How not to read taxation statistics

Michael Taft: Michael Hennigan over at Finfacts is worried that Irish taxation will reach high Danish levels by 2014. He shouldn’t be (though if that’s what it takes to reach Danish levels of unemployment estimated to be 3.5 percent in 2014, some people might think it worth the price). Ireland is a low-tax economy and will stay that way under current policy. Unfortunately.

Michael highlights the latest Eurostat figures on taxation which shows that in 2008 Danish taxation (Government revenue) stood at 48.2 percent of GDP; Ireland stood at 29.3 percent. So fears would seem premature.

But like so many, Michael claims that Ireland has to use GNP, not GDP:

‘In calculating the Irish tax burden here, we use GNP as a denominator because the main differential with GDP, the profits of the dominant multinational sector, are excluded.’

This debate over GDP and GNP can become almost scholastic (to get really obsessive on this point we could claim that GNI is the better denominator – GNP plus EU transfers). First, the ‘differential’ results from a number of outflows – profits, outward investment from indigenous companies, interest payments, remittances, etc. If we are to compare like-with-like we would have to disaggregate all that for both Ireland and Denmark and then compare the more narrow ‘profits’ category.

Second, GDP is a measure of economic activity in a particular country. If workers and managers generate profits here, why should this be excluded because of their final destination? Would we exclude such profits if they were sent out of the country for philanthropic reasons (to build schools in sub-Saharan Africa)? Or if the owners, a la Keynes, buried the profits in a big hole outside Athlone to be dug up some time in the future – or maybe never?

There is one reason to modify GDP and all measurements dependent on that – the phenomenon of importing profits generated in other jurisdictions for the purposes of taking advantage of our low-tax rate. This is money created somewhere else, not here; it ends up in our GDP through complicated channels; and like Father Ted’s ‘it’s-resting-in-our-accounts’, it is exported after tax. However, does anyone really imagine that any Government will give carte blanche to our data agencies to measure that and adjust the GDP accordingly? Or provide a mirror ‘real-life GDP’ measurement?

We don’t have to answer all these questions or engage in contestable extrapolations. There is another simple measurement that cuts across all these: namely; the amount of tax (Government) revenue per capita. When we use this (the IMF database in US dollars) we find a not-unexpected result for 2008:

Denmark: $34,398
Ireland: $20,562

Well, we were a long ways off from Denmark in 2008. And, if the IMF projections hold, we’ll be a long ways off in 2014:

Denmark: $32,268
Ireland: $17,477

Indeed, we’ll be falling further behind Denmark.

Of course, this particular factoid – like so many others – has to be treated carefully. Irish tax levels, at least at the household level, is rising, so why should the above show it’s actually falling by 2014? Because the economy will be weaker in 2014 (over 11 percent below current GDP levels in 2008). Weak economies generate weak tax revenue. For instance, tax rates, etc. could remain the same but tax revenue would rise if we had the same level of employment as Denmark. So when comparing tax levels, one has to take account of a range of factors – not just tax rates.

All this to say that using one particular metric can tell us all sorts of things – but can’t provide the whole picture. To this end, I’m not making privileged claims for the Government revenue per capita measurement I used. One should factor in purchasing power parities, the working population, the number of enterprises, etc.

But let’s get a grip.

According to the OECD Tax and Benefits database, the average Danish income earner paid 39.7 percent of his/her gross income in tax; the average Irish income earner paid 22.4 percent.

The corporate tax rate in Denmark is 25 percent; in Ireland, 12.5 percent.

The main VAT rate in Denmark is 25 percent; in Ireland, 21 percent (though the new Government will raise this to 23 percent). But Denmark has few reductions or exemptions from this main rate; in particular, food is subject to 25 percent, in Ireland, it is zero-rated.

So Michael shouldn’t worry. We are way, way off from Danish levels of taxation. The low-tax model is safe.

Posted in: Taxation

Tagged with: commissionontaxation

Michael Taft     @notesonthefront

Michael Taft is an economic analyst and trade unionist. He is author of the Notes of the Front blog and a member of the TASC Economists’ Network.