Economist: ‘Low’ tax rates to blame for Ireland’s deficit crisis

If tax on Irish workers was increased to the EU average, the Government would not have to borrow to run the state each year, a thinktank claims.

Irish workers pay one third less in taxes, including social security contributions, than the average person in the EU, ranking it the fifth lowest of the 27 countries.

The greatest difference is in the level of social security contributions, which are among the smallest in the EU and account for just over 20% of the tax take compared to close to an average of one third overall.

Economist Tom McDonnell of the independent thinktank Tasc said that if the tax take was increased from the current 28.2% of the country’s GDP to the EU average of 38.4%, this could yield an additional €15.9bn a year.

“If Ireland had a normal European system for taxation and social security contributions, then we would not have a problem with the deficit and we would not be in the trouble we are in today in terms of being locked out of the market and reliant on the troika.

“It is our low tax burden that makes us unusual by European standards — not our public spending.”

The extra tax, however, would not cover the €3.1bn annual cost of the Anglo promissory notes.

The universal social charge, introduced last year, and the rise in taxes, has increased the implicit tax rate over the last two years but still leaves Irish workers among the lowest taxed in the EU.

Irish people believe they are overtaxed and when they see their taxes and charges going to bail out banks, including dead banks, they recoil, especially as many have unsustainably high levels of debt, said Mr McDonnell.

He would not advocate substantial increases in income tax and PRSI in the short term, as they tended to damage growth, especially when they targeted low-income workers.

“In the medium term we will have to increase the take from labour taxation, but this should be a slow process undertaken year-on-year.”

Instead, he believes that local taxes such as an equality-proofed property tax with built-in deferments rather than exemptions, and increased taxes on passive income such as property rentals and inheritance tax, could be increased.

Many of the tax breaks should also be abolished, he said.

These increases would be less damaging to growth and job creation than taxes on labour and target those who can pay.

“This is not exactly a populist line, but the data is very clear.”

On the other hand the country’s recently increased Vat rate of 23% is now the joint fifth in the EU — some way behind Hungary’s 27% but ahead of the EU average of 21% and Britain’s 20%.

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