Spinning our tax wheels

Michael Taft: The Exchequer statement out yesterday shows tax revenue falling short of target. The headline rate shows tax revenue at end October falling €184 million, or 0.7 percent, below profile. However, when we dig deeper into the numbers, there is a more depressing message coming through; namely, that we are spinning our wheels in a deflationary ditch despite Government moves to boost revenue.

While tax revenue falls short of targets, when we compare with last year, revenue has increased by nearly €2 billion, or 8 percent. Or has it? The Universal Social Charge, which is counted in the income tax category, includes the Health Levy which it replaced. However, last year the Health Levy was not counted as revenue; rather, it was counted as a Departmental Balance and would have been subsumed under Net Expenditure. So to get a proper read, we have to factor in this accounting change.

According to the Minister for Health, €1,422 million in Health levies was collected up to the end of October last year. When accounting for that we find that:
Tax Revenue is only €552 million ahead of last year (not the €2 billion shown in the Exchequer statement and reproduced in media reports).

This means tax revenue is only 2.2 percent of target, not 8 percent as reported. However, there is more. Since the targets were set, changes were introduced in the Jobs Initiative in May. The main changes that concern us here are the reduction in the VAT rate and the new Pension Levy. The Pension Levy has raised €490 million (under the Stamp Duty heading) which was not envisaged when the targets were set. As well, the reduction in the VAT rate is estimated to cost €120 million in 2011.
For the purposes of the following exercise I have assumed that the VAT rate reduction has cost the Exchequer €80 million to end-October. If these changes weren’t made we might find that tax revenue would have only been €142 million ahead of last year – or about a ½ percent.

When we compare this year’s outturn with the targets, assuming these changes weren’t made (the targets haven’t changed to accommodate these new measures) we find that tax revenue falls €594 million below target – or 2.2 percent below target.
Whichever comparison we use, once we have factored in Health Levy, reduction in the VAT rate and the new Pension Levy, tax revenue is disappointing – barely above last year’s outturn and below targets. But we have to set this in context.

In Budget 2011, the Government introduced new tax measures designed to raise €1,406 million in 2011. The big ticket items were also regressive: cutting personal tax credits and cutting the standard rate tax band (€830 million).

So the Government increased taxation by €1.4 billion and during the year increased taxation again by over €400 million. And, yet, tax revenue is under-performing, barely lifting itself above last year’s level.

This is a sign, not of an economy recovering, but of an economy spinning its wheels in a deflationary ditch.