Nat O'Connor: IBEC (in their pre-Budget submission) have proposed that Ireland's level of taxation should be 36 to 38 per cent of GNP. Social Justice Ireland (in their submission) call for tax to be 34.9 of GDP.
This is a revised version of yesterday's post. Thanks to Seamus Coffey for pointing out an error in the table re total tax revenue.
Professor John Fitz Gerald of the ESRI some time ago suggested 45 per cent of GDP as a long-term target, which would place Ireland in the middle of other European countries in terms of tax.
European economics commissioner Olli Rehn has already stated that Ireland must move from being a low tax economy to "a normal tax country in the European context"(Irish Times). The European average is 45 per cent of GDP.
If we go back to 2007 figures for GDP and GNP (which are the last stable pre-crisis figures), GDP was €189 billion and GNP was €163 billion (Source: CSO). This represents a 'boom' year. Figures for 2008 represent the beginning of the 'bust'. The following table illustrates what each of the suggested rates would have meant in those years, in terms of total tax revenue (taken from the Stability Update, and including social insurance as well as non-Exchequer tax, such as local authority commercial rates). Although it should be noted that GDP and GNP continued to fall in 2009 also.
Complete figures for 2009 are not yet available, but they are likely to show a continued deterioration of tax revenue (as stamps, VAT, etc. all continued to fall between 2008 and 2009; likewise higher unemployment means less PRSI paid and business closures reduce commercial rates). Hence, to meet the various tax take targets in 2009 would require even further increases in taxation.
IBEC's rates (36-38 per cent) would have represented less or the same level of tax in 2007, but up to €3.2 billion more tax in 2008. However, the significant collapse of GDP/GNP in 2009 makes it likely that IBEC's preferred tax take will be lower than actual tax take (as a percentage of GNP).
SJI's preferred rate would have called for over €4 billion in addition taxation in 2007 and over €7 billion in 2008. Despite the collapse of GDP/GNP in 2009 SJI's preferred rate will probably remain several billion higher than actual total tax revenue. In this context, it should be noted that SJI's stated aim is for Ireland to remain a 'low tax' economy.
A European average level of taxation (45 per cent of GDP) would have meant €23.7 billion more in tax in 2007 and €25.5 billion more in tax in 2008. That is nearly half again as much taxation. Of course, it would take years to carefully raise taxation towards this kind of target, and it would involve a transformation of Ireland's economy and industrial policy.
In reality, it is reasonable to suggest that increasing tax will cause some companies to leave Ireland, which will lower GDP. However, a more sustainable economic model might combine a more modest level of GDP with higher taxation; and more tax from a smaller number of companies and people might still mean more money for Government than lower tax from a larger number; including multi-nationals who are using tax breaks to avoid paying much tax here (or anywhere).
For example, the Social Justice Ireland document (page 2) shows a table of effective taxation in Ireland that suggests much higher taxation in the 1990s and early 2000s, which was also a time of stronger economic performance.
In this context, we could imagine that GDP falls to the same level of GNP, due to many multi-nationals leaving Ireland. In such a scenario, 45% of GNP would have taken an additional €11.8 billion in tax in 2007 and €14.8 billion in 2008. That's probably a more realistic estimate of what higher corporation tax, plus much higher social insurance, along with property tax could yield.
The bottom line is that the collapse of the tax take (by one third, €14 billion, between 2007 and 2009) is a major part of Ireland's financial problems. And this was on top of an already 'low tax' model, as the actual figures for both years show.
A broad coalition appears to agree that raising tax must be part of the solution for Ireland. And that means seeking higher taxes and new taxes.
That's where the debate really begins. IBEC want the Government to target people on the minimum wage for income tax, but they also call for property tax. Whereas Social Justice Ireland seek the reform of tax breaks (which generally benefit people on higher incomes).
Dr Nat O'Connor @natpolicy
Nat O’Connor is lecturer in social policy in UCD’s School of Social Policy, Social Work and Social Justice and part-time policy specialist at Age Action Ireland. Previously Director of TASC, Nat also led the research team in Dublin’s Homeless Agency.
He has taught politics and social policy since 1999. He has a PhD in Political Science from Trinity College Dublin and a MA in Political Science and Social Policy from the University of Dundee. He is a Fellow of the Higher Education Academy (UK), a member of the National Economic and Social Council (NESC) and chairperson of the Irish Social Policy Association (ISPA). You can find him on LinkedIn (natoconnor) and TwitterX @natpolicy
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