How can we afford such a low tax take?

Slí Eile: Like the Curates Egg, the Commission on Taxation Report has many excellent parts. The starting point of any analysis of this 500 pages plus report should be the following three questions:
1 What level of public services is required and feasible in 21st Century Ireland at our current level of wealth and income?
2 How can such a service be best provided, organised and funded?
3 What role has taxation in its various forms in providing such a level of service?

If one starts from the premises of keeping the ‘burden of tax’ as low as possible one is assuming – effectively – that the State is a necessary evil in providing services that should best be provided by the market or individuals and families themselves but have to be left to the State because of failure at lower levels.

So, there are big issues at stake here and the stage has been well set, already, in the Terms of Reference of the Commission – before any recession.
Before addressing these three questions in future posts and going through the entire Commission Report lets deal, today, with one simple question:

Are we a high tax country? Here are some extracts from a recent EU Commission analysis of taxation.

‘….the overall tax ratio, i.e. the sum of taxes and social security contributions in the 27 Member States (EU-27) amounted to 39.8 % of GDP (in the weighted average); this value is about 12 percentage points above those recorded in the United States and Japan.’ The ‘old’ 15 EU Member States generally have the highest tax rates as % of GDP.'
The new accession countries have taken the economically liberal approach. Only in Denmark, Ireland and the United Kingdom are personal income taxes a relatively large part of the total charges paid on labour income.

Before the recession hit, using the latest available EU data sources, total taxes (including social security) came to 31.2% of GDP in 2007 in Ireland. The EU (unweighted) average was 37.5%.
So, at 31.2%, Ireland was about 2 percentage points down on the 1995 figure and over 6 percentage points down on the EU27 average. The total tax take in Ireland reached a low point in 2002 (possibly connected to tenure of a certain Minister of Finance).

It is instructive to note that the only EU27 countries below this level of revenue were Latvia, Lithuania, Slovakia and Romania. OK you might be now objecting to the use of GDP instead of GNP. If, instead, you divide total revenue in 2007 by GNP you get 36.7%. Not that far from the EU average? The cardinal mistake made by proponents of GNP-based calculations when comparing tax take internationally is that they forget to mention Corporation Taxes on profits earned by multi-national companies where. Either you take away such taxes from the numerator (and arrive at a figure somewhat lower than 36.7%) or (my preferred method) use GDP only since that is the total value of production in the jurisdiction before taxes are levied on income, here, and before any part of that income is repatriated.

By the way the ‘burden’ in 2007 was particularly high in Denmark at 48.7% of GDP more or less exactly what it was in 1995. but, then Denmark has a high level of public service provision. We get what we pay for.

Posted in: Taxation

Tagged with: commissionontaxation