Taxation

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Apple Deal is ‘Tip of Tax-Dodging Iceberg’

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Press Release from Attac Ireland

Ireland’s deal with Apple, branded ‘illegal’ in a preliminary judgment by the European Commission, is just the tip of the iceberg when it comes to tax-dodging by corporations here – with full cooperation from the State.

So says Attac Ireland, the Irish branch of the global activist group that campaigns for financial justice, including shutting down tax havens and taxing transactions.

Findings from the European Commission suggest that the State cut a special tax deal with Apple in return for job creation in Ireland by the multinational corporation.

“While the jobs created are relatively few, the loss in revenue to the Irish state is enormous,” Marie Moran of Attac Ireland said.

Globally Apple has $54.4 billion in offshore profits that have been barely taxed at all, thanks in part to a complex arrangement of Irish subsidiaries, known as the ‘Double-Irish’.

“Under Irish law, if the Irish subsidiary is controlled by managers who meet outside of Ireland, then it is treated for tax purposes as if it is a non-Irish company,” Conor McCabe of Attac Ireland explained.

“Companies such as Apple and Google, as well as pharmaceuticals, assign patent rights to these subsidiaries, which then charge the main Irish company a royalty fee for using these patents.” McCabe continued. “Under Irish tax law, royalty payments are tax-deductible. In effect, these companies charge themselves for using their own products, and then use that charge as a tax write-off. This is the Double-Irish.”

Marie Moran noted that while international attention is fixed on the case of Apple, the practice “has implications for a very large number of corporations based in Ireland for tax purposes. In fact, according to the Revenue Commissioner’s own reporting, the majority of companies based in Ireland pay corporation tax far below the headline rate of 12.5%, with some corporations paying no tax at all.”

“This arrangement is a form of corporate welfare that is not only potentially illegal but deeply anti-social,” Harry Browne of Attac Ireland added. “At a time when Irish citizens are bailing out the losses of private banks, and have faced cuts to social welfare, the State is complicit in measures that shore up the enormous wealth of the corporate sector, and erode social fabric and infrastructure.”

As part of its campaign for financial justice, the European Attac Network is calling for a global taxation for corporations, ‘unitary taxation’. This means that large corporations would be taxed as a single entity on the basis of a joint report of the activities and profits of all subsidiaries worldwide.

Under unitary taxation, profits would be split by a levy allocated to those countries, for example, based on the variable wage payments, fixed assets and sales. This measure would ensure that corporations cannot avoid tax payments through complex transfer pricing and other arrangements.

In addition to calling for unitary taxation, Attac Ireland calls for an immediate investigation into the legality of Irish tax arrangements, and a commitment from the Irish government to close down the socially costly and morally bankrupt ‘double Irish’ loophole.

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IBEC’s Myth Debunking is Just Bunk

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IBEC has published a paper entitled ‘Debunking Irish income tax myths’.  At its core it contains misleading, highly selective and ultimately disingenuous arguments.  In short, it is bunk.  Let’s go through one of their main arguments and see where they are misinforming the debate.

Personal Taxation – It is Lower than the EU Average

IBEC puts forward two graphs (Figures 2 and 3) to show that Irish personal taxation is much higher than in the EU-27.  This is an audacious presentation.  They use data selectively and exclude large parts of personal taxation.

(a)  Using GDP and GNP

IBEC produced the following calculations.

111According to IBEC, this proves that Irish personal taxation is higher than the average of the EU.  They further claim, that on these numbers, Irish ‘taxpayers’ are paying €3 billion more than the EU average on a proportional basis.  The problem is that they are not comparing ‘personal taxation’; they are comparing income tax.
They exclude a large portion of personal taxation; namely, social insurance or PRSI.  In almost all other European countries, PRSI plays a much greater role than income tax.  In the EU, PRSI makes up 37 percent of total personal taxation; in Ireland, it makes up only 12 percent.  In seven countries, revenue from PRSI is higher than revenue from income tax.  In the Netherlands, income tax raises €46 billion; social insurance, however, raises €63 billion.

Not only did IBEC ‘mould’ the data around the conclusions they wanted, they also mixed the measurements to suit their argument.  When comparing GDP, they used an ‘arithmetic’ average for the EU.  However, when using GNP, they used a ‘weighted’ average.  The difference is that in the former, you average the individual percentage of each country; in the latter you add up all countries together and calculate the average. It allows IBEC to claim that income tax makes up 7.8 percent of GDP (arithmetic) whereas using the weighted measurement gives a figure of 9.4 percent.

Here’s the actual data – using the weighted average.  All comparative data below is from Eurostat’s Taxation Trends in the European Union 2014.

IBEC 2

On all these measurements, Ireland is well below average.  On GDP we’re below, but we know that much of our GDP is multi-national froth.  Using the Fiscal Council’s hybrid-GDP (which compromises between GDP and GNP), we’re still below average.  Even when using GNI which is essentially GNP, we remain below, though less so.

If we use adjusted GDP we’d have to pay €3.6 billion more in personal taxation – income tax and PRSI combined.  However, this isn’t the best measurement.

(b)  A More Robust Measurement
There’s a problem in using GDP and GNP.  If, after years of recession and austerity, GDP and GNP are depressed, then you will probably not be comparing like-with-like with countries that didn’t have such an experience (or not in the degree we had).
There is a better measurement: the effective personal taxation rate.  This is the total amount of personal taxation revenue as a percentage of total wages and salaries.  The following is for employees (measuring the tax rate for self-employed is difficult as the data on self-employed income is limited) though it covers 83 percent of all those in work.

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Appreciating Facts

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Last night on Prime Time Brendan Burgess, from Ask About Money, stated that high-income earners in Ireland pay more tax than high earners in other countries.

‘We have a very low direct tax economy in this country for the lower and the middle paid and very high taxes for the upper paid.  And that’s something people don’t appreciate.  And they need to appreciate that.’

Let’s do some appreciation.  Are we a ‘very low’ direct tax economy?  Direct, or personal, taxes include income taxes, social insurance (PRSI) and other taxes on income such as Ireland’s Universal Social Charge or Germany’s surtax.

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We are low-tax, well below a lot of other countries.  But we are not that far behind the EU-15 weighted average, not that far behind ‘high-tax’ Sweden and ahead of another ‘high-tax’ economy, France.  So I don’t know that I would call it ‘very low’ but we certainly should be doing better.

But what about that ‘very high taxes for the upper paid’?  We don’t have ‘effective’ tax rates for different income groups to compare (that is, the tax rate when all reliefs and deductions are taken into account).  We only have ‘headline’ tax rates – which only include basic reliefs like personal tax credits.  But the following headline tax rates come from the OECD Benefit and Wages database.  The highest level of income for Ireland in the database is €119,000 (a couple, both working) so I’ll use that to compare with the same level of income in other countries.

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Headline tax rates on Irish high-earners are well below most other countries.  If they were living in Germany they’d be paying €11,000 more in income taxes and social insurance.

There is caveat in this.  In Ireland, taxpayers get relief on pension contributions, mortgage interest, health insurance and a rake of business investments.  Do taxpayers have access to the same level of reliefs and allowances?  More?  Less?  We don’t have easily accessible comparable data.  (Also, the tax rate for Italy in the above chart is for €107,000 – the highest level of income in the OECD database).

However, when looking at headline rate, Irish high-earners are not over-taxed in comparative terms.

And there are some further explanations needed (the type of explanations that rarely get a hearing on current affairs programmes).  Take the example of Sweden.  The chart above shows Swedish headline rates lower than Ireland.  In the first total direct taxation chart, Sweden is only slightly above Ireland.  Some might find this surprising since we all think of Sweden as high-taxed.

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Championing the Affluent

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The affluent are blessed in their champions.  They have a myriad of commentators fighting their corner.  In the Sunday Independent Colm McCarthy, discussing the benefits or otherwise of a third tax rate on high incomes, stated:

‘In order to raise meaningful amounts, it (the threshold to enter the third rate of tax) cannot be pitched at a level much higher than the €100,000 indicated, but that pulls into the high-tax bracket many people who do not consider themselves exceptionally well-off.’

€100,000 not exceptionally well-off?  Ok, maybe, but they certainly are ‘well-off’; very well-off.  In fact, they are in the top 3 percent of income earners in the state.  If these high-earners don’t consider themselves exceptionally well-off, what would they think if they were part of the 50 percent of income taxpayers who earn below €29,000 a year?  Or the 25 percent of the population who live in official deprivation.

These kinds of comments are part of the don’t-tax-high-earners-too-much-because-then-they-will-leave-in-a-tax-huff argument.  Thomas Molly, writing in the same newspaper, puts it this way when discussing the wealth tax:

‘Any other sort of wealth tax is likely to bring in very little money as the cash moves overseas at warp speed but is guaranteed to scare away many of the people who create wealth and jobs in our society.’

Ah, tax flight – the phenomenon whereby high taxation causes people to leave the jurisdiction.  How valid is this?  Not very.  The US is a good place to study.  Individual states can set their own income and wealth taxes in addition to Federal taxes.  And moving from one state to the next is not nearly as challenging as moving from one EU country to the next.  So what happens when states like Maryland or New Jersey or Oregon raised taxes on the highest income groups?  This study – ‘Tax Flight is a Myth’– found:

‘Attacks on sorely-needed increases in state tax revenues often include the unproven claim that tax hikes will drive large numbers of households — particularly the most affluent — to other states. The same claim also is used to justify new tax cuts. Compelling evidence shows that this claim is false. The effects of tax increases on migration are, at most, small — so small that states that raise income taxes on the most affluent households can be assured of a substantial net gain in revenue.’

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Making Work Pay Requires More Social Protection Expenditure

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What are we to make of the two headlines this morning?  First, from the Irish Times:

‘Work pays better than welfare for most unemployed, ESRI finds’

And then there’s this from the Irish Independent:

‘Why families are better off staying on social welfare’

Both stories refer to a study that will be launched today by ESRI researchers, using the institute’s Switch tax-benefit model that allows a detailed examination of households’ financial situation both in work and out of work.  I will be going into more detail once this report is published but in this post I want to address a broader narrative: namely, to ‘make work pay’ requires more social protection spending and more public intervention into key markets.

The Irish Times reports two findings:

  • Nearly six out of seven people would be financially better off in work than on welfare (or nearly 85 percent)
  • Among those people in employment or unemployed facing a situation where work pays less than welfare, more than 70 per cent chose work rather than welfare.  So much for ‘life-style’ choices.

The Irish Times report goes on to state that:

‘The finding appears to debunk the myth that Ireland’s relatively generous social welfare system gives no incentive for people to work.’

Of course, we don’t have a relatively generous social welfare system but that’s another story.

The Irish Independent, however, focuses on the small numbers who would be better off on social protection.  They report that 45,000 workers would not receive any benefit from taking up work, of which 22,000 would actually lose money.  However, even the Indo report admits that most people still take up work, regardless of the financial impact.

So to the degree that people are not better off taking up work, what is the reason?

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Opening the Low-Low Corporate Tax Rate Door

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The Government’s paper on Ireland’s effective corporate tax rate confirms what the dogs in the street have known for a long-time:  Ireland has a low,extremely low, corporate tax rate.

There is that vexed question of what corporate income counts for the purposes of determining the actual rate of tax companies pay here.  Professor Jim Stewart produced data which showed that the effective tax rate of US multinationals operating here was 2.2 percent in 2011.  This was disputed because Stewart – using the US’s Bureau of Economic Analysis – included the $140 billion that US multinationals move through Ireland on their way to other places, including tax havens.  Some claim you can’t count this because it is not taxable in Ireland.

But, of course, that is the point.  The issue is not the Irish corporate tax rate per se but the role that Ireland plays in the global tax avoidance chain – the ability of multinationals to use Ireland to avoid paying taxes that would be due elsewhere.  That is the character of a ‘tax-haven conduit’.

In this respect, it is worth remembering:

Tax havens attract foreign investment not only because income earned locally is taxed at favorable rates, but also because tax haven activities facilitate the avoidance of taxes that might otherwise have to be paid to other countries.

The Irish corporate tax rate is the sign on the door.  It’s an inviting sign – a low-tax rate of 12.5 percent.  But the real goodies are what’s behind the door – the prospect of using Ireland as a transit point in the global avoidance chain.

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Three Cheers for the USC

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The Universal Social Charge (USC) is a great tax.  Many progressives were critical of its introduction and rightfully so.  In replacing the Income and Health Contribution levies, the USC ended up increasing tax on low income earners – at a time when the economy was still melting down, people were losing their jobs and income was falling. That was inequitable and economically irrational.

However that is a criticism over rates and thresholds – elements which can be easily changed. The reason the USC is great tax is because it is simple, transparent and, most of all, no matter how many tax accountants you hire, you can’t escape it.  The tax has almost no exemptions, reliefs, or allowances – unlike the income tax system.

Dr. Tom Healy of the Nevin Economic Research Institute made an interesting observation:

‘Perhaps there is a case for abolishing income tax as we know it, replace it with USC, make the rates more progressive (e.g. by introducing three or even four bands) and then re-term it as ‘income tax’! . . You see – the beauty of USC is that, it applies to many different kinds of income,  it is not riddled, to the same extent as ‘income tax’  with all sorts of reliefs and exemptions,  it is reasonably simple to understand and operate.’

Now that’s blue-sky thinking.  Check out this little stat:  income tax– with tax rates of 20 percent and 41 percent – raises €11.4 billion in revenue.  The USC, with a tax rate of 7 percent raises €3.9 billion.  At a much lower rate, it raises over a third of the entire income tax system.

To raise the same amount as income tax, the USC would need to be raised to 20 percent (with the lower rates rising proportionally).  A tax rate of only 20 percent would raise as much as income tax.  That’s pretty effective and efficient.

This is not an argument for a flat-rate tax.  Dr. Healy points to the potential of introducing three or four different tax bands.  In fact, in the EU-15 only Ireland and Germany have two tax rates.   Other countries have three or more:

  • Austria and the UK have three rates while Sweden has two central tax rates and one local
  • The Netherlands has four tax rates
  • Belgium, Finland, France and Italy have five tax rates
  • Spain has seven central tax rates and four regional rates
  • Luxembourg has 18 tax rates (yes, 18)

So a number of tax rates can be used, rather than an essentially flat-rate.

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Tales From Tax Haven Ireland: Running the Numbers Game

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“The extremely low effective rate figures that have been quoted over the past week and attributed to Ireland are based on a flawed premise. The figures are estimated by dividing the amount of Irish tax paid by a total profit figure that includes substantial profits made by companies that are not tax resident in Ireland. They are running together the profits earned by group companies in Ireland and in other jurisdictions and incorrectly suggesting that Irish tax does or should apply to both.”

So, Michael Noonan rejects the recent findings of Jim Stewart of Trinity College, Dublin that US companies in Ireland have an effective corporate tax rate of 2.2%. In this he is following the insistence of Feargal O’Rourke of PriceWaterHouse Coopers who claims that Stewart erroneously includes companies that are incorporated in Ireland but do not operate here.

These are companies, like, for example, Google Ireland Holdings, Bermuda, which is ‘tax resident’ in zero tax jurisdiction Bermuda but is in effect a letter box company with a registered address in Sir John Rogerson’s Quay, that is, the office of solicitors Matheson Ormsby Prentice.

The basis of O’Rourke and Noonan’s (and the government’s) objection to Stewart’s finding is that the TCD economist uses US Bureau of Economic Analysis (BEA) data.

As Seamus Coffee puts it in a response to the 2.2% rate claim, BEA methodology highlights

“…that for companies, US residency rules are based on paperwork rather than activity.  Under US law, the tax-residence of a company is the country where it is incorporated.  All companies registered in Ireland are thus considered “Irish-based” under US law.”

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Friday Stat Attack: A Simple Graph That Can be Used in the Tax Debate

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OK, this follows on from yesterday’s post but whenever I hear someone on the media claiming that Ireland is a high-tax economy, I’m going to @ the programme with this graph.

TTonW

The question is simple:  if Ireland is a high-taxed economy how come we have the lowest tax on labour in the EU except for Bulgaria and Malta?

Don’t underestimate the import of this battle.  Keeping taxes low (while at the same time fighting off wage increases) is just a continuation of the austerity battle.  People paid for the crisis; now  there will be an attempt to make people pay for the recovery. What little is given in tax cuts will be taken away from free health, free education, affordable childcare, public services and income supports; in other words, all the programmes and infrastructure that can raise living standards.  People will be required to subsidise their own tax cuts – and this after we’ve been forced to subsidise financial institutions and the economic collapse caused by speculative activity.

So please feel free to use this graph to get the word around.  We’re not a high-taxed economy – but we are a low waged economy with even lower levels of public services and income supports.  The only high this economy experiences is rising profits.

Oh, and deprivation and emigration, too.

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The Trojan Horse

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As if we didn’t know, we now know what the Government’s intentions are regarding tax cuts:

‘Minister for Finance Michael Noonan has pledged to widen income tax bands as soon as the State can afford it to take people out of the higher tax bracket.  Mr Noonan said the biggest problem facing the tax system was the low level of pay at which people entered the higher tax rate. He said in Ireland people started to pay the higher rate on incomes of just €32,800 and this was far lower than in other EU countries.  “If I have the money that is where I will go. I would like to reduce the threshold at which people hit the higher rate,” he [said].

The standard rate tax threshold is the Trojan horse for the tax-cuts lobby.  It is true that in the Irish system people enter the top rate of tax at a very low wage level.

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Here, we enter the top rate of tax at €32,800.  In all other countries, the threshold is higher; in Germany, you don’t enter the top rate of tax until €250,000.   So that picture looks pretty clear, doesn’t it?  Well, no because it is not the full picture. I will address the details of marginal tax rates on incomes in different countries in a subsequent post.

But to make a quick point – if Irish workers are ‘disadvantaged’ by entering into the top tax rate so early, why are taxes so low?  These are the headline tax rates (personal allowances only) from the OECD’s Benefit and Wages database.

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How Do you Deliver Tax Cuts to Households Whose Income is so Low they Don’t Pay Income Tax?

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If the Irish Times report is correct, the Government is on track to implement tax cuts for ‘middle income’ families.  The Taoiseach is certainly keen on it:

‘“The priority will be to reduce the very high tax rates faced by families on middle incomes,” said Mr Kenny.’

What’s really interesting is that for many middle income families, tax cuts would be practically meaningless.  And what they need is not even on the agenda.

How much income do middle income households earn?  The following should only be seen as an approximation since it relies on income distribution data from the Survey on Income and Living Conditions which presents the information based on deciles (i.e. broken down on 10 percent categories).  Further, the latest Survey from 2011 doesn’t provide a decile breakdown; so this data is courtesy of Dr. Micheal Collins from the Nevin Economic Research Institute.  As well, the household breakdown comes from 2010 (again, as 2011 doesn’t present this data) – a breakdown for adults and children.  That’s why this should be treated as indicative.

This middle income lies in the 4th to 8th deciles, making up 55 percent of all adults and 60 percent of all children.  What is the average income for this middle group?

Avg_income

It ranges between €8,000 and €52,000 per household.  This refers to ‘direct’ income – income from PAYE work, self-employment and capital sources (e.g. capital gains).  This middle income group is made up of part-time workers, minimum wage workers, and the low-paid:  a household of two working adults would mean average gross wage of €26,000 each.  There would also be average and above-average income earners.

Data from the Revenue Commissioners is also helpful but there are some caveats.  There is a chance that there is double counting – where people might have part-time self-employment combined with part-time PAYE work.  Further, married couples are counted as one taxpaying unit.  And the data only includes those in work.  Notwithstanding these, the Revenue data corresponds with the above.

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The Terrible Debate that is in Store for Us in 2014

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We know what one of the big battles will be in 2014.  Ministers are making declarations.  Demands are being made.  Analysis (after a fashion) is being put forward.   Its tax cuts.   Daily we are being fattened up for tax cuts.

Let’s cut to the chase.  Wages will be depressed as part of the ‘wage-competitiveness’ strategy.  To compensate for this, taxes will be cut to give some increase in disposable income (take-home pay).  And with tax cuts, public spending will also be cut – public services, social protection, investment.  If this sounds familiar – tax cuts in compensation for low wage rises – that’s because it is; back to the future with a low-tax, low-spend, low-resourced economy.  If nothing is learned, nothing changes.

To clear the ground for this it has to be shown that Irish public spending his high. We had this last week with a highly misleading analysis.  Now we have, courtesy ofChris Johns in the Irish Times, an article with the sub-heading:  ‘Evidence does not support view Ireland is low tax economy’, Johns makes some incredible statements:

‘The data on international income tax comparisons do paint a very clear picture: we are at, or very close to, the top of the league tables in terms of effective tax rates . . . those who do pay tax and social insurance in Ireland shoulder a disproportionate burden, at least compared with other countries . . . if you are paying income taxes as well as PRSI and USC, you are amongst the hardest hit in terms of EU and OECD tax league tables.’

It would be nice if Johns put forward some evidence for this but, alas, that is missing.  He only refers to the fact that there are a lot of people who don’t pay income tax.  Therefore, he assumes that those who do are high-taxed.  This is pretty thin (and that’s putting it mildly).

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We’re Starving Public Services and Social Protection But All We Get is Demands for Tax Cuts

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The drums are beating.  Throughout the nation we hear a growing chorus demanding tax cuts (including the leader of the Labour Party) to relieve ‘hard-pressed’ families.  And this demand is being buttressed by some highly misleading claims that Ireland is a high public spending country.

According to Brendan Keenan, using recent OECD data, we are a high-spender.  There’s even a cartoon in the article showing Ireland ‘fat’ with too much public spending, compared to ‘lean’ European countries.  Is Ireland a high spender compared to European countries?  Of course not.  One has to know how to read these figures.

For instance, the OECD data for 2011 includes special bank payments arising out of the financial crisis.  When this is removed (and it represents some 5 percent of GDP), Irish spending falls well down the table.  It is highly misleading to claim that Ireland is a high-spending country while including payments to banks; unless one wants to make the argument that Ireland is a ‘high bank-subsidising’ country which is certainly true.

So, can we assess Ireland’s ranking in the EU-15 spending table?  Yes, with the help of the EU’s AMECO database.  We’ll look at 2014.  Even though this money hasn’t been spent yet, AMECO is working off of country’s estimated expenditure under their individual Stability Programme updates.  Any change would be marginal.  We’ll also exclude interest payments since we want to focus on spending on public services, social protection, subsidies and investment.  Further, we’ll exclude defence spending.

So what do we find when we examine government spending per capita (after all, Keenan says ‘spending per person tells its own tale’)?

GPSC

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A Progressive Tax System? The Poor Pay as Much Tax as High Income Groups?

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Remember all those observations?  About how the highest income groups pay almost all the tax and how terrible it is that begrudging lefties want to tax them more?   About how Ireland has the most progressive tax system in this quadrant of the Milky Way?  The Government has lead the chorus making this claim but in truth it is not based on comparative measurement of tax progressivity (see Note at the end of this post for a discussion of the Government’s claim).

So along comes a study that blows those arguments away.  Dr. Micheal Collins and Dara Turnbull investigated the issue in a working paper published by the Nevin Economic Research Institute, based on the CSO’s Household Budget Survey 2009/10.  They found that, contrary to the received wisdom, the poorest 10 percent income group pays as much tax as the top 10 percent tax and that our tax system is far less progressive than some have claimed.

Here’s the bottom line chart.

tax1

Oh, my.  The poorest 10 percent income group pays a tax rate of 28 percent – that is, their tax payments make up 28 percent of total income (which includes income from work and social transfers).  The top 10 percent pays a tax rate of 29 percent.  Doesn’t look that progressive to me.

How could this be?  Micheal and Dara estimated the impact of all taxation – income tax, USC, PRSI, and (and this is the key innovation of this study) indirect tax such as VAT and Excise, and levies such as TV licenses and vehicle taxes.  Previously, claims about the tax contribution of high income groups narrowly focused on income tax and, sometimes, PRSI.  But these make up only part of the tax system.  Over 40 percent of tax revenue comes from indirect taxation.  The following shows the extent to which indirect taxation undermines the progressivity of the tax system.

tax2

Unsurprisingly, the lowest income groups pay substantially more of their income on VAT, excise and levies than higher income groups.  So when this is combined with direct taxation – income tax, USC and PRSI – we get only an overall marginally progressive effect.

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