Recently, an ad for Liveline included an angry woman, decrying Ireland as a ‘high tax’ economy. Her argument was: “What’s the point in working if the government is just going to take all our money anyway?” That baffled me. As far as I knew, Ireland was certainly not a high-tax economy, certainly compared to some of the Scandinavian economies. I decided this was worth a closer look. Just how much of a low-tax economy is Ireland? And – given the €25bn gaping hole in the budget is going to have to be solved through a mixture of both expenditure cuts and tax increases – are Irish workers undertaxed?
The graph below shows the average “all-in” personal income tax rate levied on people who earn the average industrial wage, for a range of economies including Ireland, from 2000 on. The figure given is an average tax rate for four stylised households (a single worker with no children, a single worker with two children, a married couple with one earner and no children and a one-earner couple with two children). The figure for each economy includes family cash transfers, paid in respect of dependent children between five and twelve years of age. All figures come from the OECD.
Amazingly, in 2007, Ireland would have negatively taxed the four households, supplementing their income by 0.2% on average. Needless to say, negative tax is not the norm, certainly not for the average worker. Ireland is out of line with every other developed OECD economy. Our closest competitors, in terms of not taxing the average worker, are the Czech Republic and Korea – but both of those have an average tax rate for the four cases above of just over 10%.
Excluding child benefit, Ireland is still the lowest taxer, but the gap between us and the rest of the developed world narrows substantially. But including child benefit or excluding it, Ireland taxes its average worker the least of the 28 developed economies in the OECD in six of the seven different measures of average ‘all-in’ tax that the OECD produces. Only for single workers without children did one country, Korea, tax less than Ireland in 2007.
It could be argued that the use of manufacturing wages for Ireland – compared to a broader definition of ‘industrial average’ in most other OECD economies – could be affecting the result as it lowers Ireland’s average wage. That may be the case, and would affect the level of Ireland’s line in the graph above – but it wouldn’t substantially alter the trend. Ireland was already one of the lowest taxers in the OECD in 2000 and yet it cut its taxes by twice as much as any other economy.
This pattern since 2000 is important for where we are now, because a common explanation of how Ireland got into its fiscal mess is over-reliance on receipts from property taxes. That’s certainly true, but this wasn’t a passive over-reliance. This wasn’t a case of leaving the rest of the economy as-is and just not realising the once-off nature of the property tax windfall. This was very much an active over-reliance on property. The economy and the tax system was actively re-ordered based on a presumption that receipts from a property transaction tax and related sources would be the centre of the new economy. This was done with what seems like a reckless determination to tax workers less and less, without a due consideration of the sustainability of that policy.
I’m not saying that we should have high taxes for the sake of it. For one thing, direct taxation is only one part of the story – Ireland’s indirect tax rate (i.e. VAT) is one of the higher rates in the OECD (although it’s certainly not out of line). In fact, I’m not necessarily arguing that income tax rates need to go up. I can find only country in the OECD – the Netherlands – where the top rate of tax is above 50%. The Czech Republic, for example, which manages to get 10% in tax on the measure above, only taxes 32% at the top rate.
What I’m arguing is that we need to look again at our thresholds, i.e. at what point on the income scale do we start taxing people. We’ve got ourselves into this mess since 2000 and we certainly need to get ourselves back out.