In this edition of our blog, NERI economist Paul Goldrick-Kelly compares the latest available data on taxes in the Republic of Ireland and UK to other wealthy EU countries. He argues that these data suggest scope for significant revenue raising to fund reformed economies.
Few things are argued about as often in political life as whether tax levels are appropriate, insufficient or burdensome. These debates form the backdrop to policy around budget-time as well as during election season.
While these kinds of issues have receded somewhat during the pandemic, they will re-emerge. As we face the return of significant deficits linked to the unprecedented state interventions to tackle the pandemic and the economic damage economies have sustained, the debate has already started. What is the appropriate role for the state? Are the kinds of supports instated during the emergency desirable afterwards? Who should be taxed?
For this debate, we need to look at the tax structure in Ireland and the UK, as they existed before corona and in their entirety. The approach should be holistic, rather than simply focusing on income taxes as we often do, we should bring the other seven of every ten euro/pounds collected into view.
In my latest NERI inBrief, I look at the total tax take, including social contributions (since these are compulsory payments) in the Republic and UK in comparison to other, sizable and high income (Output per head over €30,000) western European countries in 2018. I use tax collection on a per person basis, to scale things between countries (most will be aware of the pitfalls of measuring against GDP, infamously skewed in the case of the Republic).I find that the Republic of Ireland and the UK are the two lowest tax jurisdictions in the 11-country group, which includes Norway, Denmark, Sweden, Austria, Belgium, Finland, Netherlands, France and Germany.
I weight country values by population to create a "peer weighted average” reflecting what is typical for this group. I find that the two countries per person take is well below this average. ROI showed a tax gap of €2,255 per person, while the UK showed an even larger €4,953 (£4,382) gap per capita. Multiplied by our respective populations, the data show that Ireland would collect an extra €11 billion in receipts and the UK over €330 (£292) billion if they adopted European norms.
The major source of these gaps is social contributions (read PRSI in the Republic and National Insurance in the UK). Taxes excluding contributions are a bit above average in the Republic (€836 above the PWA per capita), but social contributions show a large (€3,090 per person) deficit. These data imply ROI collects over €15 billion less in social contributions than a typical state in our comparator group.
About two thirds of the UK’s gap is explained by social contributions. The UK shows gaps under both headings, a large gap in social contributions of €3,278 (£2,900) and a significant tax gap of €1,675 (£1,482) per person. This scales to respective shortfalls of nearly €112 (£99) billion and €218 (£193) billion under the respective categories.
Taxes (including these social contributions) are levied on various types of income, consumption and assets, including things like income taxes, VAT, property taxes, inheritance tax etc. This can be categorised in a three-way split: Labour, Consumption and Capital taxes.
Dividing the total take this way, we see that the gaps for the two countries compared to the typical comparator state come from Labour tax, made up of the taxes linked to wages as well as well as taxes and contributions levied on transfer income of the non-employed (things like pensions, benefits).
For ROI, the gap on labour taxation is larger than the aggregate gap, showing a deficit of €2,832 per person in 2018 (Figure 2). The deficit in the UK, €4,566 (£4,040), accounted for over 92 per cent of the UK’s total tax gap. The implied gaps in both cases are substantial at nearly €14 billion for ROI and over €304 (£269) billion.
Digging deeper, I find that the single biggest contributor to this labour tax gap is the relatively small tax take from employers, in the form of social contributions and other kinds of payroll tax. The ROI showed a per person gap of €1,785 while the UK showed a gap of €2,053 (£1,816) annually. In both cases, per person receipts were less than half the typical level in the high-income EU countries. In ROI’s case, the gap is so large that meeting the peer average in employer payments would close nearly four fifths of the aggregate gap. The UK also shows a significant gap of €1,533 (£1,356) or €102 (£90) billion on tax of employee income. In contrast, ROI collects approximately average levels of employee tax.
In contrast, ROI showed an excess in receipts relative to comparators under the headings of consumption and capital taxes. Under the consumption tax heading – showing taxes on transactions and final consumption goods- levied taxes per person were €75 above the peer weighted average. This amounts to an aggregate excess of approximately €400 million. The UK, on the other hand, collects about €545 (£482) or 12 per cent less tax per person under this heading, amounting to a scaled gap of about €36 (£32) billion.
Finally, both states showed capital tax receipts- which represent taxes on capital/business income as well as stocks of wealth – that are above average. This is particularly true in ROI, which collected €506 more per person under this heading in 2018. The UK collected €162 (£143) more in receipts per head.
However, the excess in ROI explained by relatively high take from tax on corporate income, where ROI collected €908 more per person than average, or about €4.5 billion in total. Other subheadings, such as taxes on the income of the self-employed and taxes on stocks of capital – which includes taxes on property, wealth and inheritance taxes – show significant gaps of €286 and €153 or a cumulative implied total of over €2 billion. The UK shows significant gaps under the headings of taxes on corporate and self-employed income, or approximately €263 (£232) and €417 (£368) amounting to population wide gaps of €17.5 (£15.5) and €28 (£24.5) billion respectively.
At this point, you may wonder why any of this matters. We were often told before this crisis that a more expansive programme to deal with climate breakdown, or more extensive supports to help end deprivation or manage childcare were too costly or would endanger the economy.
The data from these successful economies which have done more to address these issues beg to differ. The debate around taxes should mature to something beyond what the current “fiscal space” at current tax levels allows, and it should move beyond cuts or otherwise to USC or income tax. They also call into question the adage in Ireland that our tax system is singularly “progressive” – our tax system significantly privileges employers and asset holders while levying relatively high levels of regressive taxes on consumption for instance.
As we exit this crisis, we should look to the sorts of countries and societies we want to build as we recover. Charting a new path towards a more European-style social model will demand a confrontation with these old tax shibboleths.