We are fools to believe high tax myth
A big plank of the government plan to win re-election is to cut tax. Time and again we are told that we are a high-tax economy, that the tax burden is driving people out and preventing people from coming in, that the tax burden is crushing etc.
Much of the debate revolves crudely around the rates and incidence of personal taxation – there is an emerging shibbolethic consensus that an all-in marginal rate of less than 50% is the sign of a modern economy, with the unspoken assumption that rates above that are the mark of godless communism.
Presumably in the USA of Eisenhower, when the top marginal tax rate was 90% (admittedly on a very high threshold), this was a dystopian hell. Or, not.
Much of this is crude populism at its worst.
Modern nations require state services. Modern societies demand them.
What mature, modern societies realise is that to have these requires someone to pay for them. Having tried over the decades to pay for them on the cheap (by outsourcing such fripperies as education and health to the charitable instincts of the churches) or on the never-never (by borrowing from foreigners who, unreasonable divils that they are want the money back) we might now perhaps have realised that only WE can pay for these things.
And that requires tax. A glance at the tax structure suggests that we are not an especially burdened state. And a glance at the taxation of wages suggests that the incidence of tax on wages is not especially unusual.
Take first the overall incidence of taxation. The 2014 Eurostat taxation database makes this abundantly clear. We rank 23rd of the 28 for total tax as a percentage of GDP. GDP is the correct measure. We have decided on a national policy to have a GDP/GNP mismatch unheard of elsewhere. That is our problem.
The world over uses GDP as the measure of national income. They are not out of step with us. We are with them.
If in 2012 we had taxed GDP at the European average we would have taken in €12bn or some 25% more tax than we did. Imagine what we could have done with that. Taxing at the level of that awful place Denmark, we would have taken in a whopping €30bn more tax. Examining the tax structure, we see why we have low tax.
As a percentage of GDP we rank amongst the lowest for indirect tax take (yes, VAT) and social insurance contributions. The result is that the burden of tax take has to fall on wages and corporate incomes.
This is where the problem lies. And herein lies the rub. Our levels rates and incidences of personal wage taxation are also out of line with our perception.
While the Eurostat data gives us the overall tax picture, the OECD gives us the wage tax burden. Across the board, whether we look at a single person on the average wage or a family both earning at and above the average wage, across the gamut we have a lower tax wedge than the OECD average.
The tax wedge is the difference between gross pay and takehome pay as a percentage of total cost. Here it is lower. And it has been lower for decades. Simply, we take home more than the typical OECD worker, regardless of our family and wage structure, and this has been the case for years.
It is only when we get to levels of 175% or so of average wages that the Irish tax wedge even begins to get to average OECD levels. Compared to the typical OECD worker we do not pay high tax rates at low wage levels.
Even at the highest level, 250% of average wages, we do not compare badly.
The average tax wedge for single persons in Ireland at that level is 39% while for the OECD as an average it is 42%; for a single earner family with two children at 250% of average wages the percentages are 37% and 39%. Again there is a key issue here – we have a higher marginal tax wedge at high levels. That is down again to the low level of social insurance contributions taken.
We have chosen a low tax policy while fooling ourselves that we have the opposite. And we are continuing to fool ourselves.
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