As was pointed out to me, although the main VAT rate is 21%, this means that for every €100 I spend, €17.35 is tax (i.e. 17.35 per cent). That is because €82.65 plus VAT at 21 per cent is €100. (That is, €100 minus €82.65 equals €17.35).
Similarly, if I buy things at the 13.5% reduced VAT rate, I pay €11.90 per €100. And I pay €4.58 per €100 at the 4.8% super reduced VAT rate.
Let's work out how much VAT I might pay if I was on a low income.
The Vincentians (http://www.budgeting.ie/) provide typical weekly baskets of goods in their analyses. Let’s imagine that I am living on an example weekly household budget they give, as follows:
- €40 on Food;
- €10.50 on Travel;
- €63.00 on Housekeeping;
- €19.24 on Clothing;
- €11.00 on Rent;
- €4.00 on Education.
But let’s just stick with the €147.06 total for the moment. I got more details on Ireland’s VAT from an EU publication. This gives the following information about VAT, based on the above spending:
- Basic food has 0% VAT, but some processed food attracts 4.8% or 13.5%. Let’s split this three ways across my €40;
- Travel is exempt from VAT;
- Housekeeping includes ESB, fuel, telephone, TV licence (€3.50 a week), cleaning products, pocket money for kids, bus fares, chemist and €8 for social life. I’m going to assume 0% VAT for most of this, except for (a) the €8 social life, which I am going to allocate to two pints of beer at €4 each (VAT 21%), and (b) €10 telephone and €5 on cleaning materials at 21% VAT;
- Clothing and shoes include 13.5% VAT;
- Rent in social housing includes 13.5% VAT;
- I’m going to count Education as 0% VAT as well (e.g. books are 0% as I’m not sure about education services; although newspapers include 13.5% VAT).
In this scenario, my VAT tax bill will come to €8.49 out of the €147.06 I spent; that is 5.75 per cent of my spending.
That’s surprises me, as I thought it would be higher given that I usually think about VAT at the standard rate of 21%. (Please let me know if I have missed something important in this calculation!)
I think I can reasonably include the TV licence as another €3.50 tax, for €11.99 total (8.1 per cent of my spending). Carbon tax, Excise, etc. are also relevant, but I haven’t time to make a full study out of this.
Nearly €12 paid in tax is highly relevant in the real-life context that the Vincentians are describing, where the family in question had a shortfall of €26.59 in making ends meet every week.
It also cannot be said, as one Government minister did recently, than many half of households in Ireland are “not paying a bob of tax”.
For contrast, in a 2010 report (on 2008 data) Revenue reports 56 cases of people earning more than €250,000 and paying less than 5% effective income tax. If we imagine €50,000 of this income is spent on goods at 21% VAT, this comes to another 3.5% of their income; that is, less than 8.5% tax in total. So on a very low income (€7,682 per year), I could be paying close to the same proportion of my income on tax as someone earning a quarter of a million euro!
And unlike people on high incomes, who can avail of many tax breaks, there is no relief from VAT for people with insufficient incomes to buy the essentials. Instead, many people on low incomes go to moneylenders who can legally charge 150% interest or more (see for example Life and Debt, TASC's latest report).
16 comments:
Basically, taxes based on consumption are not good for economic development or people on low incomes. Let's say we remove them, how would that affect the economy? What about production taxes on income? They are disincentives to work. What if we removed them? How if we replaced all those taxes with taxes on ownership, from land to stocks and shares, resource usage - pollution taxes, raw material taxes. Wouldn't that create a dynamic economy?
"I think I can reasonably include the TV licence as another €3.50 tax"
Sneaky!
With this sleight-of-hand, you've increased the apparent tax paid by a whopping 40% (from 5.75% to 8.1% of income).
But the TV license isn't really a tax, is it? Instead its a payment to RTÉ for the services it makes available to all TV owners. Counting it as a tax would be the akin to considering one's VHI premium as a tax. Or indeed one's pre-privatization line rental paid to Telecom Éireann. All are avoidable charges paid for services rendered, and the fact that RTÉ and VHI are agencies of state is neither here nor there.
Brendan,
“taxes based on consumption are not good for economic development or people on low incomes”
While I agree that VAT is generally regressive, I’m not sure I fully agree that it is always “not good”. Not having a sufficient income to meet their essential needs is the central problem for the many people on low incomes.
But if we could secure a national minimum income, then consumption taxes could be useful for the long-term sustainability of the economy; for example as disincentives to smoking, eating junk food or buying plastic bags. The “resource usage” tax that you mention is in essence a consumption tax.
For moving from income tax to more ownership taxes, there is a data deficit to be filled. We don’t have comprehensive national data on who owns what. Although, some ownership is already taxed (e.g. income from financial assets). And the national data may improve if property tax, or land tax, are introduced.
It would then be important to compare different forms of taxation on wealth (e.g. land tax versus financial asset tax) to make sure that different rates of taxation do not distort markets. Ideally, different forms of wealth should attract a uniform level of tax, unless there are particular policies supported by the state using tax to encourage ownership in one area over another.
Anonymous,
In principle, the TV licence is a safeguard that exists to put RTÉ’s funding at arms-length from the Government. Although the Government sets the level of TV licence, this is less control than deciding the annual expenditure of RTÉ through a block grant, as the latter could be used to manipulate or micro-manage the station more.
And I think everyone in the twentieth-first century Ireland should be entitled to view television. It is practically a universal right and lack of access can cause many people social isolation. So, I don’t think it is an “avoidable charge” in the same way as going to the cinema or renting a DVD.
I would also treat the basic levels of VHI payments as nearly equivalent to tax also; but rather than being a collective contribution to provide a universal health service, they are less progressive individualised payments.
Many essential services are either tax-funded or privately funded, depending on the state. Maybe there needs to be a concept like “inescapable payments” to describe them collectively, and differentiate them from expenditure that really is optional – like cable TV!
And given that people go to jail for not paying their TV licence, it seems very much like it has the full weight of the State’s tax collection enforcement behind it.
Thanks for response Nat. A basic income for individuals would be good, to stop welfare trap,encourage small business etc. paid for mostly from wealth/ownership/land value taxes rather than consumption or income taxes. The deadweight on economy of these existing methods is significant. I don't agree about using VAT/levies as a disincentive. There are behavioural economic theories to deal with those social issues. The plastic levy was a bad tax. The tax should have been introduced at the production/import level, not at the purchase point. The shops would have done that anyway. Agree there is a data deficit on ownership. I wonder why?
Nat,
One can't be sent to prison just for not paying the TV license. The threat of prison only hangs over someone who chooses both to have a TV and to not pay the license. There's a subtle but very important difference.
Similarly for anyone who chooses to get a TV on hire purchase and then not make any payments, or even just take the most direct approach and walk out of the shop with a TV under their arm bypassing the checkout desk!
I don't buy your argument about TV as a human right. If anything, having broadband access is much more important in this day and age, yet no-one (I hope!) is arguing that their monthly payment to Vodafone or Eircom amounts to a form of tax.
Nat -
€147 per week is less than half the fully employed minimum wage. I presume this would apply only to young people on the dole (i.e. it's less than the full dole, doesn't take into account rent allowance or any other benefits). Hard to argue they are paying *any* tax, when the income comes in it's entirety from tax payers..
Unless they're saving the difference?
But the same calculations again for a minimum wage worker might be more enlightening.
Obviously you are not taking any account of the degree to which our hypothetical low-income-earner benefits from the facilities provided from tax revenue. If you did, I think it would be pretty manifest that this low-income-earner is getting a pretty good deal. EUR 8.50 a week/400 euros a year from 800,000 people is still only enough to cover the *staff/administrative* costs of the Department of Social Protection alone.
You started off with vat and then broadened to tax generally. First, you missed some VAT. For example, travel is exempt from VAT, but you mistakenly enter it as being zero-rated in your table. In fact, public transport includes around 5 percent VAT (the VAT paid on fuel and on the vehicle and its spare parts) It also contains a significant chunk of fuel duty (except for the Luas and DART). Operators cannot claim that VAT back, because it is exempt, not zero-rated.
I am sorry, TV licence is not a tax, even if it is a basic human right. Food and shelter are far more fundamental human rights but you aren't calling those taxes. However, you may be correct, and it may be as well to abolish the licence and move RTE over to pay-per-view.
Footwear and clothing is 21 percent, not 13.5. What food exactly is 13.5 percent? Uncooked food is mostly either zero or 21. The tax on the 2 pints is a lot more than 21 percent, because there is also a big chunk of duty. But all of this is still nitpicking isn't going to amount to much. The take is still pretty low in comparison to what it costs to provide services.
These big-earning people who earn a lot of money but don't pay much tax - they don't actually get that money. They have decided to live modestly and to reinvest. They have reinvested the money into the economy through special government-approved schemes. This is what economsts call 'fiscal stimulus'.
If you want to introduce an 'ownership tax', the easiest way to do it is to introduce a capital gains tax on principal private residences, and increase the amount of inheritance tax received.
An 'ownership' or property tax, in the case of rental accommodation would be passed on directly to the occupiers, not that there is necessarily anything wrong with that.
Nat -
As a household (family) income that is unrealistically low (probably so is the spending?). Child benefit, full dole, rent allowance would all have to be factored in (the rest of us pay our rent out of after-tax income after all), as would the value of the medical card.
Do that, and the amount of tax returned to the state would probably fall to less than 2%.
If you were to calculate it for workers, they'd have to earn above a certain minimum to escape the welfare trap.
The ESRI / Combat Poverty Agency found that those on the lowest incomes paid over 20% of their incomes on indirect tax (VAT/Excise). Those on the highest incomes paid less than 10%. Given that Ireland relies more heavily on indirect tax revenue than almost (if not all) EU countries, this suggests that low-income groups are particularly penalised under this tax.
This study is based on dated data and it would be extremely helpful to have more up-to-date numbers. But gtiven that, in the report that Nat refers to, many high income earnerws pay less than 10 percent of their income on tax, you could have the perverse situation that many on low-incomes pay a higher rate of tax on their incomes than many on incomes of twnety times that amount.
http://www.combatpoverty.ie/research/seminars/presentations/2005-02-08_AlanBarrett&CaemanWall.pdf
Michael,
A few points:
1. Including Excise duty is a bit iffy given that the choice to smoke and drink alcohol really is discretionary. Nobody could convince me that fags and booze are a human right alongside telly watching.
2. Its not possible that those on a 20 times multiple of low income would only pay only 10% tax. The ERSI paper shows those in the 10th decile pay about 10% in indirect taxes alone, but they would also pay a multiple of this in direct income tax, DIRT, CGT etc. The effective minimum tax rate of 30% plus levies ensures that really high earners pay substantially more than 10% in total.
3. There are so few earners on 20 times the poverty threshold that their rate of contribution is really all about demonstration effects, as opposed to potential for raising substantial revenue. What really matters is the rate paid by the vast bulk of people, on between 3 and 6 times the poverty threshold. When cash transfers etc. are taken into account, this group pays more than those in poverty but not by a wide enough margin to fund the kind of state services they expect.
Michael,
I would really have to question those Combat Povery figures for VAT. Looking at Nat's figures, it is hard to see how they could have run up a vat bill of more than 14 percent.
To clear up some queries about my example. I don’t claim to have done anything as robust as an ESRI research report in the couple of hours of writing a blog post. I may well have under-estimated VAT in a number of cases, e.g. fuel, ESB, etc. as well as the transport example given above. Likewise, I have not included excise or carbon tax, and I purposefully avoided duty on alcohol and cigarettes for the reasons mentioned above by Anonymous.
I agree that there needs to be a much more detailed study done of how much indirect tax people pay at different income levels. This kind of descriptive analysis of the basics of the tax system is in TASC’s work plan for 2011. We decided this year to focus on examining public expenditure data and will be publishing on that over the next few months.
But I will pick up on a few points raised in comments.
First of all, I don’t agree it was “sneaky” to include TV licences. It was there in the Vincentian’s list of expenses, and I picked it up as a simple example of a regressive flat charge levied by the state (which I still regard as a ‘tax’ – see below). The fact that a TV licence can cost 2.4 per cent of a very low income (€3.50 per week out of €147.06) or, if you prefer, 1.8 per cent of Jobseekers Allowance (€196 per week), shows how regressive such a flat charge is.
Second, the issue of flat charges doesn’t just refer to the TV licence (€160 per year). If flat water charges or a high minimum payment are introduced, they could be higher than €160. And low income households will suffer disproportionate hardship in meeting more flat charges.
Third, people on the lowest incomes may be getting “good value” for their tax contribution, but so do the people who pay a small amount for holiday insurance, which then pays thousands for their hospital treatment when they break both their legs. Neither is in an enviable position.
Fourth, in answer to the assertion that the price of food and other essentials is not a ‘tax’, this is true. But the social insurance you pay that guarantees you a income when you are unemployed is a tax – and the purpose of that basic income is to allow you to survive.
Fifth, the argument that you only go to jail when you own a TV and not pay the licence, is that same as you only go to jail when you work and don’t pay income tax, and (soon) you only go to jail if you drink water at home and don’t pay your water charges; with the slight exception that only one person went to jail for serious tax evasion in recent years, whereas 54 people went to jail last year alone for non-payment of TV licences.
Sixth, welfare recipients are indeed paid out of the Exchequer and by paying tax they are continuing to make a small contribution to the State, which leaves many of them lacking essential items. They are really feeling the effects of paying tax, because even €12 matters on a low income (even on minimum wage, Jobseekers Allowance, with rent supplement, etc). The economy also benefits as they are providing demand, which has a real effect on economic growth, and their purchase decisions helps markets function more efficiently, as they look for more competition among shops. (But I would prefer full employment).
Seventh, and most importantly, there is a definitional question raised by all of this: What is a tax, as opposed to other kinds of charges levied by the state or state bodies?
I could offer a number of definitions of tax, but none of them is non-controversial. The fact that there is no agreed definition is problematic, but without trying to convince readers that I am right, I will explain what I mean when I use the term, and why:
• Tax is what we call charges levied by the State or a public body – this is because the State has unique characteristics, such as the sole legitimate right to wield violence (and thus provide defence and policing), and provides a system for the democratic pooling of resources to achieve collective goals in the public interest.
• Not everything that is de facto a tax is called a tax. For example, the income levy is (in strict legal terms) a ‘levy’ not a tax – but it has practically the same effect and I consider it be a tax.
• In Ireland, I regard social insurance contributions (PRSI, health levy) to be taxes.
• Tax is for services that are not commercial, or which require subsidy to make them viable where they compete with commercial rivals.*
* In this context, I see the TV licence as paying for the public service broadcasting remit of RTÉ, and, in line with this, the more commercial RTÉ operations such as 2fm and the RTÉ Guide, don’t get any TV licence money).
Notwithstanding all of the above, I think my general conclusions are still valid:
• People on even the lowest incomes pay tax – hence, the claim that lots of people pay no tax is false (and we will hear this claim repeated as the next budget approaches, given the Government’s stated goal of increasing the number of people who pay income tax);
• There are good reasons to seek a minimum level of income for everyone, so that paying for essential goods – including food, clothes, heating, housing, water, waste, TV and Internet access – does not require waivers or special schemes, but is something that everyone can afford, with at least enough left over for a little luxury, like two pints of beer per week. And if the latter attract massive VAT and duties to discourage excess, that’s fine with me.
By the way, I think it is a good idea that everyone pays some tax as part of 'buying in' to society and collective benefits.
I have a major concern with the continued push to categorise the payment of essential services from being ‘taxes’ to ‘service charges’.
I do not object to some essential services being delivered through outsourcing or private operators. But I do object to the loss of the principle of solidarity; that is, that we pay tax as a collective act to provide essential public services to everyone. I do not wish to see the reduction of democratic government to a series of commercialised transaction, where every profitable activity the state is involved in becomes privatised or charged on a cost-recovery basis, and where unprofitable services (like health, education and environment) are under-funded and divided into two- or three-tier systems, where ability to pay provides a better service, leaving disadvantaged people behind.
Let me conclude by quoting the letter sent to me with my tax form in 2006: “Tax is an act of democracy and good citizenship.” The letter included a one page summary of the different sources of state revenue and expenditure, and there was a link given to a website where I could view the performance indicators across the range of public services. You can view it here: www.performance-publique.gouv.fr (in French only).
Nat
I did an analysis on your VAT computations and found them wanting. However the good news is that if you had done it correctly it would have strengthened your case!
The debate about whether the licence fee is a tax or not is a diversion , but not much else.
The core issue here is who pays tax, and how much. An expenditure tax is always going to affect the lower paid to a greater extent proportionately (unless it is applied at a significantly higher rate to items such as new cars, high end fashion, etc).
But debating whether a person on €147 per week (how many of them are there?) pays 1.8% or 1.9% of their income in VAT is irrelevant.
The real question is how much income tax should everybody pay, and what proportion should that income tax be of the total tax intake? As things stand we have a very skewed tax take. The lower 50% of citizens pay no income tax, at the other end of the scale, neither do 4,000 individuals earning €100,000 +. So really the debate should be about (a) at what point on the income scale should a person start paying tax, and at what rate and (b) at what point on the scale should the maximum rate kick in and at what rate. Until there is a consensus on that there is no point in painting in the intermediate steps.
Once that is done, the income tax yield can be calculated and the shortfall from ideal total take can be quantified. At that point the debate about how much of the balance should come from what tax can begin.
So what do you propose in relation to entry level tax rates, and top tax rates?
David
David,
Thanks for your comment. In order to give my response sufficient space, I will be putting up a new post shortly on income tax.
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