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.
According 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.
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.