The myth of Ireland as a low tax economy
Dan O'Brien, in the first of a two-part series, looks behind the scenes at how the Government funds itself
'Ireland is a low- tax economy." This statement is frequently made, both at home and abroad. It is made because the amount of cash the State takes in is indeed lower than all other peer countries relative to the size of the economy, as it is most commonly measured.
But is it really the case? There are at least two parts to the answer. One is that when it comes to the biggest chunk of tax revenue - personal taxation - it depends how much you earn.
Another part of the answer is a clearer No - the amount of revenues the Irish State raises relative to the economy is much closer to European norms once the effects of inflated gross domestic product (GDP) are accounted for.
With Budget 2019 just 10 weeks away, today's column will look at the bigger tax picture and non-personal issues such as corporation tax.
Next Sunday, it will explore how much individuals and households pay on their personal incomes.
Comparing public finances metrics with other countries can only be done meaningfully when the relative size of countries' economies is taken into account. That has not been straightforward in recent years. Ireland's GDP numbers are notoriously distorted. The distortions are becoming ever more extreme. That is because the Irish economy is very open, and becoming more so by the year.
The GDP measure of economic activity - invented in the US in the industrial age when there was little internationalised activity - has been described as the most important metric invented. But it has also been subject to growing criticism and questioning in recent years.
More and more questions are being asked about the reliability of GDP numbers in an age when services account for more economic activity than manufacturing; when multinational companies are proliferating in number and reach; and when intellectual property assets are becoming as important as traditional industrial assets, such as steel plants and car assembly lines.
Because the Irish economy is now more like the port of Rotterdam than a traditional, relatively closed national economy, its GDP figures have been subject to unusually large distortions. This was the focus of international attention almost exactly two years ago when the State's statisticians found that GDP had jumped by an unprecedented 26pc in the previous year.
This triggered a reaction. The Central Statistics Office concluded that it needed to try to strip out the effects on the economy which flatter to deceive (in the interests of full disclosure: I was on the committee that advised the CSO on the construction of this alternative measure of Irish economic activity). The new measure of the size of the economy - known as GNI* and pronounced GNI star - was a whopping 40pc smaller than GDP in 2017.
When the cash the State takes in is compared to this measure of the economy, Ireland's tax burden relative to its European peers changes radically. Irish Government revenues last year equalled 42pc of GNI*. On average across the EU, governments raised revenues of 45pc of GDP.
It is relevant that our nearest neighbour and the country into which the Irish labour market has traditionally been highly integrated is one of the dozen EU countries with a tax burden lower than Ireland's. The British state last year raised revenues worth 39pc of the country's GDP.
So the amount of money the Irish Government raises is broadly similar to the average in European peer countries when measured by the best available indicator.
Let's now move on to who pays what. Ireland is similar to other countries in that most of the money raised by modern governments is in the form of taxation - in Ireland last year €68bn of the €76bn that the Government took in was from various forms of tax: from income tax and social insurance to insurance levies and capital gains.
It should be noted that these figures are much bigger than the Department of Finance's "exchequer returns" - figures which exclude €8bn of non-tax revenue, such as the Central Bank's big recent profits. More curious still, the exchequer returns do not include the €12bn paid in social insurance contributions, even though these are a de-facto income tax and are included in comparative tax data by international bodies such as Eurostat and the OECD (it is particularly remarkable that the Irish authorities have not included PRSI data in the exchequer returns because social insurance in Ireland is more like an income tax than in most other countries, where those who have paid social insurance get much higher social benefits than those who haven't).
In Europe taxes on individuals' incomes, VAT, corporation tax and others such as excise duties and car registration tax account for the bulk of states' resources. How is the Irish State different in the taxes it relies upon compared to the norm, and how is it similar?
The most recent complete set of EU-wide figures are for 2016. In that year Ireland's 'indirect" taxes - VAT, excise, stamp duties, levies on insurances policies and the like - accounted for almost one quarter of total tax (and social insurance) receipts. That was almost perfectly in line with the EU average; no issue there.
Where there is a perennial issue is corporation tax. In 2016, taxes on profits accounted for almost 12pc of tax receipts. That was the fourth highest in the bloc of 28. Only Malta, Cyprus and Luxembourg - jurisdictions often in the line of fire when charges of facilitating tax avoidance are made - were more dependent on corporate tax revenues.
The debate about whether enough tax is being raised on the huge profits that slosh through this jurisdiction will no doubt continue to rage, but in terms of the amounts actually raised relative to total taxes, Ireland is far from falling short when compared to other countries.
Now consider a source of revenue that is much lower than the norm across Europe: PRSI paid by employers (that's the part that is not included on workers' salary slips). Across Europe, employers' social insurance contributions on behalf of staff accounted for 17pc of total tax revenues in 2016. In Ireland the share was seven percentage points lower. In only three other countries in the EU 28 did this source of revenue account for less than in Ireland.
It is sometimes argued that this is a potential source of significant revenue growth for the State. If its share of total taxation were to rise to the average level in Europe around €5bn a year would be raised.
But that assumes no negative effect from hiking the rate. Ultimately, employers' PRSI is a tax on labour and it doesn't matter from a business cost perspective whether it is formally paid by employer or employee. If employing people becomes more expensive, fewer people will be employed. The only question is how big the effect would be.
All that brings us to personal tax - income tax, USC and employee PRSI. This is both the biggest source of tax revenue in Ireland, as it is in most countries. It is in some ways the trickiest to analyse. Next week's column will discuss it.
Ireland is not a low-tax jurisdiction - but how the state raises money has some unusual features...