Irish Economy

How can Ireland tax and grow? Thoughts for Budget 2011

19 Oct 2010

"With 1.6 million occupied homes in the State, the average property tax bill per year would need to be in the region of €2,000, to raise the €3bn or so needed."

Almost a year ago, the Minister for Finance stated that the Budget he was introducing before Dail Eireann, with its €4bn in savings, was going to be the toughest on the road to Ireland’s recovery. It was, even then, a bold statement and one I doubted at the time.

In recent weeks, interest – at home and on the international bond markets – in Budget 2011 has increased. (For example, on this site, four phrases to do with Ireland’s upcoming Budget have driven 20% of all traffic in the last month.) And it is clear that if last year’s Budget does prove to be the toughest, it will be by a hair’s breadth, as savings of a further €4bn or more are sought in December.

How will this €4bn in savings be achieved? Should the balance be in tax increases or in spending cuts? The TASC proposals, for example, suggest that Ireland can – without deflationary impact, to the scepticism of some commenters on irisheconomy.ie – raise an extra €2.7bn in taxes next year, while only cutting spending by €300m.

In my next post, I’ll be focusing on expenditure. But that is only one half of the equation and today the focus is on taxation and the government’s receipts. I’ll look at measures that can be implemented for the coming year but also with an eye on the Government’s commitment to reduce the deficit to 3% of GDP by 2014 (I actually work off 2015, as I just don’t think 2014 is feasible).

This year, Ireland’s government will take in about €50bn in receipts. The bulk of this, about €44bn, will be in the form of direct or indirect taxes, or “social solidarity” such as health levies or PRSI. By 2015, if the deficit really is to be reduced, revenues will have to rise to between €55bn and €57bn, depending on how growth and spending evolve. This means that we need to increase our total tax take by about 10%-15% in five years. Do-able? I think so, if done right. Here are two ideas that should drive the government’s taxation strategy.

1. Make income tax simple and normal

I have made this point on numerous occasions: Ireland’s income tax system is abnormal. It has evolved over the 2000s to a system based on the wealthy paying a disproportionate share. (Try selling that idea down the pub!) In the last year for which public information is available, 2006, Ireland’s top 0.5% of earners, the 11,714 people who earned more than €275,000 in a year, paid almost 18% of all income tax, over €2bn in total.

As their average tax rate was 27%, it is perhaps less their paying “above their fair share”, and more the average earner getting away practically scot free. A family with one earner on the average industrial wage was actually subsidised by the state, that’s right, negative income tax all-in, in 2007. Ireland’s income tax system is not normal.

Not only that, Ireland’s income tax system – for years so simple – has become complicated by income levies and a raft of different thresholds. It is no longer a straightforward job trying to explain to someone from outside the country what people pay income tax. Ireland’s income tax system is not simple.

Ireland should go back to having a normal and simple income tax system. Firstly, a complicated system of health and income levies serves no purpose. Secondly, it is frankly not sustainable that one can earn €18,300 a year without making any contribution to the society you live in. And lastly, it is certainly not good for Ireland’s competitiveness that as soon as you go over €34,000 a year, you are faced with one of the highest marginal tax rates in the developed world.

The graph below shows the highest “all-in” marginal tax rate in a range of countries (“all-in” includes social insurance/PRSI and any local government taxes). As you can see, Ireland is by no means undertaxing its highest earners. Its top marginal rate is the fifth highest in the eurozone. So it is not the tax rates that are the issue – it is the number of tax credits. In France and Germany, for example, people pay tax after their first €6,000 and €8,000 in income.

Top rate of "all-in" income tax, OECD countries, 2009

Top rate of "all-in" income tax, OECD countries, 2009

Simplicity could be regained by replacing the current mix of rates and levies with two rates, probably 22% up to €34,000 and 45% above €34,000. Normality could be brought about by two simple moves that would raise up to €2bn next year and somewhere in the region of €4bn by 2015. The first is a reduction in tax credits. Cutting tax credits from €18,300 to €14,000 next year and to €10,000 by 2015 would bring Ireland back in line with our peers. The bad news is that this would cost everyone who earns over €18,000 an extra €860 in 2011, a figure that would increase to €1,660 by 2015. The good news is that this would make a dent of about €1.6bn in the deficit next year and of €3.3bn in the 2015 deficit.

To compensate – everything has to be politically acceptable, after all – a flat-rate income tax of 35% could be levied on those earning more than €275,000. This might sound generous but is well above their last known effective rate of 28% and could of course be a minimum. This is similar to the Swiss flat tax of (wait for it) 11.5% on anyone who earns more than (wait for it) €530,000 a year. This latter move wouldn’t be a silver bullet – after all only about 12,000 people earned more than €275,000 a year even at the height of the boom – but it could still raise €300m next year and perhaps €500m by 2015.

2. Introduce a property tax

I’ve talked about property taxes before. The current property tax “system” is a huge part of the problem. Tax receipts from property sources – including stamp duty, VAT on new homes and capital gains taxes – ballooned during the property bubble to over €9bn a year. They have since fallen by about 90% and will probably contribute less than €1bn this year. Put simply, if you want to know where the hole in Ireland’s government finances came from, it came from unsustainable spending increases on the back of temporary property-based revenues.

This sort of volatility speaks for itself, when considering what property tax we want to have in the future. What we replace it with, though, must have a number of desirable properties. Three are central:

  • It must be relatively stable, falling only slightly as an automatic stabiliser for consumer spending during times of recession. This means it must be wealth-based, rather than transaction-based. That means getting a property bill every year, unfortunately.
  • It must be relatively significant: the typical developed country gets just short of 10% of its tax revenues from property, so we are looking at about €3bn a year.
  • It must preserve incentives to improve your property. The last thing we need is a property tax that somehow convinces people to live in, say, one-off and energy-inefficient homes. This means a tax based on the value of the land, rather than on the value of the building.

With 1.6 million occupied homes in the State, the average property tax bill per year would need to be in the region of €2,000, to raise the €3bn or so needed. This would be significantly reduced if other land was included, for example farms, although this would be anathema to one of Ireland’s most entrenched vested interests. (Incidentally, talk – usually from TDs – about how hard it is to compile databases of properties and value them is complete rubbish.)

There is the option of bringing in an initial flat €500 property tax on all residential properties next year. However, combined with the tax credit adjustment above, that would represent an overnight fall in average monthly take-home pay of over €100 a month, which I think is too sudden and too large. Instead, the government should take the opportunity to make a firm announcement in December that an annual land value tax will be introduced on 1 January 2012, with a 50% exemption for the first two years, as people get used to the regime change. For full fairness, the full tax could be “grandfathered in”, meaning that those who have paid stamp duty since 1 January 2004 would be entitled a sliding scale of tax credits based off the amount of stampy duty paid. For ease of payment, PAYE workers could opt to have the amount deducted at source. The total tax take from the land value tax by 2015 would be in the region of €3bn, some of which would be offset by the virtual disappearance of €1bn currently taken in via stamp duty.

There are, of course, other options, ranging from the economically illiterate, such as flat water charges, to the idealistic, such as a voluntary 2.5% “Economic Solidarity” corporate tax surcharge. Standardising tax reliefs for pensions and abolishing various tax reliefs could, according to Department of Finance and TASC figures, raise €1bn. But we shouldn’t forget that a small number of taxes make up the bulk of government income, so the focus must be on those. Implementing the two measures above should increase the tax-take in 2011 by €1.9bn and in 2015 by about €6bn. This would represent half the battle in terms of savings required for 2011 and would go a huge way to delivering targets for 2014 and 2015.

Tags: , ,

20 Comments

  1. Rory O'Farrell said on October 19, 2010 | Permalink

    Hi Ronan, I agree with the general point of simplification. Also I agree with a property tax. Maybe an increased inheritance tax might be easier to administer, while having similar effects.

    Ireland’s top 0.5% of earners … paid almost 18% of all income tax
    How much of this is just due to Ireland’s unequal distribution of income? In 2006 Ireland had above average Gini coefficient, after tax. So its fair to say we must have been even more unequal before tax.

    If you know where to find data on taxation paid by each income group could you please post it. It think lots of people would be interested. Also I have some data on top wage shares up to the year 2000, but do you know of anything more recent?

  2. Kevin Murray said on October 19, 2010 | Permalink

    Ronan

    My figures suggest that water charges would raise about €400m per annum if levied on the same basis as the non-domestic sector.

    KJM

  3. Ronan Lyons said on October 19, 2010 | Permalink

    Hi Kevin,
    Thanks for that – is that based on metered water or a flat water charge?

    Hi Rory,
    Thanks for your comment. Ireland is mildly more unequal than the typical developed country (regardless of the general hype about us being the most unequal!). In the typical developed country, top earners are probably taxed twice as much as average earners (in the region of 40% versus 20%). In Ireland, it’s seven times the rate! We need to balance a progressive system with the need to preserve Ireland’s competitiveness. I’ve already heard from insiders that our digital media cluster in Dublin 4 is losing top managers to other countries with less punitive marginal rates. And if we can’t attract managers, we won’t attract other jobs.

    The link for the report is here:
    http://www.revenue.ie/en/about/publications/statistical/2008/statistical-report-2008.html
    Fingers crossed for more up to date figures soon!

    R

  4. Nat O'Connor, TASC, said on October 19, 2010 | Permalink

    Ronan,

    I agree with a number of your points, especially the call for a simple and transparent tax system. I also think it is useful for the debate on property tax to move to a more technical level, where the ‘how’ questions of implementation are teased out. Deducting at source for PAYE workers is a good idea; annual tax bills are painful. What do you think of TASC’s suggestion of a system of deferred payments for people on low incomes or those (on any income) whose housing costs plus childcare costs are more than half their net income? People who defer would pay when they sell or transfer the property.

    I just want to add a point of information and one gripe.

    TASC’s proposals don’t claim to have no deflationary impact, but we have chosen a mixture of taxes – notably property tax – which international studies show is less deflationary than other taxes. Plus our propsals for investment in the economy are an effort to counter-balance the deflationary impact which is inevitable from more or less any tax or cuts.

    “it is frankly not sustainable that one can earn €18,300 a year without making any contribution to the society you live in.”

    This is untrue and condescending. Everyone pays tax. An ERSI study showed that people on low incomes pay 20 per cent of their income in VAT and Excise. This is a contribution to society. We have to look at the effect of the tax system as a whole when measuring progressivity, not just income tax.

    Moreover, many people on very modest incomes – like carers – make a significant contribution to society; which has a real cash value, in addition to its obvious moral worth.

    Nat

  5. Ronan Lyons said on October 19, 2010 | Permalink

    Hi Nat,
    Apologies about the deflationary claim – and agreed on property tax. I think the suggestion re deferred payments is interesting. I would need to tease it out myself to see its implications but paying when selling seems a good way to avoid tax evasion.

    Apologies if I sounded condescending but I would still disagree on the contribution point. If you want to include indirect taxation, then the problem we have compared to our peers remains. Variation in indirect taxation (VAT) is much smaller than in direct (income) tax, and VAT is typically 20% across most EU/OECD countries. So what we have is the typical worker in the OECD making a contribution of 40% of their income (20% in income tax and 20% in VAT) in tax, but the typical worker in Ireland contributing just 25% (5% in income tax, 20% in VAT).

    I’m not a fan of the race to pull the “carer’s card” fastest – it’s become the Irish public discourse counterpart to mentioning Nazis in schools debating. One could also point out that male strippers, whoopy cushion sellers or some other supposedly “frivolous” occupations might have modest incomes. I totally agree with you on the social contribution of carers. But a blanket amnesty on income tax for anyone who might earn like a carer is a blunt tool.

    This of course brings up a much wider issue of the relationship between social/public expenditure and social/public benefit. Board Snip is necessary only in a public service where this is absolutely no connection between what comes in and what goes out. I’ve plenty of thoughts on this (and have a chapter on this topic coming out next year), but it’s not a transformation we can perform in 5 years, rather one we need to phase in over 10-15 years.

    Thanks for the comment,
    Ronan.

  6. Rory O'Farrell said on October 19, 2010 | Permalink

    Hi Ronan,

    sorry, I meant tax figures for other countries. Regarding inequality (before tax) in terms of top income shares, I would say that Ireland is in line with English speaking countries, but out of line with Western Europe. My data only goes to 2000 though, but I don’t see why it would have become more equal since.

  7. George Campbell said on October 19, 2010 | Permalink

    Ronan

    Property tax

    Ronan why do go for of a tax on land which is not the approach Nat takes in the TASC proposals?

    George

  8. James said on October 20, 2010 | Permalink

    Hello Ronan,

    A couple of brief points.

    Water charges are only water charges if they are offset by an equivalent reduction in income tax. Since this is not going to (nor should not) happen, water charges are tax. Let’s call that one as it is. Proponents of water charges correctly state that we should pay for our water, but we do – that’s partially why we pay income tax.

    Property tax: bringing in your proposed sliding scale tax is wholly unfair to those who chose not to purchase a second-hand house since 2004. Many people decided or were not able to afford a second-hand property and chose a new house in order to avoid stamp duty. They should not now have to pay the stamp duty equivalent, as you suggest.

    Otherwise, good comments. We need to cut the fluff and call our taxes for what they are, and include all citizens who can afford into the mix.

    JPB

  9. John O'Connor said on October 21, 2010 | Permalink

    Hi Ronan,
    Two points for you.

    Firstly, typical paye income only employees contribute more than just Income Tax and VAT/excise. How about PRSI, Income and Health Levies. You can then add another ~6% to your totals for people earnings €15k-26k and make that 10% to lower paid people earning €26k above.

    I would also be inclined to add in the employer prsi contribution (13.5%) to the analysis here as well as it forms part of the contribution directly attributable from an employees work to tax take. I say this despite the fact that employer social contributions in Ireland may lag those made in other Euro states, France certainly.

    Secondly, you say that “A family with one earner on the average industrial wage was actually subsidised by the state”. Have you more on that as that raised an eyebrow.

    Thanks for the excellent commentary,
    John

  10. Ronan Lyons said on October 22, 2010 | Permalink

    Hi all,
    First, for those interested in land-value tax, check out this very interesting article in praise, which sums it up well:
    http://www2.macleans.ca/2010/10/21/did-2010s-man-of-the-year-die-in-1897/

    @Rory
    I don’t know of any source for internationally comparable stats on tax share, but I think it might be do-able with a bit of work, if only because much academic research (such as http://www.jourdan.ens.fr/piketty/fichiers/public/AtkinsonPikettySaez2009a.pdf) has been done using this very measure.

    @George
    Two reasons I’d be against TASC’s proposal on property tax (for others: a 0.28% value tax on residential property):
    (1) It’s a bad tax from the point of view of stability of income, incentives for home improvements, etc.
    (2) It would not generate enough money, relative to what a good property tax should (i.e. compared to our OECD counterparts). A tax that blunt would have to be doubled or trebled to generate enough income.

    @James
    On water: In a perfect world yes. But when 1/3 of the money the government spends is not backed by any income at all, we don’t have that luxury. The choice is not between water charge or not, it is between water charge or higher income tax. (So I guess, in a way, you would be getting what you asked for…)

    On grandfathering: point taken but I think for political acceptability/avoiding riots on the street, some account will have to be taken for stamp duty paid. There’s also an equity issue. A property tax is payment for amenities enjoyed by the residents. If you have paid stamp duty, at least you’ve made some contribution. If you haven’t, you’ve been enjoying roads and schools and water and so on scot-free. (Literally, as I’ve recently learnt that a scot is a payment!) Ultimately, this is a bargaining exercise: could I win you over with only offering tax credits for half of all stamp duty paid?

    @John
    Someone elsewhere brought up the employer PRSI issue. I think it’s an interesting one but my own view is that employer PRSI is a competitiveness issue (the wedge the employer faces) rather than a contribution issue (the point made above). Perhaps the forthcoming budget will sort this out for once and for all – my hope, though, is that they keep the concept of paying for a service (namely insurance against unemployment). The more things that go into an amorphous blob of central spending, the more difficult it becomes to manage our public finances.

    On the average age tax contribution, check out:
    http://www.ronanlyons.com/2009/04/27/are-irish-workers-undertaxed/

    Thanks to one and all for the comments,

    Ronan.

  11. Pineapple Dan said on October 25, 2010 | Permalink

    You want people to pay 2000 per year but from what? people can’t afford property tax and they can’t sell their house either.

    property tax is a great way of gouging the poor whether or not they have the money they still need to pay. and also making sure that only people with high incomes can continue living in a large house

  12. Kevin Murray said on October 26, 2010 | Permalink

    Ronan

    Sorry for not responding to your question about the revenue from water charges more quickly.

    My figures are based on the typical consumption in a residential property (excluding water that leaks away) and the exisitng metered charges to non-domestic customers.

    If the government were to introduce a flat charge based on a true assessment of what people consume, then they would probably bring in around €400m per annum. That would be based on €500 pa for a family home and €300 pa for a 1 or 2 person property. It allows for social welfare waivers but not for a universal free allowance of water.

    If they bring in water meters then there will be a small (10%) reduction in the net revenue; although the customer may end up paying as much or more for the cost of the metering and reading service.

    In any event, €360m to €400m is a good estimate of what the government could bring in, with or without meters.

    Oc course if they do bring in meters they will additionally save about €75m per annum on the water that would otherwise have been lost through customer-side leaks.

    Kevin

  13. Kevin Barrett said on November 8, 2010 | Permalink

    Hi Ronan, just on a technical point, the PAYE tax credit for 2010 is €1830 not €18,300. Also I think the maximum marginal tax rate is 52%, 41% income tax, 5% health levy, and 6% income levy. This applies to anyone over €175k which puts us above the UK.

  14. Mark said on November 24, 2010 | Permalink

    Well you got a small move in both directions.

  15. Cathal O'Donoghue said on November 27, 2010 | Permalink

    Ronan. The tax credit system that has evolved over the last few years not only resulted in a large number of people paying little or no income tax as they have median income earnings but also produced a disencentive for certain workers to increase their earnings. For example a part time office clerk earning €18,300pa pays no income tax,assuming that person was offered additional hours of work then they would only net 80cent in the euro (ignore prsi/health levies etc) on their marginal income assuming a 20% tax rate. Tne tax free thrshold of €18,300 only applies to PAYE workers as the self employed including proprietary directors do not get a PAYE credit. The self employed start paying income tax after earning €9150pa. Not to forget if you are self employed their is no ceiling on PRSI/health levies. many paye worker who were let go and started a business in 2009 got a shock when preparing their tax return to lesrn of the low tax free thrshold they had relative to PAYE workers.

  16. Ronan Lyons said on November 28, 2010 | Permalink

    Hi Cathal
    You’re dead right – a good tax system would mess as little as possible with people’s incentives to work. Ireland has probably the greatest meddling with people’s incentives of any OECD country because of the gap between average all-in rates and the marginal rate on the next euro.
    Thanks for the comment,
    Ronan.

  17. Ronan said on December 7, 2010 | Permalink

    Hi Ronan,
    Fantastic site with some great points and clearly expressed. I have noticed that you are using the rest of the OECD countries as a yard stick which is conceptually correct but may not tell the real story,the cost of living is so much cheaper than in “rip off” Ireland…a phrase i hate, certainly there are legislation and policies that we can learn from them and implement, look at their concepts and adjust accordingly to make them work in ireland such as the property tax and reforming income tax which is badly needed.

    I just feel that lowering the tax band to include those who cant afford to pay is unfair and i did find it condescending as did Nat O’Connor.I appreciate that you didnt mean to sound so harsh.I feel that yes, if we were working from a blank canvas that is the way to go, everybody should contribute accordingly but when the cost of living in this country is so high and given the amount of social welfare that is currently claimable, you are eradicating the incentive to work.

    I work in a pub along with being a trainee accountant and i deal with the so called upper and lower classes of society on a daily basis, i see some friends on the dole getting €196 into their hand every week for doing nothing, the majority are 18-25, most with tradesman qualifications, they complain if they get a days work, we are ruining this generation, the days of the stereotypical hard working irish are dead and gone, we think we are too good to work in restaurants, pubs, cinemas etc, if you go up to dublin on a night out or evening shopping you can count the amount of irish people who serve you on one hand, we need the ” foreigners” because they have the hard working attitude we, the Irish were once renowned for.

    On the other hand wealthy business men & women willing to pay huge fees just to get their tax bill down which they are right to,why not avail of these loopholes, its not their fault, the difference is at the top their are loopholes, at the bottom there is poverty and homelessness.Might sound exaggerative but these are real issues that we rarely hear about because they have lost their voice in society because depending on where u stand in society is how loud your voice is heard.
    Can anyone explain to me how lowering the minimum wage which i believe 3% of the working population is on is going to lure anyone back to work when the current minimum wage clearly doesnt.
    I apologise for the length of this rant!!..and im going to make my last point brief as it is the single biggest disgrace…too many needless td’s on crazy wages, they have the equivalent to a blank cheque with their expenses and mental pensions considering the current hardship everyone they represent faces at the moment, how can these people lead us out of our current climate when they have never heard or never will hear that dreaded beep beep beep at an ATM…they would probably mistake it for a ringtone on their new iphone paid for by every one of us commenting on this article!

  18. Ronan Lyons said on December 7, 2010 | Permalink

    Hi Ronan eile,
    I think we’re in agreement. I don’t think reducing the minimum wage – without also reducing unemployment benefit – will improve the incentive to work. However, I wasn’t suggesting that in this blog post at all. I think it’s a competitiveness measure, not a fiscal one, so I am as confused as anyone about how it ended up in Budget discussions.
    Anyway, one other point I’d make is that Ireland may be more expensive than other OECD countries but that is not a blank check to have whatever system we want. We’re about 10% more expensive than other OECD countries. So certainly we can be one tenth out of line… but any more than that and we are out even by your conditional argument.
    Hope that makes sense,

    R

  19. David Quaid said on December 9, 2010 | Permalink

    Hi Ronan,

    Another very interesting and thought provoking post.

    Just a question about the 0.5% top earners, indeed take the top earners over €150k.

    For a start, wouldn’t it be true that State Employees (and there’s plenty who earn over this amount) don’t actually generate tax – they’re just paid an amount net of Tax, it doesn’t actually increase the tax take?

    Secondly, if you were a company director, would you not just align your PAYE Tax at the point where it gets ineffective to pay yourself more and so just pay Dividends/Licence/Royalty or just stop?

    Most of the big billionaires in the USA are paid quite small salaries in comparison to their wealth which is based on Shares and proceeds from.

    Thanks,
    David

  20. Ronan Lyons said on December 11, 2010 | Permalink

    @David
    Good question. On the first point, the question becomes how to factor in the social benefit created by public service organisations. That is a long task ahead of us, though, so for the moment you are write in an accounting sense that public service (as distinct from semi-state) can be viewed as a cost. On the latter point, the key thing for the tax system is to be fair, i.e. not discriminate between capital and labour income, so it makes no sense to switch as described. I’m not sure how the current system stands in that regard.

5 Trackbacks

  1. [...] Browse All Posts « How can Ireland tax and grow? Thoughts for Budget 2011 [...]

  2. [...] The top .5% of income earners in Ireland pay approx 18% of all income tax and the top 6% pay 5-% of all income so they are paying more than their fare share….especially with nearly half the working population paying nothing apart from the levy…The highest rate of tax here is already higher than in nearly all OECD countries already. Irish lower paid workers are paying less tax than nearly every other European Country. We have the highest starting threshold for tax credits etc. How can Ireland tax and grow? Thoughts for Budget 2011 | Ronan Lyons [...]

  3. [...] Browse in Irish Economy « How can Ireland tax and grow? Thoughts for Budget 2011 [...]

  4. [...] a higher tax regime. Certainly, we can do with fixing our income tax credits – which seem particularly generous to lower earners compared to those elsewhere in Europe – but our income tax rates are, if anything probably too high, I’m sure [...]

  5. [...] [...]

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*

Categories

Tags

Subscribe

Ronan Lyons Posts RSS feed

Receive RSS updates of Posts and Comments.

Subscribe to Email Updates

Subscribe to Email updates.