Ireland's tax revenue compared to GDP is second lowest in euro zone

IRELAND RANKS among the EU countries with the lowest tax revenues and only Slovakia has lower revenues in the euro zone, a new study has found.

In joint research, the tax and statistical divisions of the European Commission attributed the sharp drop in tax revenues from 2007 to the economic crash.

“Tax policy in Ireland still reflects the need for consolidation after the crisis, but also tries to further improve the economic outlook, notably by implementing measures improving employment,” the study said.

The Taxation Trends in the EU report also said the property collapse in countries such as Ireland served as a powerful reminder of the danger to budgetary stability of over-reliance on once-off property transaction taxes.

“In Greece, Ireland and Spain annual revenue levels fell by between 0.4 per cent and 0.6 per cent of GDP between 2008 and 2010; for the latter two countries, the destabilising effect was even greater considering that by 2008 revenues had already dropped by about 1 per cent of GDP compared to their peak two years earlier.”

Citing 2010 data, the study said Ireland had the EU’s fifth-lowest tax take as a proportion of national economic output.

Irish tax revenue compared to gross domestic product was 28.2 per cent, a little above fellow euro country Slovakia (28.1 per cent) and in the same league as Bulgaria (27.4 per cent) and Latvia (27.3 per cent).

The lowest tax revenue was in Lithuania (27.1 per cent) and the highest was in Denmark (47.6 per cent) which was followed by Sweden (45.8 per cent).

While tax revenue rates were higher in the countries which were in the EU before the 2004 expansion, Ireland and its fellow bailout recipients were outliers.

“The exceptions are Ireland and Greece, whose tax ratios are amongst the lowest in the EU; the Portuguese overall tax ratio, having increased by half a point in 2010, is now ranking just above Greece’s.” The Greek revenue rate was 31 per cent of GDP in 2010.

“From 1999 to 2002, Ireland reduced the total tax burden across the board from 31.5 per cent to just 28.3 per cent of GDP,” the study found. “Since 2002, however, the total tax ratio has increased every year, reaching 32.0 per cent in 2006, in large part due to a surge in VAT receipts, capital gains tax and stamp duties. This upward trend was interrupted in 2007 when the total tax ratio decreased by almost one percentage point.

In 2009, total tax revenue to GDP reached the lowest value and remained at the same level in 2010.

“This decrease was mainly driven by lower ratios of VAT, personal income tax, other taxes on products (incl import duties), and corporate income taxes to GDP, caused by the worsening economic situation in Ireland.”

The study found “very low social security contributions” result in the one of the lowest levels of tax on labour in Europe, 11.7 per cent of GDP compared with the EU average of 17.1 per cent.

“As in many EU countries, the implicit tax rate on labour increased steadily from the early 1970s until the late 1980s,” it said.

“Having attained stability in the early 1990s, the rate fell from 29.3 per cent in 1996 to 26.1 per cent in 2010, as a result of successive cuts in personal income tax and social contributions.” Ireland has one of the most centralised tax systems, with comparatively little tax collected by local government.

Strong growth until 2007 offset the impact of the 12.5 per cent corporate tax rate, the EU’s second-lowest after Bulgaria and Cyprus (both 10 per cent). “Losses may be carried forward indefinitely,” the report said. “There are no controlled foreign company rules and no general schemes of transfer pricing or thin capitalisation rules.”