The burdens of a low tax society

Sli Eile: Received wisdom in political economy establishment thinking here in Ireland is that taxes are a ‘burden’ (in other words not nice and to be avoided if you pardon the pun) and that the way out of the present calamitous budgetary situation is via spending cuts more than tax hikes (which, it is claimed, would further damage competitiveness, work incentive and add to deflationary pressures).

Writing in the Irish Times, recently, Ray Kinsella asserted that:

Now let’s examine revenue, which has collapsed over the last two years. Let’s assume that it will grow by 2 per cent on average for the next five years. That’s pretty generous for an economy dependent on international recovery and a domestic economy that is running on empty. This would result in revenue of about €38 billion after five years.

Kinsella, in common with most other economists, does not see raising taxes to any significant extent as part of a recovery-with-fairness strategy. In fact, he states

this will require cuts in public expenditure, not the kind of counter-productive and socially insensitive cuts which we have had to date. Somebody is going to have to ask the elephant, very politely, to leave the room. For elephant, read size of public sector.

So, the elephant is the public sector wage bill which equals numbers employed (including most professional economists) multiplied by average salary per unit. This assumes a number of things including:

Our public sector is ‘bloated’ in terms of unproductive workers; and
Pay, on average, in the public sector is too high to allow the private (especially traded) sector to regain competitive advantage.

Suffice it to say that the evidence for a bloated public sector in Ireland is very thin indeed. The OECD Review of the Irish Public Service published in 2008 found that the overall level of public sector employment and spending was modest in Ireland compared to other OECD countries.

But, the real elephant in the parlour is taxes. There is, I would argue, considerable scope for raising taxes as one part of an overall strategy to re-start (and reform) the economy? Colm Keenan reports that Irish taxes as % of Gross Domestic Product are low by EU standards:

The ratio for Ireland was 31.2% in 2007 compared to a (weighted) EU average of 39.8%. You can download the tables in Excel here

and the full Report there

It may be objected that comparing taxes to GDP is inappropriate for Ireland since we have on the highest gaps between GDP and GNP arising from profit repatriation (and transfer-pricing of multinationals). Even if this argument is accepted (which I don’t) taxes as % of GNP in 2007 in Ireland was 36.9 – still below the EU average in 2007.

However, it is not legitimate in my view to base total tax comparisons on GNP since all of GDP including profits of multinational companies can be taxed by Irish public authorities. Alternatively, if people insist on using GNP for comparisons of tax take as % of national income then they should deduct corporate taxes paid by MNCs. You can't have it both ways.

Expect a lot more hot air on taxes with the publication of the long-awaited Commission on Taxation soon as the ground is prepared for more public spending cuts in December and further tax hikes on PAYEE earners.

Posted in: Fiscal policy • Fiscal policy • Taxation

Tagged with: GDP • GNP • taxation