profits, wages and other income then it is clear that, ceteris paribus, taxes at current rates and
levels of allowances are falling. If you are saying that patterns of consumption, investment and indebtedness are unsustainable, unjust and
highly destabilising I am with you all the way.

I am not disputing any of that.

What I am drawing attention to is the scope for raising taxes in some areas and for some groups who can afford to pay more. While the total
of 'non-wage' income is not more than 40% of measurable national income it is considerable. You only have to look at the extent of retail profit margins - all too obvious when you compare prices for the same goods in the same retail chains across national borders using internet search tools and differentiating for differences in VAT. Likewise, on wage income there are huge disparities within both public and private sectors. Add to this the relatively unknown area of wealth which is
possibly more skewed here than in other jurisdictions (check out the 2006 Wealth of the Nations BOI Report).

You ask which is it: '1. Default the debts; 2. Inflate the money supply.'? I am not going to get trapped into that bind. I put a different set of questions: '1 deflate the economy via the Dublin Consensus or 2. tackle poverty, injustice by initiating new growth areas
to get people back to work.' There are no magic silver bullets here and the road to recovery will not be quick, painless or easy. However, what I am suggesting is that we ought not postpone social justice to when 'the public finances and competitiveness' are right. They all go together or not at all.

So, permagrowth is not the default position or implication of what I am saying. The issue is equity, justice and sustainable growth in quality and efficient public services to a growing population. The low-tax, low-social provision model was deliberately fostered in the Noughties.
Now that tax-paying itizens are obliged to stump up for a massive fiscal and regulatory mess-up the opportunity must be seized to close the tax breaks, bring the super rich back into the tax net and re-prioritise public spending towards essential infrastructure and income maintenance for those unable to find paid work. The Question still remains - in recession or out of recession - what level of social provision is appropriate for 21st Century Ireland and how do we mobilise the assets
in individuals and communities to rise to this challenge. We need vision, planning and democratic dialogue to move forward - not back to the failed neo-liberal model so loved by the some of the political classes.

Niall said...

The rate of Corporation Tax has little to do with the yield, rather it is the level of deductions granted. The Irish CT yield is around 7 times per capita that of Germany. Have a look at the following article on the Der Spiegel web site (in English)
http://www.spiegel.de/international/business/0,1518,646558,00.html