Wednesday, 6 October 2010

IBEC and Social Justice Ireland call for Higher Taxes (Revised)

Nat O'Connor: IBEC (in their pre-Budget submission) have proposed that Ireland's level of taxation should be 36 to 38 per cent of GNP. Social Justice Ireland (in their submission) call for tax to be 34.9 of GDP.

This is a revised version of yesterday's post. Thanks to Seamus Coffey for pointing out an error in the table re total tax revenue.

Professor John Fitz Gerald of the ESRI some time ago suggested 45 per cent of GDP as a long-term target, which would place Ireland in the middle of other European countries in terms of tax.

European economics commissioner Olli Rehn has already stated that Ireland must move from being a low tax economy to "a normal tax country in the European context"(Irish Times). The European average is 45 per cent of GDP.

If we go back to 2007 figures for GDP and GNP (which are the last stable pre-crisis figures), GDP was €189 billion and GNP was €163 billion (Source: CSO). This represents a 'boom' year. Figures for 2008 represent the beginning of the 'bust'. The following table illustrates what each of the suggested rates would have meant in those years, in terms of total tax revenue (taken from the Stability Update, and including social insurance as well as non-Exchequer tax, such as local authority commercial rates). Although it should be noted that GDP and GNP continued to fall in 2009 also.

Complete figures for 2009 are not yet available, but they are likely to show a continued deterioration of tax revenue (as stamps, VAT, etc. all continued to fall between 2008 and 2009; likewise higher unemployment means less PRSI paid and business closures reduce commercial rates). Hence, to meet the various tax take targets in 2009 would require even further increases in taxation.

IBEC's rates (36-38 per cent) would have represented less or the same level of tax in 2007, but up to €3.2 billion more tax in 2008. However, the significant collapse of GDP/GNP in 2009 makes it likely that IBEC's preferred tax take will be lower than actual tax take (as a percentage of GNP).

SJI's preferred rate would have called for over €4 billion in addition taxation in 2007 and over €7 billion in 2008. Despite the collapse of GDP/GNP in 2009 SJI's preferred rate will probably remain several billion higher than actual total tax revenue. In this context, it should be noted that SJI's stated aim is for Ireland to remain a 'low tax' economy.

A European average level of taxation (45 per cent of GDP) would have meant €23.7 billion more in tax in 2007 and €25.5 billion more in tax in 2008. That is nearly half again as much taxation. Of course, it would take years to carefully raise taxation towards this kind of target, and it would involve a transformation of Ireland's economy and industrial policy.

In reality, it is reasonable to suggest that increasing tax will cause some companies to leave Ireland, which will lower GDP. However, a more sustainable economic model might combine a more modest level of GDP with higher taxation; and more tax from a smaller number of companies and people might still mean more money for Government than lower tax from a larger number; including multi-nationals who are using tax breaks to avoid paying much tax here (or anywhere).

For example, the Social Justice Ireland document (page 2) shows a table of effective taxation in Ireland that suggests much higher taxation in the 1990s and early 2000s, which was also a time of stronger economic performance.

In this context, we could imagine that GDP falls to the same level of GNP, due to many multi-nationals leaving Ireland. In such a scenario, 45% of GNP would have taken an additional €11.8 billion in tax in 2007 and €14.8 billion in 2008. That's probably a more realistic estimate of what higher corporation tax, plus much higher social insurance, along with property tax could yield.

The bottom line is that the collapse of the tax take (by one third, €14 billion, between 2007 and 2009) is a major part of Ireland's financial problems. And this was on top of an already 'low tax' model, as the actual figures for both years show.

A broad coalition appears to agree that raising tax must be part of the solution for Ireland. And that means seeking higher taxes and new taxes.

That's where the debate really begins. IBEC want the Government to target people on the minimum wage for income tax, but they also call for property tax. Whereas Social Justice Ireland seek the reform of tax breaks (which generally benefit people on higher incomes).


Nat O`Connor said...

For transparency, Seamus Coffey's comment on the original post was as follows:


The figures you use for Tax Revenue are wrong. It is incorrect to equate Exchequer Revenue to Tax Revenue. They are not the same. There are a number of taxes which are not paid to the Exchequer, but which are taxes nonetheless. These include (with 2007 total)

PRSI contributions (€9,053 million)
Motor Tax (€957 million)
Broadcasting License Fee (€23 million)
Rates (€1,267 million)

With these included we get a more accurate reflection of the tax burden in Ireland. In this document the Department of Finance gives the 2007 total tax take of €61.5 billion. (See table 7 on page 17, add items 12 and 13).

This gives tax ratios of

TAX/GDP = 32.4%
TAX/GNP = 37.8%

This is in line with IBEC proposals (36-38% of GNP), i.e. IBEC is proposing no increase in taxes (based on 2007 figures). SJI (34.9% of GDP) is recommending about €4.5 billion in extra taxes.

There is no vast pot of untaxed gold out there. Our tax rates are not amazingly low. Reading the Department of Finance Stability Programme Updates reveals this.
They are lower then most other EU countries (2007 EU Average = 44.9% of GDP).

Exchequer figures are not tax figures. Mis-truths based on these are not helpful. The widening GDP to GNP gap is also an issue to enter consideration.

Anonymous said...

It is not surprising that the 'social partners' are calling for more money to be taken ordinary working people and to be handed to the management teams of the 'partners' for them to dole out as they see appropriate and to allow them to tell everybody else what to do.

You can dress it up as 'free enterprise' or 'workers' rights' or 'social justice' but it what it actually is is old-fashioned, Irish corporatism of the most conservative kind.

Anonymous said...

more tax from a smaller number of companies and people might still mean more money for Government than lower tax from a larger number

It must take a special type of smugness to seriously suggest that we deliberately shrink our economy and working population, in the sure and certain knowledge the you yourself will remain blissfully unaffected.

we could imagine that GDP falls to the same level of GNP, due to many multi-nationals leaving Ireland

You're really serious about this, aren't you? No problem consigning to the scrap-heap some of the most productive and dynamic workers in this economy. Why? Would it make you feel more important to be a medium sized fish in a much smaller pond?

Nat O`Connor said...


You are reading much more into the blog post than is actually there.

The current deficit is €19 billion. Between 2007 and 2009, tax revenue collapsed by €14 billion, due to a combination of the housing bubble collapse (stamp duty, excise), construction collapse (VAT), financial collapse (some corporation tax) and unemployment (PRSI, income tax).

We can’t go back to where we were because stamp duty and VAT from housing/construction are never again going to provide the same level of tax revenue. Hence, there is a need to look at rebuilding the tax system in new ways.

What I put in my post is simply some recent figures on what different organisations are saying about their preferred level of tax.

I’m certainly not saying that we should drive out multinationals – and productive, dynamic jobs – by raising corporation tax. But, if we want to estimate how much tax revenue would be raised by setting tax at 45 per cent of GDP (which is the level that European economics commissioner, Olli Rehn, is openly talking about for Ireland) we should not forget that multinationals will leave and GDP will collapse. I use GNP as an estimate of where GDP will fall to if Ireland had a typical European tax system because most countries have relatively similar levels of GDP and GNP.

Likewise, I am not suggesting that we shrink our economy. TASC has consistently called for stimulus measures, which occurred in nearly every other EU country, in order to maintain jobs and keep up economic growth (which in turn would lessen the relative debt/deficit burden). In contrast, the Minister for Finance, Brian Lenihan, explicitly talked about deflating the economy as a policy goal (to make ourselves ‘competitive’, etc.). Likewise, current policy has done little about the mass out-migration of workers.

It is however a mathematical fact that other EU countries gain similar proportional amounts of tax revenue from corporation tax as Ireland – although their rates are set at much higher levels and come from a smaller pool of companies.

We cannot increase tax to 45 per cent of GDP in anything less than a twenty year period. However, our policy-makers do need to decide on a long-term ‘normal’ level of taxation for Ireland.

Will it be IBEC’s level? In which case there will be small tax rises and big public expenditure cuts. Will it be SJI’s level? In which case there will be more tax rises, but still significant cuts. Or will we move to 45 per cent of GDP as Olli Rehn suggests? In which case, we will need to open our minds to how big a transformation of the Irish economy that would be. Is our crisis evidence that the low tax policy has failed? If so, where are productive and dynamic jobs going to come from in future?