Service provision relies on significant tax levels

Perhaps not the most incisive piece of social commentary from the great US songwriter Randy Newman but you get the gist: “If you lived in Norway you’d be fine right now. Get sick there, you make the doctor wait”, writes Brian Keegan. 

Do other countries provide better services for their citizens? Is the so-called Scandinavian model of high tax, high benefits really the way to go?

US president Donald Trump doesn’t think so. In a tax policy speech some weeks ago, he repeated the claim that American citizens know better how to spend their money than Washington does. The irony of the president’s comments was that in a speech calling for political consensus on lowering taxes in the US, he omitted to mention that the US is one of the most lightly taxed jurisdictions in the developed world.

It’s complicated to compare like with like when looking at the tax systems in various countries because different tax systems have different measures and priorities. Most European countries, for example, have some form of national insurance or PRSI,
whereas a charge like USC is relatively unique to Ireland.

A more helpful way perhaps to draw comparisons between countries is to
look at the amount of tax a government collects relative to the GDP (acknowledging that GDP is itself a contentious thing to estimate).

In ballpark terms, Ireland collects 25% to 30% of GDP in tax. Most European
countries collect 30% to 40% of GDP and the Scandinavian countries collect about 40% or more. In America, the amount collected is typically less than 25% of GDP.

Which brings us back to the Scandinavian model. Scandinavian countries have more money to spend on citizens because they collect more tax from them in the first place. According to OECD figures for 2015, the Danes spent almost $27,000 (€22,500) per capita whereas we spend just about $20,000 per capita. Again, this is a crude measure because it doesn’t reflect national priorities such as defence, or particular national circumstances such as the consequences of having to pay interest on a large national debt. Nevertheless, these macroeconomic figures underline the reality that a country cannot have significant welfare benefits if it does not significantly tax its citizens and businesses.

It would come as a surprise to many people to hear Ireland described as a low-tax jurisdiction. However, even though relatively few people pay tax in this country, those who do, pay through the nose. Some 83% of all income tax and USC is paid by 26% of earners. This leaves Irish governments with little enough scope to levy extra personal taxes without asking the relatively unscathed 74% to contribute a bit more. The other main source of revenue for the exchequer, Vat is also close to a tipping point.

Our top Vat rate of 23% is within striking distance of the maximum rate permissible under EU rules, which is 25%.

Hikes to other important sources of income might ultimately be counter-productive because increased prices will eventually suppress demand.

In addition, recent experience has shown strong resistance from citizens to any suggestion that they might have to pay more for critical services such as water supply. Broadcast media is in crisis as evidenced by RTÉ currently seeking voluntary redundancies. Yet, the notion of a broadcasting charge to cover people who watch TV content on laptops, tablets and smartphones, has been quietly shelved.

The current minority government has not the political strength to make hard decisions about
increasing taxation despite obvious and urgent societal demands for improved
infrastructure and on perhaps most critically of all, for social housing.

Our self-imposed refusal to increase government funding through increased taxation keeps us far distant from the Scandinavian tax and welfare model. We will all have to wait to see doctors for some time to come.

Brian Keegan is director of public policy at Chartered

Accountants Ireland

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