It is a common perception that taxes are high in Ireland. However, in truth, those living in Ireland have one of the lowest burdens of taxation in Europe and, despite this, public services are reasonably good relative to many of our European neighbours. The Government is also running a surplus.
This exceptional outcome is made possible by the corporation tax bonanza of the last decade, where most of the rapidly growing revenue from this tax is paid by foreign multinational companies and, ultimately, by their foreign shareholders.
Today the Government’s revenue from all taxes and charges amounts to about 43 per cent of national income. This is not very different from the European Union average of 45 per cent, or the UK’s 41 per cent.
However, if the corporation tax paid by foreign firms is excluded, Ireland’s revenue is 34 per cent, down from a figure of 44 per cent at the height of the financial crisis in 2012.
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Thus over the last decade, because of the huge rise in corporation tax receipts, we have seen a dramatic reduction in the tax burden on the population. At the same time, the exceptional corporation tax receipts have permitted a significant improvement in public services, with something over for Government to put into savings on our behalf.
It’s clear when we take off exceptional multinational revenues that Ireland’s tax take is far below the EU average, or the UK level – using this basis, only Romania and Malta collect a lower share of national income in taxes than Ireland.
I would welcome promises in the coming local elections to use the available headroom to levy a higher property tax rate and to use the revenue to make Dublin a better place to live
This week the Parliamentary Budget Office has also highlighted the fact that not only do multinational firms pay most of the corporation tax collected, but their employees pay more than half of income tax receipts, reflecting the high average pay rates in these companies.
All of this makes Ireland very vulnerable to any external shock hitting these foreign firms. To guard against such an outcome the Government is currently running a surplus to put significant sums into a “rainy day” fund.
One of the big differences between Ireland and our EU neighbours is that we collect about half what they do in social insurance contributions, yet the welfare system still plays a vital role in making Ireland a fairer place to live. This is done by financing much of the welfare system from other taxes.
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While a decade ago we collected more than the EU average from VAT and in excise taxes on goods such as alcohol and petrol, today these indirect tax receipts have fallen below the EU average, as excise tax rates have failed to rise with inflation.
Given our very low tax base, future governments over the coming decade will face big challenges financing the greening of the economy and the growing cost of caring for our ageing population. The Commission on Taxation and Welfare said that, for these reasons, the total amount of taxation to fund public services will need to increase in the years ahead.
As we make the transition to electric cars, excise tax receipts from petrol and diesel will disappear, resulting in a loss of tax revenue amounting to nearly €4 billion. This means that the Government will have to find other revenue sources to fill a growing gap in the public finances.
Levying higher social insurance contributions would bring us closer to the EU average, but this is not the right answer, as taxes on labour tend to discourage employment
As carbon taxes are planned to rise steadily – to bring the cost of using fossil fuels closer to the social and climate costs involved – that will provide some revenue to help tackle climate change. But it won’t be enough for that purpose.
Other environmental taxes on motoring, such as a charge per kilometre travelled, and congestion charges in the cities, will be needed to replace some lost revenue from petrol and diesel, and help with the climate agenda.
Levying higher social insurance contributions would bring us closer to the EU average, but this is not the right answer, as taxes on labour tend to discourage employment.
The Commission on Taxation and Welfare recommended that some of the additional revenue we need to raise should come from property taxes. In a world where there is a housing shortage, taxing those lucky enough to own property is appropriate.
Dublin needs more investment to improve its public services and tackle run-down areas. However, the parties who run the four Dublin local authorities have chosen to charge the minimum rate of property tax, at the expense of additional civic services.
I would welcome promises in the coming local elections to use the available headroom to levy a higher property tax rate and to use the revenue to make Dublin a better place to live.
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