Taxing matters

Having just raised the issue of monetary policy (the Euro), I shall also mention fiscal policy. When I first had a job in Ireland, one of the less satisfying elements was the high taxation to which we were all subjected. All elements of both direct and indirect tax were punitive, and Ireland was known as a high tax economy. For those who believe that raising tax levels is an easy answer to our national debt problems, it may be instructive to note that we were there once and it didn’t help.

Now in more recent times the picture has changed. Corporate tax is low, income tax is more in line with European norms and perhaps lower than in some countries, and highly unusually, a huge proportion of the population is outside the income tax net altogether; I know of no other country where the proportion of non-tax payers at lower income levels is so high. As we have already noted, there is no property tax, no local taxation, and there is no wealth tax (though Ireland experimented with that rather unsuccessfully in the 1970s). Indirect taxation, on the other hand, is high by international standards.

The low tax framework has been one of the major drivers in foreign direct investment. I know this for a fact, because I was involved in discussions around one or two of the most important investments over recent years, and Ireland’s tax régime was the deciding factor that prompted them to go for here rather than some other European country.

Having said that, Ireland’s tax net needs to be widened, as there are too many people either escaping liability altogether or manipulating expenses or exemptions to such as an extent as to undermine the national interest. But whatever it is that we do, Ireland needs to have fiscal policy levers to underpin economic and social policy. In this context, the constantly threatened attempt to impose an EU-wide harmonisation of taxation is a major risk to national interests. While Ireland’s EU Commissioner assures everyone that corporation tax harmonisation is not on the agenda, media reports suggest otherwise, and this will become one of the most important issues for government over the period ahead. If we don’t have tax advantages, we have very few others in competition with geographically more advantageously placed and bigger and wealthier countries. This is one benefit we must hold on to.

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12 Comments on “Taxing matters”

  1. Vincent Says:

    If by National Interest you mean fat doctors, solicitors, barristers and upper civil servants, or the Ibec, rgdata and sme’s, for that’s how they see it. Then we are not really thinking about the State now are we.
    In the past our Tax rate was very high, something of itself wasn’t the problem. But the deployment of those taxes into areas that compounded niche advantages for blatant sectarian or class was a very real issue. That we to-day continue to practice such insanity is beyond belief.
    Take a small instance with the Kids Hospital. Why on earth are we still allowing religious or sectarian reasons impinge on what should be a simple logistical question. A question that a LEGO trained five year old could answer.
    While using that same 5yo, it is as plain as a pike stave that ALL the major Dublin hospitals should be moved out to the orbital, where a dedicated lane should be devoted to access.
    Why in the past were we paying the Civil Service as if they were working for the Imperial home service at Whitehall.
    Why did the Farmers escape paying a screed of tax until the 70’s. Then the draw from the EEC vast transfers only to pay exorbitant land prices, so they promptly passed what was to provide some life to the countryside to the Banks.
    I’m sorry, but any look at history of this Island in the last 200 years would lead you to the conclusion that they were playing a 17th century colonial rotten borough system of transfers were taxation is concerned. And in much that same default fashion that the Dept of Social Protection, (nee Social Welfare) think in terms of Workhouse legislation when under stress like now.

  2. Longman Oz Says:

    I enjoy your blog and read it most days. Important to say this seeing as it takes a disagreement to provoke a comment out of me!

    Nevertheless, how you can explicitly recognise our high levels of indirect taxation and still complain that there are too many people on low incomes outside of the tax net bemuses me greatly!

    It has been the ridiculous FF/PD logic over the past decade that Ireland had been transformed into a blissful tax paradise for those on modest levels of earnings. When such people did incur tax then, it was because they CHOSE to eat, wear clothing, throw their waste out, procreate, buy an affordable family home fifty-odd miles from their job, which required a car (aka “tax cow”) then to make their lives anyway feasible, etc.

    • Hi! My comment about people escaping liability etc was more directed at those on high incomes manipulating their liabilities… That said, I would be in favour of lower indirect taxation and bringing more people into the tax net in return, at all ends of the spectrum.

  3. Ernie Ball Says:

    What evidence do you have (that Commissioner Olli Rehn does not) that taxation in Ireland is “in line with European norms”? It is not and most of your positions falls with that claim.

    • Ernie, I didn’t say ‘taxation’, I said ‘income tax’. Most EU countries have income tax rates at or around the Irish levels, with the difference being that in most of these countries more people would be in the tax net than is the case here.

      • Ernie Ball Says:

        Assuming the data on the page you linked to is accurate, I look at the chart there and I see Ireland 4th from the bottom in personal income tax rates as a percentage of income in 2005 and the lowest of any EU state on the chart. I don’t know how you conclude from that that Irish personal income taxation is “in line with European norms.”

  4. kevin denny Says:

    On corporation tax, while there are lots of anecdotes there is very little evidence for Ireland as far as I am aware. This is partly because the headline tax rate doesn’t vary across firm or indeed time so its almost impossible to know but my colleague Ron Davies put it succinctly:
    “Taxes matter, but are only part of the equation. And they are a relatively small part compared to wage costs. Think about it this way, which is a greater part of firm costs, taxes or labor costs? A 5% rise in taxes means far less to profits than a 5% rise in labor costs.”
    Its also the case that the headline rate of 12.5% corporation tax is only a part of the picture. The effective marginal tax rate depends on what allowances/credits are available, taxation of repatriated profits and so on. It is fiendishly complicated which is why tax lawyers are paid tons of money.

    • Actually, Kevin, I think you’re missing a few things there. Your assessment would be right for a labour-intensive operation, typically involved in manufacturing. But if the business is more technology based, and labour costs are a smaller part of it, or employees are dispersed across several EU countries, and a degree of transfer pricing is involved, then you are quite wrong, tax becomes crucial. Google would not be in Ireland but for the corporation tax rate. I can list at least 12 other very large companies where I have absolute evidence that this was the clincher.

      • kevin denny Says:

        Actually Ferdinand you’re missing one big thing: anecdotes are not evidence and the statements of CEO’s are not evidence. Let us say 12 people said to you “The doctor put me on Prozac and I feel much better”: would that clinch the argument? Eh, no. They might be wrong. They may not be honest. They might not be representative. There are too few of them. There is no control group. There are a whole host of reasons why people’s responses may not be uninformative.
        Say you ask people about why they choose where they do their grocery shopping. You offer them Value for money, Choice, Location, Customer service, Range of products etc etc. What do the answers tell you? Little if anything really. Most people tick most boxes. What we need to know is the effect, at the margin, of changing their tax rate. You can yak with people till the cows come home and it won’t tell you anything.
        Where transfer pricing is involved, tax could well be important. I am not aware of evidence on how important it is in Ireland. But that is precisely when you don’t want taxes to be important because it doesn’t correspond to increases in real economic activity, additional jobs etc. Ok, the Exchequer gets a few extra shekels but thats not the argument that is usually made for the low tax rate.
        As an aside, I am curious about the labour intensity (or otherwise)of hi-tech companies. Manufacturing firms actually make stuff, with machines. The word-on-the-street when I was a student was that labour costs in manufacturing tended to be about 60% of Value Added. Whereas hi-tech companies like Google are admired because they hired lots of graduates. They don’t have tons of machines, JCBs or do they? So I don’t know whether they are more or less labour intensive. Just askin’.

        • Actually Kevin, I am more on the inside on this one than would make it just anecdotal… There is evidence.

          Regarding transfer pricing, some companies located in Ireland on that basis. And actually, it does produce real economic activity, just not on the scale suggested by the revenue data.

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