Wednesday 9 March 2011

How not to read taxation statistics

Michael Taft: Michael Hennigan over at Finfacts is worried that Irish taxation will reach high Danish levels by 2014. He shouldn’t be (though if that’s what it takes to reach Danish levels of unemployment estimated to be 3.5 percent in 2014, some people might think it worth the price). Ireland is a low-tax economy and will stay that way under current policy. Unfortunately.

Michael highlights the latest Eurostat figures on taxation which shows that in 2008 Danish taxation (Government revenue) stood at 48.2 percent of GDP; Ireland stood at 29.3 percent. So fears would seem premature.

But like so many, Michael claims that Ireland has to use GNP, not GDP:

‘In calculating the Irish tax burden here, we use GNP as a denominator because the main differential with GDP, the profits of the dominant multinational sector, are excluded.’

This debate over GDP and GNP can become almost scholastic (to get really obsessive on this point we could claim that GNI is the better denominator – GNP plus EU transfers). First, the ‘differential’ results from a number of outflows – profits, outward investment from indigenous companies, interest payments, remittances, etc. If we are to compare like-with-like we would have to disaggregate all that for both Ireland and Denmark and then compare the more narrow ‘profits’ category.

Second, GDP is a measure of economic activity in a particular country. If workers and managers generate profits here, why should this be excluded because of their final destination? Would we exclude such profits if they were sent out of the country for philanthropic reasons (to build schools in sub-Saharan Africa)? Or if the owners, a la Keynes, buried the profits in a big hole outside Athlone to be dug up some time in the future – or maybe never?

There is one reason to modify GDP and all measurements dependent on that – the phenomenon of importing profits generated in other jurisdictions for the purposes of taking advantage of our low-tax rate. This is money created somewhere else, not here; it ends up in our GDP through complicated channels; and like Father Ted’s ‘it’s-resting-in-our-accounts’, it is exported after tax. However, does anyone really imagine that any Government will give carte blanche to our data agencies to measure that and adjust the GDP accordingly? Or provide a mirror ‘real-life GDP’ measurement?

We don’t have to answer all these questions or engage in contestable extrapolations. There is another simple measurement that cuts across all these: namely; the amount of tax (Government) revenue per capita. When we use this (the IMF database in US dollars) we find a not-unexpected result for 2008:

Denmark: $34,398
Ireland: $20,562

Well, we were a long ways off from Denmark in 2008. And, if the IMF projections hold, we’ll be a long ways off in 2014:

Denmark: $32,268
Ireland: $17,477

Indeed, we’ll be falling further behind Denmark.

Of course, this particular factoid – like so many others – has to be treated carefully. Irish tax levels, at least at the household level, is rising, so why should the above show it’s actually falling by 2014? Because the economy will be weaker in 2014 (over 11 percent below current GDP levels in 2008). Weak economies generate weak tax revenue. For instance, tax rates, etc. could remain the same but tax revenue would rise if we had the same level of employment as Denmark. So when comparing tax levels, one has to take account of a range of factors – not just tax rates.

All this to say that using one particular metric can tell us all sorts of things – but can’t provide the whole picture. To this end, I’m not making privileged claims for the Government revenue per capita measurement I used. One should factor in purchasing power parities, the working population, the number of enterprises, etc.

But let’s get a grip.

According to the OECD Tax and Benefits database, the average Danish income earner paid 39.7 percent of his/her gross income in tax; the average Irish income earner paid 22.4 percent.

The corporate tax rate in Denmark is 25 percent; in Ireland, 12.5 percent.

The main VAT rate in Denmark is 25 percent; in Ireland, 21 percent (though the new Government will raise this to 23 percent). But Denmark has few reductions or exemptions from this main rate; in particular, food is subject to 25 percent, in Ireland, it is zero-rated.

So Michael shouldn’t worry. We are way, way off from Danish levels of taxation. The low-tax model is safe.

7 comments:

Paul Hunt said...

Although Denmark isn't in the Euro it closely shadows it, so some comparisons are valid. The price levels for household consumption (incl indirect taxes) are approx. 20% above the EZ average in both Ireland and Denmark. Ireland has a low tax/ high 'point-of-use charge' model. Denmark has a high tax/low (or zero) 'point-of-use charge' model.

I'm assuming you would view Danish citizens as, generally, having higher levels of economic prosperity and general well-being than Irish citizens. So, presumably, it would make sense to move towards their model. This means reducing the high 'point-of-use' charges and increasing taxation. Leaving aside the concerted opposition to higher taxes - much of which is coming anyway, do you see any possibility that the government will be able to face down the "die in the last ditch" opposition of the protected sectors (public, semi-state and private) to any reduction in their revenues that reduction in their 'point-of-use' charges would entail?

Michael Hennigan said...

Michael,

GDP v GNP discussed here:

http://www.finfacts-blog.com/2011/03/ireland-gdp-or-gnp-which-is-better.html

Michael Taft said...

Paul - what specific 'point-of-use' charges are you referring to?

P said...

@Michael Taft,

I'm referring to the full gamut of user fees charged to households and businesses and that includes all professional fees (legal, accounting, engineering, surveying, medical, pharmacy, dental, etc.), service fees (banking, insurance, financial, property rents, business rates etc.), government service fees (all sorts of official registration and permit charges) and utility charges (electricity, gas, waste, etc.). The deadweight costs and monopoly profits embedded in these add to the costs of businesses using these services and when these guys have their additional cut on top the final consumer is being hosed.

One would expect some costs to be higher in Ireland than in other big economies (lack of economies of scale and scope and some transport costs), but the price gap between Ireland and the EZ average can only be fully explained by profit-gouging, deadweight costs and unjustified inefficiencies.

Anonymous said...

@Michael Taft

the average Danish income earner paid 39.7 percent of his/her gross income in tax; the average Irish income earner paid 22.4 percent

But surely you're totally against the average tax-payer paying even a penny more?

Surely those tax increases can be achieved solely at the expense of the rich?

Which of course is the central fallacy of much left wing discourse in this country ... the state should consume a Nordic style proportion of our economic output yet we must continue to exempt the majority of workers from the kind of income tax burden shouldered by their European counterparts.

Michael Taft said...

Anonymous - you must be confusing me with someone else. I have never argued against the average tax-payer paying even a penny more - either here or over at Notes on the Front. Indeed, it would be a silly argument since if a worker gets a pay rise (and industrial wages are rising even during the recession), by definition they pay more taxes.

You might be confused over the formulation I, and others, have put forward. First, we need to raise the overall tax levels in the economy. Second, however, increasing taxes on low-average income earners (with the result of reducing disposable income)during a period of domestic-demand recession is irrational and counterproductive. All that will result is a lengthening and deepening of the recession. Given that the EU Commission (and a number of other forecasters) project that consumer spending and domestic demand will still be negative in 2012, cutting people's disposable income will do nothing to correct this.

Therefore, third, driving fiscal consolidation through taxation must begin with those with a lower propensity to spend; namely, those on high incomes and wealth. This will impact less on domestic demand. This is in keeping with the G-20's call for 'growth-friendly fiscal consolidation'.

Fourth, general taxation should only increase once wage and employment growth resumes and should only rise consistent with that growth. This will allow for additional tax revenue while maintaining domestic demand.

As an aside, I believe that such increases should come primarily through (a) social insurance so that people get a contractual benefit such as free health, earnings-related pensions, earning-related unemployment and disability benefit, etc.; and (b) local government taxation where it is potentially more accountable. It is in these two areas – social insurance and local government – where Ireland suffers from ‘low-tax’ status, not income tax, corporation tax and VAT/Excise.

I don’t know if this is a ‘left-wing’ discourse. It certainly is a rational one.

Paul Hunt said...

@Anonymous,

I think you're being a tad harsh on 'left-wing discourse'. The Scandinavian economies (and indeed the Dutch and German economies) have shown that it is perfectly possible to achieve a balance between economic efficiency and social justice. Despite considerable variation these economies show that they can prosper with high levels of taxation and expenditure funding and providing, resp., high quality universal public services.

The point about Ireland is that the excessively high level of charges levied by the sheltered sectors (whether public of private) had to be matched by low taxation in an attempt to achieve levels of disposable income that would allow people to pay these charges. But much of these high charges comprised deadweight costs, inefficiencies and, in the private sectors, profit-gouging. These will have to stripped out to increase disposable incomes for everyone and then it might be possible to contemplate increasing taxes to fund the level and quality of services people deserve and require.

Where the 'left' is compromised is that it constinues to defend unjustified deadweight costs and inefficiencies in the public and semi-state sectors. And this prevents it tackling the profit-gouging in the private sheltered sectors. It sometimes seems there is an 'unholy alliance' between IBEC and the unions not to attack each others' sacred cows.

And furthermore, there is a strong argument to shift taxation from 'goods' such as productive labour and efficient profits to 'bads' such as pollution and carbon emissions and rents.