The Republic is the third lowest taxed economy in the industrialised world, according to new figures from the OECD. Of the 37 countries examined in the data, only two – Chile and Mexico– had lower tax takes compared to the size of their economy. Given that anyone on a middle to higher income sees a large chunk disappear in income tax – and that we are hit with VAT,excise, property tax and more, how can this be? You need to look behind the figures to make some sense of it, but the trends are interesting. They point to how we pay tax may change in the years ahead. And they suggest that even if the way we pay changes, the overall burden is unlikely to fall by much.
1. Tax and the Leprechaun economy
First off, we need to look at how the figures are calculated, which is looking at the tax take as a percentage of GDP. The cash value collected in taxes in each economy is directly comparable, but in the Irish case GDP has been inflated by the activities of multinationals here.This has been a distortion in Irish national data for years, but the figures were really thrown out in 2015 when multinational reorganisation driven by international tax changes sent Irish GDP shooting up by 32 per cent in cash terms. This led to a big fall in the Irish Tax to GDP ratio from 28.7 per cent in 2014 to 23.6 per cent in 2015.
Adjusting for this multinational impact and maintaining the comparability with other countries is not straightforward. The Central Statistics Office has developed a new indicator - Gross National Income*(GNI*) – to factor out all the activities of multinationals. Using this would bring the tax to national income figure here to around 36 per cent, just above the OECD average of 34.2 per cent. This may overstate the Irish payment level a bit compared to the other countries. If we use GNP – the traditional measure excluding some of the multinational impact – it is still below 30 per cent. It seems fair to conclude that the tax burden here is roughly about the OECD average. However there is no measure which suggests that, overall, we are a highly taxed economy. So how come so many people find it hard to live on their after-tax income?
2. The take from your income: a tale of two taxes
Whatever the contortions caused by trying to adjust for GDP figures, working out where different countries get their tax revenue from is a cleaner exercise. Looking at taxes on our income, two things are clear. We pay a relatively high amount of income tax but a low amount of social security contributions by international standards.
Taxes on individual incomes (including capital gains tax) are around 32 per cent of total tax revenue here, compared to 24 per cent in the OECD on average. But wait. The rest pay, on average, much more in social security – what we call PRSI. It accounts for 17 per cent of total tax here, compared to 26 per cent on average in the OECD countries. Add the two together and around half of all tax is collected in personal tax and social security here and on average across the industrialised world.
There are two issues arising from this. The first is that numerous studies have shown that our taxes on income are spread differently from the international norm. People on lower incomes pay relatively little tax here – due largely to the relatively high entry-point into the tax system – while people on higher incomes pay in line with the norm, or above it as incomes rise.
Figures compiled by KPMG and featured in work by the Irish Tax Institute show that when income tax and PRSI are combined, a single Irish employee on €18,000 pays just 3 per cent, compared to 11 per cent in the UK and 22 per cent in France. At higher income levels, of the eight countries surveyed, the Irish single employee is fourth highest taxed on income behind Germany, Sweden and France but ahead of the UK at income levels between €45,000 and €75,000, moving to third highest of the eight – ahead of France – at incomes over €100,000.
This means the Irish income tax system is what is called more progressive than the average – hitting the better off for more compared to the lower paid.
The second issue arising relates to social security. Clearly Irish employers and employees pay less than the international average here, more or less cancelling out the relatively high burden from income tax and USC. Here the other key question is what employees get in return for this in terms of benefits such as unemployment supports, sick pay, maternity and parental leave, pensions and how this compares internationally. Comparisons here are tricky, given the differences which exist across countries.
In countries such as the Netherlands and Germany, for example, high social security contributions account for close to 40 per cent of tax and include a significant amount for health insurance contributions. In the Netherlands, families pay a relatively low amount of heath insurance (around €1,200) and the rest of the cover comes via social security contributions from employer and employee.
Separately, a study by consultants Glassdoor of European countries – looking at what is available in 14 EU countries in areas such as unemployment entitlements, parental leave and sick pay shows Ireland featuring down the league under most headings, with the exception or maternity leave.
This issue of benefits versus costs needs to be a key part of social security planning. If, for example, families could avoid having to pay for expensive private health insurance – or pay less – in return for paying a bit more PRSI, they would no doubt see it as a good deal.
3. What we pay elsewhere
In terms of other taxes we all pay, the Republic is in line with OECD trends. Our tax from VAT at 20 per cent of revenue is exactly the same as the average and so is the 13 per cent contribution which comes from other taxes on goods and services, such as excise duties. It is striking how revenue from these sources has become less important over time, particularly excise duty as smoking declines in popularity. VAT and excise impose a relatively higher burden on the lower paid – who pay a higher proportion of their income on food and other essentials. This means any further programme to increase these taxes – for example via a carbon tax on fuel – will have to include ways of giving back money to those worst hit in some other way.
In terms of corporate tax, Ireland’s take was a bit ahead of the average in 2017 and this will have increased this year as corporation tax surges. While there may be controversy about the amount of tax big companies pay on their profits, the presence of big US multinational headquarters here and recent decisions to locate intellectual property assets here have been a boon to the Irish exchequer.
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So what are the key lessons from the OECD work? The first is that, in overall terms, Ireland is not overtaxed. This does not mean the system is not unfair in some areas or not in need of reform. But it means that overall the burden is unlikely to fall as we plan to spend more on services and government-funded investment.
The second is the interesting area of the future of social security and what people get in return. The Taoiseach Leo Varadkar has pushed this agenda to some extent - and a study is being undertaken on merging the USC and PRSI. However, central to this will be mapping out a strategy which ties benefits to the payments made and increases them if employees or employers are asked to pay more. Here areas such as health insurance are key and there is also a clear link to the idea of auto-enrolling people for pensions.
The wider point, of course, is that the electorate does not always link improved services to taxes. And there is a lack of confidence in the political and administrative system to deliver say, improvements in the health service. While the Taoiseach has made a point of promising tax reductions via an increase in the point at which people start paying the higher rate, the next election is more likely to be fought out on the basis of who can address the key areas of health and housing – what we get for our taxes, in other words, rather than what we pay.
Smart Money is an online subscriber only column which looks at the big economic trends and what they mean for you.
