The Irish Tax Institute does not disappoint. It describes itself as ‘the only professional body exclusively dedicated to tax’. In a way, this is an odd description because readers of its yearly pre- and post-budget documentation may have the impression that tax is an evil, but a necessary one at that. The aim of professional analysis by tax experts is to minimise it - legally (so that we might have ‘tax efficiency’). Alas, large international corporations do ‘tax efficiently’ very well as we know only too well here in Ireland. A special focus in this year’s publication Pre-Budget 2019 Briefing Papers is on Tax Freedom Day – that day in the year when workers have paid their entire income tax obligations were they to pay all of their tax upfront and after which they ‘start earning for themselves’. The implication of such language including references almost everywhere to ‘tax burden’ is that we are not free until we have to stop paying taxes and then we can earn to pay for our own lives, families and needs according to our own choices, priorities and values.
According to this thinking and mode of language, the lowest paid are the freest of all meeting their income tax obligation on the 1st January. A worker on €18,000 is free after the 11th January according to the ITI. Pity the hard working person on €150,000 a year and is not free until the 8th June. It looks like a reversal of Das Kapital whereby highly paid managerial, professional and CEO workers are paying and working long hours to create ‘surplus value’ which ends up in the pockets of those at the bottom. It is a topsy-turvey kind of world and it could be in a scene from Alice in Wonderland
Now, the idea that paying tax is a form of un-freedom (a type of modern-day slavery) is a most peculiar idea and one that is relatively new since the rise of a particular ideology in the USA and UK many decades ago. Essentially, the State is seen as either too big or very bad and the smaller and leaner it is the better. The idea is that individuals and families provide for themselves (remember ‘there is no such thing as society’) and the role of the State is regarded as a minimalist one to defend law and order, guard property rights and provide some basic level of education and welfare and the latter if only to keep the peace. Freedom to live the good life is a personal, individual thing and at most families are the maximum collective setting so the thinking goes.
Let us look under the bonnet of this year’s contribution by the ITI. It contains many gems and not a few useful ideas and proposals for tax reform and, let it be said, even tax increases some of which are to be welcomed. However, it takes a number of ‘facts’ or partial facts and presents these as part of an over-arching narrative that runs something like this:
A Workers are paying more tax than they were in 2008.
B Workers who earn more than the average pay the vast bulk of income tax.
It does not take brilliance to work out point C implied in all this: cut taxes on the hard-pressed middle and the ‘entrepreneurial’ class that drives wealth and job creation and you can raise all boats through trickle-down economics. A key part of the argument is that by reducing costs and taxes you can release new entrepreneurial energy and economic activity. A former Minister of Finance used often cite the Laffer Curve although the current incumbent seems to be less convinced of it.
The implication of A is that workers should pay less tax because they paid less tax ten years ago in the months before The Great Recession inflicted these shores. This is a seductive and, if I may say so, populist type of story. The implication of B is that, well, lower paid workers should pay a bit more income tax. After all, lower paid workers pay more income tax in other European countries and get along fine, so the narrative runs.
There is nothing at all new in these claims. And, factually speaking the claims in A and B are correct. You see, the conclusions drawn and the context not given is the problem. And, the idea that taxing higher income workers is a penalty for wealth creation is unsupported by research.
2008 was the high point of Celtic Tiger II (there being two phases and the last one enduring from 2001 to 2008). In 2008, households and individuals had seen very significant cuts in levels of personal tax over the previous decade. The year 2008 was the low point in terms of personal tax rates (see Chart 1). Yet, tax buoyancy at least up to 2007 was remarkable, fuelled as it was, by rising incomes, rising taxes of all sorts and a relatively modest budget deficit in the immediate period before The Great Crash. When the latter arrived, the banks collapsed, construction activity came to a halt, the domestic economy and aggregate demand started contracting sharply. The automatic fiscal ‘stabilisers’ kicked into place. In a short period of time the Government of the day started to raise taxes and to cut spending. The extent of ‘adjustment’ gathered pace as the crisis deepened (and as fiscal austerity helped to compound the problem in Ireland and, later, in Europe). An emergency ‘income levy’ and standing ‘health levy’ were rolled into a new Universal Social Charge (USC).
What ITI does not explain is that there had been a systematic erosion in the tax base as well as in rates of personal taxation over a long period of time dating back to the period of the 1980s when another, but different, economic crisis impacted on the Republic of Ireland. Picking the year 2008 as some sort of meaningful benchmark or point of desirable return can only be described as fitting into a scene from Alice in Wonderland. Chart 1 shows that tax rates in 2017 are back, approximately, to where they were in 2000. Remember that the 1990s saw significant reductions in tax rates and extension of various tax reliefs.
A huge and often neglected fact underlying any analysis of taxation is the role of tax and social welfare in redistributing what we might term market income (that is, income from labour and capital). In the Republic of Ireland, market income is very unevenly distributed. The Irish tax and welfare system has to work hard at redistributing income. The Irish Tax Institute acknowledges this point about heavy lifting required on the part of the State but it does not draw any attention to the fact of very significant market income inequality. The NERI will return to this point with an update in long-term trends in a paper to be released by my colleague, Ciarán Nugent. See a previous Monday blog Some dirty secrets about income and earnings and a recent blog by SIPTU researcher, Michael Taft, When Progressive Taxation is a Dubious Distinction
What conclusions can be drawn?
Should the rate of personal income tax be reduced at this time in Ireland? All the cross-country evidence indicates that, on average, we pay less in total taxes whether on labour or on capital. A key factor is the relatively low rate of social insurance paid in Ireland – by employees and employers. Another factor is the unique tax advantage given to married couples vis-à-vis single persons. It is noticeable that, in comparisons of tax paid, commentators such as the ITI and many others focus on single persons. For reasons of length I have confided the statistical material in this blog to single persons.
In particular, many commentators draw attention to the income level (€34,550) at which the higher income tax rate (40%) becomes payable by single persons. If we put all the numbers together: income tax, social insurance, corporation taxes, stamp duty, VAT, excise duty, etc. Ireland pays less in tax than other European countries. Leaving aside all of the complications to do with GDP, GNI and GNI* (let’s not go there!), the data show that the average effective tax rate is lower, in Ireland, than it is elsewhere. This is before account is taken of various tax reliefs for pensions, health and other costs which are considerable in the case of Ireland.
Comparing ourselves with similarly prosperous economies in Northern Europe including the UK, Germany, France and the Nordic countries, Ireland paid, in 2016, €13,600 per capita in all types of taxes. The average across similar countries was €15,100. An updated picture may be had using the latest published OECD data on average ‘headline’ personal income tax rates (including social insurance and, in the case of Ireland, USC).
The data for Single Persons, only, are shown in Chart 2. The comparison is for the main comparator OECD countries in 2017 and refers to average tax rates using standard thresholds and rates for single persons. There are three points to note about the data in this chart:
- For the ‘average-wage’ single person, Ireland is well down the list of countries (see red bars, below).
- The same is true for workers on two-thirds of the average.
- In the case of above average-wage workers (about which the ITI has much to say), the average tax rate is below that of most other OECD countries (at a level of 31.3% and coming 18th out of 28 countries shown).
Much play is made by commentators about the high marginal tax rates in Ireland – especially in regards to the relatively low income threshold at which people pay the highest marginal rate. This corresponds to the extra tax paid for each additional Euro earned. It is, typically, much higher than the estimated average tax rate because of the existence of different bands as well as exemption thresholds for tax and, in the case of Ireland, PRSI and USC. Chart 3 shows a comparison of marginal rates. Two points may be noted:
- The marginal rate is, indeed, relatively high for average or just above average wage earners (=133% of the average wage) in Ireland.
- At the same time, the marginal rate for higher earners (167% in the OECD example) is high but by no means the highest. Six other OECD countries have higher marginal rates for this group and these are: Sweden, Belgium, Denmark, Netherlands, Italy and Finland. Hence, relatively high marginal rates (by OECD norms) is not necessarily an impediment to economic dynamism and productivity.
In the cut and thrust of debate about average and marginal personal tax rates, it is easy to forget the bigger picture which includes the role of corporation tax, capital taxes (including those on financial gains and inheritance) and consumption taxes including ‘carbon taxes’. The ITI does acknowledge these areas and makes recommendations some of which I think make sense provided that they are timed and phased in such a way as to avoid reducing the disposable income of poor households. In particular, the proposal to increase the rate of VAT in the hospitality sector is positive and timely.
As stated in a Monday Blog this time last year:
‘Rising population, an ageing population and the winds of competition from outside leave us with little option but to bring Ireland more into line with other parts of Northern Europe. However, to maintain and improve fiscal health as well as accelerate investment in the key bottleneck areas, we also need to pay urgent attention to two areas:
Reforming and improving our public services so that a greater social consensus around taxes and public expenditure is possible (‘where will all the money go if we just throw more money at health’ is a response from some commentators).
Devise a medium-term strategy to up the game in small and medium-sized enterprises which are the backbone of the domestic economy and the mainstay of employment and tax revenue through those employed there.’
We should be competing on quality of life, fairness and access to health and education. Some of the most successful and competitive economies in the world combine high levels of taxation with high levels of productivity and more equitable distributions of income before tax.
Freedom Day is when we have achieved a good balance between ‘cash in workers’ pockets’ and ‘services and income in worker’s lives’. We might take a leaf from societies where collective bargaining enables a more equal distribution of wages while reaching high productivity levels. We pay for what we get and we get a less than satisfactory healthcare system and many other collective goods for many reasons one of which is that many of us pay less tax than we ought. Think of it this way – a double-income household with a combined income of say €60,000 might incur well over €1,000 a year in out-of-pocket medical expenses not to mention private health insurance if they opt for it (and still pay dearly for outpatient appointments and visits to the doctor). Would it not make better sense for most people to pay a bit more and pool the benefits in better services?
People do not become free on a given date based on when ‘they start earning for themselves’. Rather, by avoiding hard and necessary changes in the tax code, most people end up being very unfree for the rest of the year by virtue of a sometimes poor, absent or under-supported public transport system, prohibitive childcare costs, high out-of-pocket healthcare costs, high rents and house prices (indirectly related to systematic under-investment in public housing over four decades) and rising education costs.
I suggest that we revisit the concept and meaning of freedom.
Irish Congress of Trade Unions Congress Pre-Budget Submission. Budget 2019 – Investing in our Shared Future.
Irish Tax Institute Pre-Budget 2019 Briefing Papers
Department of Finance Tax Strategy Group papers (Budget 2019)