Anthony Foley: It's not the best time but we need to talk about tax

Few would deny the value of good public services but they have to be paid for, and the main source of payment is the money collected from taxes

Thu, 17 Mar, 2022 - 18:00

Anthony Foley

The Russian invasion of Ukraine will result in higher public expenditure to provide services for the large number of refugees, to pay for defence spending and energy subsidies, while all the time climate change will require substantial spending.

There is strong public demand for improved services in most areas of the public sector, including childcare, transport, cycleways, universities, rural broadband, social welfare payments, better disability services and services for victims of domestic violence.

These are desirable because better public services improve the quality of life, wellbeing, and social cohesion and also help economic performance.

Few would deny the value of good public services but they have to be paid for, and the main source of payment is the money collected from taxes.

There are other non-tax sources to finance public services such as school transport, hospital, and prescription charges.

The Government also taps non-tax income in dividends from State commercial enterprises, and of course from borrowing.

However, non-tax charges account for a small part of the total finance required and there are also borrowing limits under EU rules to be considered.

There are other objectives to tax measures, including ensuring equity and behavioural changes, such as using carbon taxes to reduce fossil fuels and excise taxes to reduce alcohol or tobacco consumption, and to incentivise economic growth.

Anthony Foley: 'The main political parties have not clearly identified their long-term visions for the scale and extent of public services and the associated tax implications.'

There is extensive public discussion on public services but much less so on the taxes to finance them.

Every year, the Government's budget sparks debate on short-term and incremental changes rather than on a longer-term focus.

The Government established the Commission on Taxation and Welfare last year to see how best the taxation and welfare systems can work together to boost the economy, facilitate income redistribution, and meet the costs of public services.

Its terms of reference raise a number of tax issues but do not add up to a broad discussion on tax.

The Nevin Economic Research Institute, or Neri, has estimated that Ireland collects relatively low levels of tax, including social contributions, per head of population than nine other European economies.

The Irish tax per person was €2,255 less than the average of nine EU economies. Most of this is explained by relatively low rates of employer PRSI contributions, but Ireland also has a low employee PRSI rate.

The 2021 Tax Strategy Group also identified that the average EU employer social insurance contribution was much higher than that in Ireland.

There are several questions that need to be discussed. Do we want to pay an additional 10% of wages in higher employee social insurance contributions? Do we want to double employer contributions and what economic effect would it have?

Economic growth increases tax revenues without the need to increase tax rates or to bring in new taxes.

More expenditure means more VAT receipts and higher employment and higher incomes generate higher income tax and PRSI receipts.

However, growth alone will not by itself finance a substantially larger public sector, which means we will have to discuss new taxes.

The main political parties have not clearly identified their long-term visions for the scale and extent of public services and the associated tax implications.

Sinn Féin in its 2020 election manifesto went further than most: It identified €3.8bn of new sources of tax revenue, that included a wealth tax and higher tax and employer PRSI on large incomes. However, the manifesto also identified tax reductions of €2.4bn, which meant a net tax gain of only €1.4bn.

Matching public services of Denmark and the Netherlands will require more tax revenues. We need to talk about tax even though it is clearly not a great time to do so.