It was my feeble attempt to change the way things might be looked at, and it fell on the deafest of deaf ears. I called them M&Ms, and I tried to talk about the health warning that should always be attached to a myth, or a mantra. Just because it’s said with a self-important air, and repeated ad nauseam, doesn’t mean it’s true.
The PDs were starting to be in the ascendancy then, and the core myth they created was being repeated like a mantra, day after day, by their acolytes in Fianna Fáil. You may remember their myth — although actually, you don’t need to, because it has now been elevated into an article of faith.
You could maybe sum it up in this phrase: “Public spending bad, tax cutting good.” Little by little, we all came to believe that Charlie McCreevy’s tax-cutting strategy (he was the PD’s mole in government) had created the growth of the Celtic Tiger years. It was in fact the other way around –- McCreevy gave away the growth in tax cuts, rather than created it. But never mind. There is nobody, it seems, who doesn’t now believe the M&Ms about tax and spend.
In fact, it has been added to, to the point where it is now both unchallenged and unchallengeable. How many times have we heard the phrase, “you can’t tax your way out of a recession”? And when Michael Noonan was asked why he had decided to put up the VAT rate, his reply, again and again, was the same thing: “I don’t want to increase income tax, because that costs jobs.”
There is something deeply depressing, isn’t there, about a political discourse that won’t allow anything to be challenged. It’s simply not true that a properly structured and well-balanced tax system costs jobs. But it feeds into the other myth we all suffer from in Ireland, that we’re all grossly over-taxed, and couldn’t possibly afford to pay another cent towards the cost of public services we claim to value.
If you go looking for the evidence for this assertion, it’s hard to find. But there is some data about.
For example, Eurostat, the statistics office of the European Union, gathers all sorts of information about the way we pay taxes, and goes to great lengths to apply the collected information so that we can compare like with like. Their most recent publication came out in July, but sadly didn’t make the bestseller lists that month, so it has taken me until now to catch up with it. It’s called Taxation Trends in the European Union.
And it makes amazing reading. The amount of tax collected in Ireland, expressed as a proportion of our national wealth, is not far short of 30%. The actual figure — it’s called the tax-to-GDP ratio – is 28.2%. Just imagine. Shock. Horror. The pain of that. The cruelty. No wonder the economy is in such trouble. Our tax rates must be the highest in the world, to produce a figure like that.
Eh, no. Our tax-to-GDP ratio isn’t the highest in the EU at all. In fact, it’s the third lowest. There are two other countries in the EU that have a lower tax burden than us. Latvia is one of them, Romania is the other. And this is all taxes we’re talking about. If someone feels like writing in to the paper and telling me that I’m ignoring the stealth taxes, I’m afraid not. Our total tax take, expressed as a proportion of our total wealth (even taking account of the fact that total wealth has been going down), is the third lowest in Europe.
It does offer one answer, of course, to all those who think we’re crippled by tax. They could choose to live somewhere else. Although, I’m told, Bucharest and Riga start to get pretty cold around this time of year.
But seriously, here’s a fascinating paragraph from the chapter on Ireland in Taxation Trends: “From 2000 to 2002, Ireland reduced the total tax burden across the board from 31.5 % to just 28.4 % of GDP. Since 2002, however, the total tax ratio has increased every year, reaching 32.2 % in 2006, in large part due to a surge in VAT receipts, capital gains tax and stamp duties. This upward trend was interrupted in 2007 when the total tax ratio decreased by almost one percentage point. In 2009, total tax revenue to GDP has reached the lowest level.”
It’s like a picture of the property bubble, expressed in the less than lyrical language of a Eurostat statistician. As property prices rose, we collected so much tax that our total tax take began to resemble the European average. The minute the bubble burst, our tax take collapsed.
And that is precisely the thing that has caused us the problem we face today. We talk all the time about how awful public spending is, and how out of control it is. And yes, there’s a lot of things that need to be much better managed, and some things that need to be reformed. But our real problem is an income problem, not a spending problem.
I don’t understand why we’re so determined to shy away from raising some additional revenue. If employers are asked for more in terms of a contribution, for instance, another one of the M&Ms is trotted out, about how important competitiveness is.
But look at what Eurostat has to say: “Social security contributions represent a meagre 5.8 % of GDP (second lowest in the Union after Denmark), compared to an EU-27 average of 11.1%”. Throughout Europe, on average, direct taxation contributes about a third of total tax revenue, indirect taxation another third, and a third comes from social security contributions (which are funnelled into much better systems of social protection). In Ireland, just over 40% comes from indirect taxation (and that will go up with the VAT increase), just under 40% comes from direct taxation, and around 20% comes from social security contributions.
You know what’s even more bizarre about all this? We concentrate all our anxiety here on the marginal tax rate — the rate you pay on the highest proportion of your income. And sure, the marginal rate is pretty high in Ireland at 41%. But in Germany (remember them, the people who pay our bills?) the marginal tax rate is 47.5% — that’s what better-off people pay there. And it contributes to an overall tax take of 39.7%, slightly higher than the European average.
In fact, if you look at the overall European table, the astonishing thing is that higher tax contributions are much more often associated with leading prosperous countries — the ones with the Triple A ratings we envy — than otherwise.
That’s the truth, as opposed to the myth. Isn’t it about time we began to debate these issues on the basis of truth rather than myths and mantras? Then maybe we’d start to construct a tax system that’s progressive and fair, rather than try to cut our way out of the recession.