Could higher taxation be the best solution to the State's problems?

Two opposite views on the taxation question from economist Donal de Buitleir and Fr Sean Healy of CORI

Against raising tax:

Donal de Buitleir, Economist

Some argue that the process of tax reduction in recent years has gone too far and that an increase in taxes is necessary if we are to enjoy first-class public services. Others point to the sharp increase in public expenditure since 1997 to counter this.

The latest OECD figures relate to 2002. These show that taxation in the Republic, as a percentage of gross domestic product (GDP), is 28 per cent, compared to an EU average of 40.5 per cent.

These figures give a poor indication of the relative tax burden in the State as it is necessary to adjust them for the lower level of gross national product (GNP) in Ireland.

It is well known that GDP is a very poor measure of taxable capacity for the Republic. In most countries, GDP and GNP are almost identical. However, in Ireland, due to the importance of the multinational sector, GNP is about 80 per cent of GDP.

Even with this adjustment, Ireland still raises a relatively low amount in taxation of 34.7 per cent of GNP. We lie towards the bottom of the 15 EU member-states, just above Portugal and just below Greece, Spain, the UK and Germany.

Our tax burden is substantially above advanced countries outside the EU such as the US (28.9), Japan (27.3) and Australia (30.1).

Does this imply that our public services must be worse than other EU countries? Before we can answer this question, there are a number of special factors that must be taken into account.

Adjusting for these factors allows a more meaningful comparison of the tax burden needed to finance public services.

Debt service costs: Interest on Government debt in the Republic now takes about 1.8 per cent of GNP compared to an EU average of 3.1 per cent - in excess of the amount spent on third-level education.

Unemployment Rates: Different rates of unemployment have dramatic effects on budget deficits. A reduction in unemployment translates a negative social welfare payment into a positive tax payment.

Our rate of unemployment is about 3 percentage points below the EU average, which saves us about €600 million or 0.5 per cent of GNP.

Defence spending: In 2002, the State spent about 0.7 per cent of GNP on defence, compared to an average of 2 per cent of GDP for EU member-states in NATO. This means that, other things being equal, the taxes required to finance our spending should be 1.3 per cent of GNP less.

Pensions funding: In most EU member-states, the bulk of the expenditure for old-age and survivor benefits comes out of statutory pension schemes and is financed from social insurance contributions and general taxation.

The Republic is significantly different in that most pensions are financed on a pay-as-you-go basis in the public sector or through funded private schemes and so do not enter the tax line.

Capital expenditure:

The Republic's infrastructure is clearly deficient, which means that we have to spend a greater proportion of our resources on investment than countries with more developed infrastructure.

National Pensions Reserve Fund:

The State is allocating 1 per cent of GNP to provide for social welfare and public sector pensions in future years. This is not contributing to the volume of public services now.

Adjusted tax burden:

The adjusted tax burden for the State is shown in the table. Favourable factors are added and unfavourable ones deducted.

When one adjusts for factors other than a potential demographic dividend, the tax burden in the Republic is 41.9 per cent compared to an EU average of 40.5 per cent.

In addition, the State has a very favourable demographic structure. Much of the concern about a demographic crisis is due to worsening dependency trends. At the peak of economic dependency in the mid-1980s, there were nearly 230 dependants for every 100 workers. This ratio is expected to fall to 125 dependants per 100 workers by 2010 - well below the current EU average.

Old-age dependency in Ireland (the ratio of the population over the age of 60 to the population aged 20-59) is estimated at 27.8 per cent - the lowest in the EU and well below the 40.9 per cent average.

It is estimated that in 1999 the State's favourable demographic structure was worth about 2.5 per cent of GDP (2.9 per cent of GNP) in a requirement for lower health spending.

While one would expect the need for education spending (5.9 per cent of GNP) and child-related welfare spending to be somewhat higher than in other EU countries, this is unlikely to match the potentially large lower requirement for health spending. It is clear that our favourable demographic structure implies a lower need for public spending to provide an equivalent level of public services.

All this supports the view that structural factors result in the Republic having a relatively low tax burden without having to sacrifice the quality of important public services (assuming equal efficiency of Irish public administration).

This suggests that whatever may be wrong with the Irish economy and the standard of public services we have, it is not due to a lack of taxation.

Donal de Buitléir is chairman of the Foundation for Fiscal Studies. All views are personal.

For raising tax:

Sean Healy, CORI

Ireland's poorest people have waited far too long. For years successive governments have promised to eliminate poverty when adequate resources were available.

Some progress was made on this commitment in recent years with the substantial increase in jobs and the decrease in the number of people unemployed. But the proportion of the population living in poverty is higher now than it was in 1987. And that poverty line is not high - it is equivalent to €175 a week for a single person in 2003.

The failure of Government strategy in tackling poverty can be found, in part, when we look at the groups that are living in poverty. More than 56 per cent of these live in households headed by a person who is not in the labour force.

They are ill or retired or have a disability that keeps them out of the labour force or are in that category called "on home duties".

As they are not in the labour force in the first place, a strategy that suggests a job will solve their poverty is not sufficient. They rely on social welfare payments and that is why the level of social welfare rates is such a crucial issue in tackling poverty in Ireland today.

The current national agreement Sustaining Progress contains a commitment by Government to benchmark the lowest social welfare rates at 30 per cent of average industrial earnings.

This was the target set in the Government's own National Anti-Poverty Strategy and it is to be reached by 2007.

If this benchmark is to be honoured in Budget 2004, the lowest social welfare payments must rise by at least €12 a week for a single person and €20 for a couple on Wednesday next.

But that is not the whole explanation for Ireland's persistent high poverty rates. An analysis of Ireland's spending on social protection against that of other EU countries is very telling.

Social protection expenditure is defined by Eurostat to include spending on: sickness/health care, disability, old age, survivors, family/children, unemployment, housing and social inclusion initiatives not elsewhere classified.

Using either GDP or GNP, Ireland's spending on social expenditure stands out as the lowest in Europe. There remains a considerable gap between Ireland and the next lowest country, Spain.

Side by side with this low social expenditure, Ireland's total tax take is the lowest in the EU. In recent years, Ireland has evolved into a low-tax economy.

During the last year, the OECD published a review which showed that Ireland collected a lower proportion of GDP in tax than any other country across the European Union.

A recent CORI Justice Commission analysis has updated these figures following Budget 2003.

Ireland also has one of the worst rich/poor gaps in the EU. The most recent data on income distribution, from the 2000 Household Budget Survey, indicates a further shift in the distribution of Ireland's income towards the well off. In 2000, the top 10 per cent of the population received 25.90 per cent of the total income while the poorest 50 per cent only received 23.29 per cent.

The widening rich/poor gap and the rising numbers living in relative income poverty are not an accident. Rather, they flow directly from Government policy.

For example, the gap between an unemployed person and a person on €50,000 a year has widened by €276 a week (€14,350 a year) over the past six years as a result of this Government's budget decisions.

Ireland continues to display serious deficits in its infrastructure and social provision. In a European context, our roads, railways, IT broadband and transport systems compare badly.

Similarly, our growing poverty rates, unequal income distribution, growing rich/poor gap and under-equipped health, education and social housing systems represent the most visible signs of the extensive gaps in our social provision. In the context of continued economic growth and per capita income well above the European average, the opportunity to address these deficits is available.

Ireland's total tax-take needs to be raised to be the second lowest in the EU. This increase should not come from income tax or employee PRSI which are close to the EU average. Rather it should be collected through a number of initiatives such as the elimination of tax expenditures that are simply State handouts to the wealthiest in the country.

The standard-rating of tax breaks which benefit the better off more than those who are poor would also be a step in the right direction. The CORI Justice Commission's Policy Briefing on Budget Choices lists a range of options that Government could follow to raise its total tax-take in an equitable and fair way. This is necessary if poverty and social exclusion are ever to be addressed on a sufficient scale in Ireland.

In the years of economic growth and prosperity, the gap between rich and poor has further widened. Never before has the distribution of income in Ireland been so unequal. A society is measured by how it treats its most vulnerable people. By this measurement Ireland is failing dismally.

Government can go some way towards rectifying the imbalance in its Budget decisions next Wednesday. Honouring its benchmarking commitments on the lowest social welfare rates should be the Budget's number one priority.

Dr Sean Healy, S.M.A. is director of the CORI Justice Commission