Ireland was one of just four EU countries with tax on low-incomes at under 30%, and was an example for others countries on how tax could be used to help create employment and fight against poverty.
All EU countries were asked to review their tax systems with a view to shifting them away from labour by EU leaders at last week’s summit.
Such a review was timely given the need to foster a job-rich recovery, according to Laszlo Andor, the commissioner for employment, social affairs and inclusion.
However, tax expert Brian Keegan of Chartered Accountants Ireland said the country’s “virtue was accidental”, and not entirely correct.
“Our tax base was too narrow during the boom years, and even though we have broadened it, mainly by the Universal Single Charge, we still fit his prescription for the balance of tax paid between high earners and low earners”.
With unemployment at over 10% in the EU, countries were duty-bound to consider all options to mitigate the impact of the crisis on the lives of citizens, Mr Andor told the tax forum in Brussels.
The issue of tax was particularly pertinent now as it impacts on the relative price of labour and capital and determines productivity growth, innovation wages and profitability.
However, the extent of tax-cuts is limited by the need to maintain the welfare system, fiscal sustainability and general price stability.
The alternative option is to shift tax from labour to other sources of revenue.
But shifting to indirect taxes, such as increasing VAT has a regressive effect on income distribution and may conflict with Europe 2020 policy targets for cutting poverty.
The consensus is that reducing the tax burden on low-paid workers was important in promoting job-intensive growth.
“Nevertheless, the only member states where the tax burden on low incomes is below 30% are Ireland, the UK, Malta and Luxembourg. This should be a wake-up call to the other member states,” he said.
While some countries have cut employers’ social security contributions, a more selective approach could be adopted such as cutting tax on the wages of the low-paid and offsetting the loss of revenue by raising tax on very high wages.
Mr Andor said countries should not shy away from innovative tax measures such as the proposed financial transaction tax.
He was praised by Mr Keegan for discussing social welfare and tax together, as they were often excluded from tax policy debates.
But he said, unless the financial transaction tax is universally adopted, it could lead to significant distortions in global financial markets.
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