Benchmarking Ireland's Income Tax against the Anglo-Saxon World

Nat O'Connor:
The Irish Times reports that the Government may be considering benchmarking tax on higher earners against what they would pay in the UK, USA, Australia or Canada.

Irish people speak English and we are very much part of the Anglo-Saxon economic 'sphere'. Despite the popularity of spending a year in an EU country as part of the Erasmus scheme for third-level students, many Irish people see the UK, Australia or Canada as a more attractive destination for work than France, Germany or Spain. Ireland's economy is the gateway to the EU for many US multi-nationals, and there is a natural flow of people to and from Ireland within this economic sphere.

Yet, this is an incomplete picture.

In 2013, Ireland's goods exports totaled €14 billion to the UK, €35.5 billion to other EU states and €37 billion to the rest of the world. Goods imports in 2013 were nearly €17 billion from the UK, €15.5 billion from the EU and €17.5 billion from the rest of the world. Trade with the NAFTA countries (USA, Canada and Mexico) constituted nearly 23% of all goods imports and exports in 2013, compared to 41% EU and 14.5% UK. (CSO Trade Statistics, October 2014 - rounded figures).

Trade in services is different, with €16.5 billion exported to the UK in 2013, compared to €10 billion imported. Exports to Germany were €9 billion with less than €3 billion imported. Exports to the USA were €8.5 billion with €22 billion imported and trade with the Netherlands was €3.5 billion of exports and €14.5 billion imported. (CSO International Trade in Services 2013 - rounded figures)

The latter indicates Ireland's role in global finance, where large volumes of trade in financial services do not necessarily indicate a corresponding level of economic activity in terms of employment compared to goods.

Migration statistics also show a mixed picture. For 2014 the CSO estimates 9,700 in-migration from the UK and 8,200 out-migration to the UK, in-migration of 11,200 from the rest of the EU and out-migration of 5,000. In-migration of 7,400 from Australia, Canada and the USA combined, and out-migration of 14,100 from those countries. (CSO migration)

The main point of looking at these statistics is to show that Ireland's strength is that it lies in the overlap between the EU and the Anglo-Saxon economic sphere. While there are major risks to do with Ireland's over-reliance on low corporation tax, Ireland trades with the rest of the EU as much as with the Anglo-Saxon world, and people move to and from EU destinations as much as they do from English-speaking countries.

It is therefore not obvious that we should be aiming to mimic Anglo-Saxon tax policies. Many people living in Ireland are from West European countries or have lived there, and have higher expectations for regulation of the economy and the provision of quality public services than those whose only foreign experience is the UK, US or Australia.

The focus on those earning €32,800 to €70,000 is also disingenuous. They are the top 25% of adults in terms of income, not the middle of the income distribution (see here for example).

Giving them tax cuts will mean that any spare public money will go to those who need it least, diluting public services and denying those who cannot work any increase in their long-frozen weekly payments (see my analysis of Budget 2015 for example).

Market income inequality is rising faster in the Anglo-Saxon sphere, which championed deregulation and the importance of financial services in their economies. Little surprise that the culture of excessive CEO pay and bonuses to bankers (despite tax-funded bailouts) originates in the City of London and Wall Street in New York, although the Netherlands and Frankfurt are major players in financialization too.

Tax cuts for high earners just compounds the inequality already caused by the market. Many West European and Nordic countries face the same pressures of rising pay at the top, but they have managed this by maintaining stronger taxation, social insurance and market regulation. In many cases, West European countries also have far fewer children experiencing material deprivation and more extensive, higher quality public services for all their citizens than Ireland.

If Ireland's tax system was to be benchmarked against EU norms, we would have far, far fewer tax reliefs and tax breaks. Likewise, we would have much higher social insurance, including on low and middle income earners, in order to fund quality public services.

Ireland can benefit from the advantage of trading with both the Anglo-Saxon world and the EU. But we cannot have the 'best' of tax policy from both sides - if that means low tax on everyone - because that means that we will provide extremely weak social protection or public services.

People already pay higher social insurance contributions in the USA than Ireland, and property tax can be up to ten times higher than it is here. The corporation tax rate in the USA is nearly three times higher than the Irish rate.

Ireland is still in a fortunate demographic period of relatively few older people and relatively many young people. But the future costs of health care, social care and pensions alone will require a major increase of taxation.

If the Government wants to lure Irish emigrants back to Ireland, it could do worse than guarantee them that their parents and siblings will have a high quality of life here.

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