Last week's exchequer returns, supplemented by the publication of the Revenue's headline results for 2021, suggest that by accident if not by design, Ireland has ended up with a model of taxation which makes government funding more resilient than that available in many other countries.
As a general rule, when an economy expands, tax receipts increase in direct proportion. In November last, the European Commission estimated that the Irish economy would grow by almost 15% in 2021. Yet tax revenue in 2021 increased by almost 20%.
How did this happen, and what makes the Irish tax system so resilient?
It is clear that Irish taxpayers and Irish businesses are very tax compliant. Revenue’s headline results for 2021, which provide detail into the mechanics of the tax system, show tax compliance rates among large and medium taxpayers - mainly businesses that collect and pay the bulk of the money - at around 98%. Businesses are obliged by law to collect taxes, mainly via the PAYE and Vat systems. Compliance therefore has a stabilising effect on the exchequer receipts. The average value of every tax payment made to Revenue is in the order of €8,000.
The pandemic disruption has affected employees in sectors such as travel, hospitality and retail the most. These sectors often do not pay as well as the likes of the information and communication, public service, legal, accounting, health or engineering sectors, where employment levels were less affected by the pandemic disruption. Therefore, the disruption to overall income tax yields was less than might be expected.
Though it doesn't figure in the tax receipts, €12.6bn was collected in PRSI during 2021. Normally most of this is the PRSI paid by employers, not employees. The high PRSI take will improve the state of the nation’s social insurance fund, which funds pensions and other occupational benefits.
Related to this is that for several decades Irish industrial policy has focused on bringing in foreign direct investment, particularly from high-tech and pharmaceutical industry. Products and services from these sectors have been in higher demand worldwide due to the pandemic. This had a positive effect on corporate profitability, and hence corporation tax receipts, but also on the buoyancy of employment and wage levels in those sectors.
The policy response from Government towards individuals and businesses most affected by the pandemic has also kept tax receipts buoyant. Schemes like the Pandemic Unemployment Payment and the Employment Wage Subsidy Scheme helped people to have some money in their pockets even when their employment was disrupted.
That in turn resulted in continued consumer spending on products and services.
Though largely outside government control, inflation has an impact on exchequer returns. For instance Vat and some other duties on fuels are calculated on wholesale prices, rather than just on volumes. When petrol prices on international markets increase, so too do the Exchequer receipts from taxes on fuel.
It is unlikely that any government designs its economy to be pandemic proof. The draw on government spending due to Covid-19 eclipses the improved tax receipts for 2021. No state, especially one with an economy as small as this one, could deal with too many years of pandemic disruption. The exchequer figures though suggest that Ireland, at least from a public finance perspective, may be coping better than most.
- Brian Keegan is director of public policy at Chartered Accountants Ireland