Ireland a low-tax country; Kenny wants radical income tax cuts
Ireland: The national parliament's belated Committee of Inquiry into the Banking Crisis, colloquially known as the Banking Inquiry, has yet to report but expect nothing as you shall not be disappointed. Enda Kenny, taoiseach, who has put tax cuts at the heart of his party's general election programme, in common with his recent predecessors merits the famous epitaph for the French Bourbons delivered by Charles-Maurice de Talleyrand, prince de Bénévent: "they had learned nothing and forgotten nothing."
Tax cuts are easily made while the reaction to the introduction of water charges is just one example of the difficulty of raising taxes.
Jean-Baptiste Colbert (1619-1683), Controller General of Finance under Louis XIV, is reputed to have said: "The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing." However, in recent decades governments have taken advantage of what are called stealth taxes but in an era of low inflation, the opportunities have been reduced.
Last weekend Harry McGee wrote a profile of Enda Kenny in The Irish Times: "Kenny is not a policy generator and has never been a policy wonk...Kenny is not a micromanager; he leaves ministers to their own devices. He is a chairman rather than a chief executive."
The general election due to be held in early 2016, is going to be a traditional one on tax, welfare and spending, with assumptions on growth to provide positive scenarios. Parties will have some aspirations on issues like reform but that will be window dressing. The equivalent of the Irish Fiscal Advisory Council in Australia, reports to Parliament and it costs party election proposals. It also assists non-government parties during the parliamentary term. Why not in Ireland?
Kenny has in effect set up a Dutch auction on taxes.
Enda Kenny at a Fine Gael Party event at the weekend, invoked Charlie McCreevy, Celtic Tiger-era finance minister, and the US Republican Party, in arguing for self-financing tax cuts. It's a hell of a lot easier than finding a solution to the housing crisis in Dublin.
“In the mid-1990s, Fine Gael in Government decided to introduce the 12.5% rate of corporation tax that has been the anchor of our jobs policy ever since,” he told the annual Fine Gael presidential dinner. “Some said at the time that such a low rate of corporation tax would starve the exchequer of resources needed for services and investment. The opposite has been the case. (this story is misleading - see below. Charlie McCreevy introduced legislation for the 12.5% rate in 1998).
“Let’s now take the lessons of our successful corporate tax into reform of our personal tax system. As the UK and other countries now seek to match Ireland’s corporate tax rate, we must now secure the economic recovery by reducing tax rates on income.
“That is why, if returned to Government, Fine Gael will put complete abolition of the USC (universal social charge) at the centre of the most radical overhaul of personal taxation in a generation, all designed to make work pay, encourage labour force participation and entrepreneurship and keep the recovery going.”
Kenny claimed the abolition of the USC will create an extra 225,000 jobs, bringing unemployment down from its current level of 9.4% to 6%, and attract 75,000 young emigrants back to Ireland. Abolition of the USC would increase “Ireland’s attraction as a dynamic hub for young talent.”
Easily said with a new set of numbers produced by economic advisers that last January had given Kenny dodgy numbers to make similar bold claims.
Ireland a low-tax country
According to Eurostat, as a ratio of GDP, tax revenue (including net social contributions /PRSI in Ireland) accounted for 40.1% of GDP (gross domestic product) in the European Union (EU28) in 2013 and 41.2% of GDP in the Euro Area (EA-19).
The ratio of 2013 tax revenue to GDP was highest in Denmark, Belgium and France (48.6%, 47.8% and 47.3% of GDP respectively); the lowest shares were recorded in Lithuania (27.2% of GDP), Romania (27.4%), Bulgaria and Latvia (both at 28.1%) as well as Switzerland (27.2 %).
The ratio was 30.3% in Ireland; 35.4% in the UK and 39.6% in Germany. The rate in Norway, Europe's richest country, which is not a member of the EU, was 40.5%.
Using GNP (gross national product which excludes the profits of the significant foreign-owned sector — it is still distorted by other factors) we get a ratio for Ireland of 35.8%.
Ireland's GDP ratio was 33.8% in 1995 and 32.9% in 2006 — the peak bubble year.
The OECD’s annual Revenue Statistics report published in 2014 found that the tax burden in Ireland increased by 1 percentage point from 27.3% to 28.3% of GDP in 2013. The corresponding figure for the OECD average was an increase of 0.4 percentage points from 33.7% to 34.1%. Since the year 2000, the tax burden in Ireland has declined from 30.9% to 28.3%. Over the same period, the OECD average in 2013 was slightly less than in 2000 (34.1% compared with 34.3%).
The Organisation for Economic Cooperation and Development has 34 member countries including all the world's developed economies (ex Singapore)
Eurostat data is from June 2015 and includes national accounts revisions based on a new 2010 standard.
The Tax Wedge is a measure of the difference between labour costs to the employer and the corresponding net take-home pay of the employee. Employers are concerned about the former, while employees focus on the latter. The tax wedge is very important a it can be used to estimate the effects of all types of taxes on jobs, whether they are formally levied on companies, like employers social security/ PRSI (Pay Related Social Insurance) in Ireland and national insurance in the UK, or employees, like income tax.
The OECD says the tax burden on labour income is expressed by the tax wedge, which is a measure of the net tax burden on labour income borne by the employee and the employer.
Ireland has the 8th lowest tax wedge among the 34 OECD member countries. The average single worker in Ireland faced a tax wedge of 28.2% in 2014, compared with the OECD average of 36.0%. In Ireland, income tax and employer social security contributions combine to account for 87% of the total tax wedge, compared with 77% of the total OECD average tax wedge.
One-earner married couple with two children: The tax wedge for a worker with children may be lower than for a worker on the same income without children, since many OECD countries provide benefits to families with children through cash transfers and preferential tax provisions. Ireland has one of the lowest tax wedges in the OECD for an average married worker with two children at 9.9%, which compares with the OECD average of 26.9%.
Child related benefits and tax provisions tend to reduce the tax wedge for workers with children, compared with the average single worker. In Ireland in 2014, this reduction (18.3 percentage points) was greater than the OECD average (9.1 percentage points).
Tax burden trends between 2000 and 2014: In Ireland, the tax wedge for the average single worker decreased by 0.7 percentage points from 28.9% to 28.2% between 2000 and 2014. During the same period, the average tax wedge across the OECD decreased by 0.7 percentage points from 36.7% to 36.0%. Since 2009, the tax wedge for the average single worker increased by 3.4 percentage points in Ireland. During this same period, the tax wedge for the average single worker across the OECD increased by 0.9 percentage points.
Employee tax burdens on labour income: In Ireland, the average single worker faced a net tax burden of 20.5% in 2014 compared with the OECD average of 25.5%. In other words, in Ireland the take-home pay of an average single worker, after tax and benefits, was 79.5% of their gross wage. Taking into account child related benefits and tax provisions, the employee net tax burden for an average married worker with two children in Ireland was reduced to 0.2% in 2014, which is the lowest in the OECD, and compares with a reduction to 14.8% for the OECD average. This means that an average married worker with two children in Ireland had a take-home pay, after tax and family benefits, of 99.8% of their gross wage compared to 85.2% for the OECD average.
The evidence shows that Ireland is a low-tax country.
However, in the OECD's Economic Survey of Ireland 2015 (summary), which was published last month (i.e. before Budget 2016), the economists said that:
"the system generates undesirable jumps in marginal effective tax rates at some points in the income distribution, even for those without children. At the bottom end of the income distribution the main issues are spikes in the marginal effective tax rate that occur as a taxpayer becomes liable, first for the USC at €12,012, then at around €16,500-€18,000 (approximately 57% of the average wage) when they become liable for income tax and then employee social security contributions. The first priority should be to reduce these spikes in marginal tax wedge, to prevent threshold impediments to supplying more labour. The spikes could be smoothed without raising the average effective tax wedge by using lower tax credits and more gradually rising income tax, USC and PRSI rates. A rough estimate of the cost of this policy based on multiplying the gain at different income deciles by the number of tax payers in each decile is €300 million (0.16% of GDP). In the alternative scenario, the initial tax income credits are lower and decline with income and a three band income tax band is introduced, along with lower initial USC and PRSI rates. Almost all tax payers pay less tax on average but the overall cost is reduced by the lower income tax credits. Some taxpayers between an average wage of 60 and 100% face a marginal tax wedge that is around 3 to 4 percentage points higher than now. This could be reduced as well but the trade-off is higher fiscal cost."
The Survey says: "For large parts of the population the tax and welfare system maintains a strong incentive to shift from welfare to work. Indeed around two-thirds of the unemployed are single and therefore receive only the Job Seekers Benefit (JSB) or Job Seekers Allowance (JSA). Single individuals on both JSB and JSA tend to have low replacement rates (Savage et al., 2015). However, there is evidence that unemployment traps do exist in Ireland for some groups, and particularly for those with a non-working partner and children (Savage et al., 2015). Around 18% of the unemployed in receipt of a JSB or JSA have a replacement rate of 70% and above."
The OECD adds: "New data compiled for this Economic Survey shows that Ireland’s tax and welfare system has become increasingly more supportive of low- and middle- income households. The total amount of social benefits on which tax has been paid (around ¼ of total social benefits) has risen significantly as it has been more than doubled as a percentage of disposable income over the last decade. While tax credits have become more generous for low and middle-income households, tax allowances were reduced for high-income earners. As a result, after-tax income is more evenly distributed and its share is increased up to the 8th decile (transfers especially benefit the 3rd to 6th income deciles, while the tax system overall supports the 2nd to 7th). Higher income groups bear most of the tax burden. For the top decile, the share of market income is 36.8%, but 29.7% after taxes and transfers. However, the reduction in the share of income after redistribution is less pronounced for the top 1% and above."
Companies in Ireland can hire foreign staff and allow them to disregard 30% of their earnings for tax purposes above €75,000. There is no upper limit.
Kenny's tax mantra
Kenny's argument about the cutting of the corporate tax rate in the 1990s suggests that it was inspired by Fine Gael but the move followed pressure from the European Commission before Fine Gael took office and it took effect after it left office.
Charlie McCreevy, then finance minister, introduced legislation in the 1998 Budget that created Ireland's 12.5% corporation tax for trading income. The reduction had been announced by the previous minister, Ruairi Quinn of the Labour Party, in May 1997 weeks before the governing parties were defeated in a general election. Michael Noonan, current finance minister, said in the Dáil in 2010: "the origins of the 12.5% rate are shared by Fine Gael, Labour and Fianna Fáil."
For exporting companies who either had a tax holiday or were paying a 10% rate (a manufacturing tax was broadly defined to include for example growing mushrooms or developing software), there was a rise in the headline rate — the effective rate for US companies was 2.5% in 2010 as we showed here. A 10% rate also applied to Dublin's International Financial Services Centre (IFSC).
The new headline rate of 12.5% was a gift to domestic companies with their rate cut by about 20%. There was nothing asked in return by the Government and today Enda Kenny has entitlement to 3 public pensions — as a teacher, TD and minister — and the majority of the private sector workforce has no occupational pension coverage — the worst in the OECD Area, along with New Zealand.
While the OECD acknowledges that "taking into account taxes and transfers..Ireland’s income inequality is below the OECD average, reflecting a tax and transfer system that is very effective in redistributing income," the high number of workers on low pay (see chart above and detail here on low pay) are also inevitably the same people with no occupational pensions and at risk of poverty.
The OECD also notes: "Wealth tends to be more unevenly distributed than income, and even more so if coupled with income immobility...The first priority should be to get more people into better paying jobs. This requires building skills among the unemployed and continuing to improve activation policies in line with best-practice centred on mutual obligations."
This is where a taoiseach is needed to push change and improvement that do not make for easy headlines.
Ireland has had two monumental economic crashes in a generation following elections where the electorates were sold on yarns that the free lunch had been invented — tax cuts and spending rises could be made with no downsides.
The mother of all Dutch auction elections was in 1977 and Gerry Collins, Fianna Fáil front-bencher, placed an advertisement in his local provincial newspaper in Limerick, which said that his party wasn't offering "pie-in-the-sky promises such as no rates." By the time the newspaper hit the streets, FF had added the abolition of residential rates to its treasure chest of electoral goodies, which had included the scrapping of car tax.
The car tax was abolished, coincident with the introduction of a £5 "car registration fee" — which was the road back to tax.
Between 1977 and 1982, the combination of tax cuts and huge spending increases resulted in a trebling of the National Debt.
Pic on top: Enda Kenny, taoiseach, on a visit to the village of Slane, County Meath, July 2015.