World View: Is competitive tax system worth social dysfunction?
Pressure for better public services may prompt radical change in levies
Wealth inequality in the State has increased since the 1980s. The richest 10 per cent now own 50 per cent compared to 42 per cent then, while the richest 1 per cent’s share has gone from 10 to 15 per cent. Photograph: Dara Mac Dónaill
“Only compare!” seems a suitable injunction for those seeking to understand and promote political and social change in Ireland. It would echo the epigraph to EM Forster’s novel Howard’s End published in 1910 concerning the ensemble of inter-relationships in personal life: “Only connect!”
The flurry of research and debates on housing, income and wealth inequality, health, social welfare and taxation reflect the problems facing a rapidly modernising and relatively prosperous society. One that is coming out of the Covid pandemic but ill-served by its existing social services and political structures. Popular hopes for better public services contradict existing methods of taxation to fund them. Such ingredients can make for radical political change.
Ireland’s model of political economy is in the Anglo-American mould, tempered by European engagement and aspirations. It is one of the lowest-taxed states within the 34 members of the OECD and the 27 members of the European Union. Capital taxation is among the lowest in the developed world, not only on corporate profits and on wealth but on the social insurance contributions companies make for workers they employ.
That model is changing under pressure from the geopolitical and geoeconomic cores modern Ireland relates to: the European Union, the United States and the United Kingdom. All three agree through the OECD that higher corporate taxation, especially on many huge digital multinationals based here, is desirable soon.
The State is forging new alliances in the EU after Brexit and is anxious to become a bridge for new transatlantic relations during the Biden administration. It is adjusting, like others, to the shifts away from official policy paradigms which favoured a smaller state, the growing global interdependence and financialisation of capitalism and accompanying social inequalities since the 1980s. Emerging paradigms link a larger state role to the greater fiscal capacity required to tackle social inclusion, growing geopolitical competition and climate emergency.
Emerging paradigms link a larger state role to the greater fiscal capacity required to tackle social inclusion, growing geopolitical competition and climate emergency
The coincidence of these external policy changes with internal social dissatisfactions is creating a politics of starker competition along left/right lines in Ireland about its existing model of political economy. Comparison reveals the State to be an outlier in the following relevant respects: a low overall tax burden; low corporate taxation and employer contributions to social insurance funding; low taxation of wealth and on the lowest incomes combined with high income taxation – making for relatively better take-home income equality; plus very low fiscal capacity and policy competence of local government.
According to OECD studies, Ireland’s overall tax burden compared to economic output is low. Including taxes on wealth and income, social insurance, levies and VAT, at 32.3 per cent it compares to an average EU figure of 39.6 per cent and lies 24th out of 27 member states.
Low corporate taxation at 12.5 per cent may have to rise soon to put Ireland onside in that debate. Less well realised is how low are employers’ contributions to social insurance. Ireland collects over €15 billion a year less in social contributions than comparator EU states. Employees pay 4 per cent and employers now an increased 11.05 per cent, but the EU average is much higher – in France and Germany social insurance is three or four times Ireland’s as a percentage of economic activity. That reflects the narrower range of services covered here than elsewhere, including housing and family care, as well as the very high 45 per cent using private health insurance. It piles pressure on income tax. Is all this social dysfunction worth its supposed competitive advantage?
Wealth inequality here has increased since the 1980s. The richest 10 per cent now own 50 per cent compared to 42 per cent then, while the richest 1 per cent’s share has gone from 10 to 15 per cent. The bottom 70 per cent own 17 per cent now, compared to 28 per cent then; the bottom 50 per cent, 12 per cent then compared to 7 per cent now. Wealth overall has increased from €370 billion to €680 billion since 2013, with €240 billion of the increase due to housing.
Any increased wealth tax must hit property harder to be effective, however it is designed
Yet the property tax take here is about one-third of the EU average. Any increased wealth tax must hit property harder to be effective, however it is designed. At least the new property tax will all go to local government, starved of funds since rates were abolished in 1977. Ireland spends one-third at local level compared to other EU states and has the fewest local powers, including on social services.
Those seeking change should connect and compete on such comparisons.