Colbert, a French finance minister of the late 17th century, said: "The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing." In Ireland, income taxes and VAT, which are collected automatically as we earn or spend, largely stay under the public radar, whereas taxes which were paid as lump sums, such as domestic rates, estate duty, wealth tax and the income- related property tax, attracted such vocal protest that eventually they were abolished.
The Revenue Commissioners wisely offered a pay-as-you-go-option to pay property tax. It is the latest form of lump- sum charge, the water charges, which is the main focus of organised opposition today.
Early in his career Colbert was concerned with the high cost of tax collection, which was such that less than half the taxes collected reached the king. Over recent decades the Irish tax system has been streamlined. The introduction of self-assessment, targeted audits and online payment options have all served to bring down the cost of tax collection from 1 per cent of revenue in 1990 to 0.75 per cent by 2013 – a far cry from the cost of tax collection in 17th century France.
Changes in the tax system alter the incentives facing individuals, be they consumers or retailers, workers or employers.
Environmental taxes, such as carbon taxes or motorway tolls, can make a positive contribution to the welfare of the wider community by reducing pollution or congestion, although they also effectively lower consumers’ disposable incomes.
The excise on tobacco is probably the most regressive tax levied in Ireland, raising its revenue disproportionately from those on low incomes, who are the heaviest smokers. However, there is evidence that the high price of tobacco in the long run seriously discourages smoking, so that the health benefits of the measure far outweigh the short-term distributional costs.
The person who nominally pays the money over to the Revenue Commissioners is not necessarily the person who will ultimately lose most as a result of the tax payment. The incidence of any tax depends on the relative sensitivity of consumers and sellers to the changes in price brought about by the tax. Where the demand for an item is extremely sensitive to price, the seller will bear more of the tax burden. Where the supply of an item is extremely sensitive to price, it is consumers who will ultimately pay.
In the case of excise and VAT, much of the incidence falls on the consumer rather than the supplier, even though it is the retailer or supplier who pays over the tax. It is only in the case of luxury goods, which are price-sensitive, that producers or retailers will carry more of the burden.
Taxes on income, which include PRSI and the universal social charge, can change the balance of economic advantage between working in Ireland or working abroad, and between working and paying childcare, or being a stay-at-home parent. The supply of labour is sensitive to these taxes and, in particular, to high marginal rates of tax.
Because taxes on income can reduce labour supply in this way, their ultimate effect is that employers will have to pay higher wages to hold the labour force that they need. In turn, output will be lower because of the reduction in competitiveness and the loss of skilled workers. The first partnership agreement in the late 1980s recognised this, trading off tax cuts for pay moderation.
Research conducted in the late 1980s, looking at a period when marginal tax rates were even higher than today, suggested a very big loss to the economy from the reduction in output consequent on the high marginal tax rates.* It was estimated then that for every €1 in additional taxes raised, the cost to the economy of lost output was more than €2.
With substantially lower marginal rates today the lost output is not as great. With an unemployment rate of just under 10 per cent, problems of labour supply may not seem too pressing at present, but it is an issue that is likely to become more important as the labour market tightens.
Working couples who pay for childcare out of taxed income are likely to be particularly sensitive to rising marginal tax rates, which affect the economics of a partner holding a job. Two-earner couples accounted for two-thirds of tax units earning more than €75,000 a year in 2011 (table 1). So while enhanced marginal tax rates for higher earners may make sense on equity grounds, the outcome could be reduced labour supply and loss of potential output.
Research shows that other forms of taxation, in particular property tax and environmental taxes, have a much less negative effect on the labour market and on labour force participation.
If more of the burden of taxation were shifted to property and environmental taxes and away from taxes on income, this could increase output and result in a rise in labour force participation, especially by women.** Some forms of wealth tax could also raise revenue and enhance progressivity, while not seriously impacting on the labour market.
Unfortunately, the more job-friendly forms of taxation are also the least popular, because of our aversion to lump- sum charges. They also tend to be less progressive than taxes on income. Major tax reform would require a very courageous government, even though the long- term benefits for employment might be substantial. *The Marginal Social Cost of Taxation in Ireland, by Patrick Honohan (UCD) and Ian Irvine (Concordia University, Montreal) in The Economic and Social Review, Vol. 19, No. 1, October 1987 http://iti.ms/1H4l7r4
** The Structure of Ireland's Tax System and Options for Growth Enhancing Reform, by Brendan O'Connor (Dept of Finance) in the Economic and Social Review, Vol. 44, No. 4, Winter, 2013 http://www.esr.ie/article/view/93/73