Taxpayers are in for a big surprise — and not a happy one, judging by a European Commission report on the level, incidence and amounts of taxation across the EU27.
Irish people have a perception that, as a nation, we are taxed to the hilt. In general, we can see no more room for increases in the level, range or incidence of taxes levied. However, this is not borne out by the facts.
Those sacred cows who are today happily munching away in the tax fields of Ireland may very soon feel the discomfiting gaze of a foreign butcher upon their necks.
We are deluded to presume special status for our economic circumstances. Just as there was a herd mentality about the property bubble, so too there is a worrying consensus about tax. If we have learned anything, it should be that where consensus exists we need to seek contrary views.
Overall, we are not that heavily taxed. This may come as a shock to many of us. The shock we feel is that, having been relatively lowly taxed, we are now being asked to become used to being slightly more taxed. This is painful. But it’s the direction things in which things are going.
As a percentage of GDP (more on this later) our tax take, in total, is 28.9%. This is 22nd of the EU27. The only ones with lower taxes than us are the new accession states of Latvia, Romania, Bulgaria, etc.
The top five highest taxpayers are the Scandinavian countries of Sweden, Finland and Denmark, and France/ Belgium. None of these are hellish places to live; quite the opposite. None are known for their economic backwardness; quite the opposite. High tax takes, quality services and economic prosperity can go together.
It is sobering to realise that if we collected the same percentage of GDP in tax as does Denmark, we would be collecting 60% more. In 2013, this would amount to €75bn+, and we’d be running a massive surplus.
If we had the average EU 27 tax take, we would still take in about 24% more and be in budgetary balance.
Can we really expect sympathy from our EU partners when our tax take is so much lower than theirs?
Some, most, will argue that this is an incorrect metric. They will say we should use GNP and not GDP. This argument is largely false. Even if we measure our tax take against GNP, we still are only on the average in terms of tax burden.
We have decided, over decades, to become heavily dependent on a particular structure in our economy. We have a business model that, at its most benign, is open to the charge of tax-led economic predation; and, at worst, to being a full-scale tax laundry.
As we have seen with Cyprus, the new approach can involve the centre dictating the appropriate economic model for a country. That this may scupper decades of democratic decision-making is irrelevant.
Is Ireland’s 12.5% tax rate on corporation tax and associated tax reliefs, shelters and dodges etc, really any easier to defend than the Cypriot banking model? I don’t imagine that it is seen as such in Europe.
We should wish very hard that our banks are fixed for once and for all, and that they will not compel us to go back cap in hand to Europe. We choose how to structure our economy. We cannot then complain when those that choose a more balanced approach baulk when asked to pay for our (and their) mistakes.
On most tax areas we compare poorly to our European partners. Our corporation tax rate is at the bottom end, and as a percentage our tax take from business and corporates is 18th out of the EU 27.
Our energy taxes are low; we’re 23rd out of the EU 27 as a percentage of GDP. Within that, our taxes on transport and fuel is 21st out of 27.
More problematically, Ireland’s social contributions, PRSI and related, are also low by European standards, even with the USC. Employer social contributions are the second lowest as a percentage of GDP; employee social contributions are third lowest.
It is this low level of social contributions that is, to a very large extent, contributing to the overall low level of tax take. Were we to take the average European social insurance contribution, we would double our rates.
The above are not arguments for increased tax. They are, however, facts that should be part of the debate. We have chosen a particular tax and economic structure that is not in the European mainstream. Pretending otherwise ill serves us.
- Brian Lucey is professor of finance at Trinity College Dublin.
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