'Progressive' tax isn't fair if we don't get value for money
Published 23/09/2016 | 02:30
Most of the time, Ireland doesn't really 'do debates'. There is no debate about the EU, for example. We react to decisions made by the EU, like the recent ruling against Apple, but we don't seem to have any vision about the kind of EU we want to be in because we never have a debate about that.
There is no debate about immigration. It's assumed that it is a good thing, full stop, end of argument. We are not allowed to have an opinion about how much immigration is a good thing, or about the kind of migrants we want (high skilled, low skilled, etc)?
There is only the barest of debates about whether it is better to cut taxes or increase public spending. The overwhelming weight of opinion that we hear on the airwaves favours increased public spending. It is 'virtuous' to want increased public spending and it is 'greedy' to want tax cuts.
To make matters worse, what debate there is about public spending versus tax cuts takes place in an environment loaded with assumptions that favour public spending.
The Irish Tax Institute has just issued a document on the amount of personal tax people pay here at various levels of income compared with other countries. The paper is called 'Perspectives on Ireland's Personal Tax System' and is required reading for every politician in the country, and also for every journalist with any interest in the tax and public spending debate.
Before getting into the meat of the paper, however, we need to tackle the meaning of the term 'progressive taxation'. 'Progressive' is a nice sounding word. If a country has a 'progressive' tax system that is surely a good thing, and when it has a very 'progressive' tax system, like Ireland's, that must be even better.
But when the word 'progressive' is used here, it doesn't mean 'progress', it simply means that the more you earn, the more tax you pay. In a steeply progressive system in this sense, higher earners pay vastly more tax than lower earners.
Ireland, it turns out, has the second most 'progressive' tax system among all developed countries. Don't take the Irish Tax Institute's word for it. This comes from a Department of Finance analysis of Organisation for Economic Cooperation and Development (OECD) figures.
Our tax system loads the tax burden on to medium and higher earners to a much greater extent than even famously egalitarian countries like Denmark, Sweden or Norway.
Here is how steeply 'progressive' our tax system is: someone on €25,000 pays 5.6 times more tax than someone on €18,000. Someone on €35,000 pays 11 times more tax than someone on €18,000, and someone on €75,000 pays 44 times more tax than someone on €18,000.
The top 1pc of income earners now pay 22pc of all personal taxes while the bottom 50pc of earners by next year will be paying just 3.6pc of all personal taxes.
What this means is that public spending is being loaded on to a relatively small number of people. Apart from any issues around fairness, is this even practical?
The Tax Institute paper looks at someone on €55,000 and the amount of tax they pay in various countries. The Germans, Dutch and French are absolutely hammered.
But the Irish person on that wage pays more in tax than their equivalents in Spain, Sweden, Britain, Switzerland, the US and Singapore.
Singapore is famously low tax. A Singaporean on €55,000 pays €5,396 less in tax than an Irish person on the same income. But guess what? Singaporean public services on the whole are excellent. They have a good health system and a good education system.
This brings us to the subject of value for money. We aren't getting it. Everyone thinks we spend too little on health. But according to EU figures, at the height of the boom, we were spending far more on health than anyone else in the EU as a percentage of gross national income (GNI).
Even after the cutbacks, we still spend more than anyone aside from Denmark, which spends only fractionally more as a percentage of GNI than us.
But according to the EU, despite all this spending, Ireland ranks only in the middle third when it comes to life expectancy at birth and at age 65, and in the bottom third among EU countries when it comes to avoidable hospital admissions and cancer survival rates.
This is very, very bad and it means we need health reforms far more than we need more spending drawn from the taxes of a group of people already paying too much tax.
The Irish Tax Institute in its paper asks some very pertinent questions. Among them: is there a point at which a country's personal tax system becomes overly progressive; and do high tax rates above the average wage impact on our competitiveness and create issues around incentive to work, labour costs and ability to attract talent and skills?
The first question is related to fairness. Is there a point at which some people are being asked to pay too much tax, especially given the poor quality of public services they often get in return?
The second question is a practical one. Are high tax rates eventually counterproductive?
These are the questions that ought to be asked every time there is a debate about increased public spending versus tax cuts. Finally, in the absence of a party that really champions the taxpayer, maybe the time has come for a taxpayers' alliance to create real pressure for a fairer tax system.