the structure of ireland’s tax system and options for growth enhancing reform
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The structure of Ireland’s tax system and options for growth enhancing reform Brendan O’Connor, 19 June 2013. Motivation. Economic strategy post Troika Several straw-men arguments need to be analysed Ireland’s tax burden is too low? - PowerPoint PPT PresentationTRANSCRIPT
The structure of Ireland’s tax system and options for growth enhancing reformBrendan O’Connor, 19 June 2013
Motivation
Economic strategy post Troika
Several straw-men arguments need to be analysed Ireland’s tax burden is too low? No further scope exists for adjustment on the revenue side? Burden too low on high earner? Tax burden on labour is too high?
Discussions and commentary around Budget time tend to focus on fairness, equity and progressivity concerns
Limited focus on the potential for growth orientated reforms Revenue neutral tax shifts – potential output gains?
What does the burden of taxation look like in Ireland
Using GDP as a measure of economic output it might appear that Ireland has the capacity for greater tax revenue by European comparisons.
But is GDP the appropriate measure of tax base? GDP includes net factor flows out of Ireland (profits of MNCs) which are very large and
negative 2011 GDP represented 124% of GNP – second largest gap in EU (Callan et al 2013) IFAC hybrid measure of GNP + 40% of net factor flows
DK SE BE FR FI IT AT DE NL SI LU HU UKEU
-27 CY CZ MT PT EE PL EL ES
IE-GDP SK RO LV BG LT
0
10
20
30
40
50
6036
29
Total Taxes as % of GDP
What does the burden of taxation look like in Ireland
Using GNP, Ireland has a greater than average share
Using the IFAC Hybrid Measure Ireland approaching EU average
DK SE BE FR FI IT AT DE NL SI LU HUIE-
GNP UKEU
-27 CY CZ MT PT
IE-Hyb
rid EE PL EL ESIE-
GDP SK RO LV BG LT
0
10
20
30
40
50
60
36
36
3329
Total Taxes as % of GDP
Other Issues – Social Insurance Contributions
In Ireland SSC accounted for 5% of GDP in 2011 (3.5% employer, 1.3% employee) Against an EU average of 11% and an OECD average of 9% and an EU high of 17%
(France) Should they be included in a comparison?
SSC an insurance in some countries and more akin to a tax on labour in others
DK SE FIIE
-GNP BE UK IT AT M
TIE
-Hyb
rid FR CY LUEU
Ave
rage
IE-G
DP PT HU NL DE SI EL PL EE BG ES RO CZ LV SK LT
0.0
10.0
20.0
30.0
40.0
50.0
25
24
Total Taxes excl SSC as % of GDP
Labour taxation comparisons also distorted by SSC
SE DK BE AT FR FI IT NL DE SI CZ HU ES EEEU
-27 LU
IE-GN
P UK PTIE-
Hybr
id LV LT SK CY PLIE-
GDP EL MT RO BG
0.0
5.0
10.0
15.0
20.0
25.0
30.0
17 12
Labour Taxes as % of GDP
Share of GDP Ireland Ireland Rank in EU-
27
EU Average
Labour including SSC
12% 23 17%
Labour excluding SSC
7% 8 6%
Distribution of tax burden
Income Share of tax paidTop 1% of earners > €200,000 20%Top 5% of earners > €100,000 40%Top 23% > €50,000 77%Bottom 77% < €50,000 23%
<€10000
<€20000
<€30000
<€40000
<€50000
<€60000
<€70000
<€80000
<€90000
<€100000
<€120000
<€140000
<€160000
<€180000
<€200000
<€250000
>€2500000%
10%20%30%40%50%60%70%80%90%
100%
77%
95%99%
23%
59%
81%
Income Tax and USC, all Tax Units, Cumulative, 2012Share of Tax Units Share of Tax Paid
Irish income tax system is one of most progressive in OECD
Measurement of progressivity - ratio of effective tax rates or tax wedges of tax payers at different income levels (167% of AW and 67% of AW) – see OECD Taxing Wages
Irelan
dIsr
ael
Portugal
Luxembourg
Australia
New Ze
aland
Finlan
dKorea
Swed
en
Switze
rland
Spain
Greece
United St
ates
OECD-A
verag
e
Netherl
ands
United Kingd
omCan
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Italy
Icelan
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Czech Rep
ublic
Norway
Austria
Belgium
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Slova
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German
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Denmark
Estonia
Chile
Poland
Hungary
0%
50%
100%
150%
200%
250%
300%Progressivity Measure, Single Taxpayers
Ratio of Effective Tax Rates
Low effective rates
1003510036
1003716016
1601716499
1650018303
1830421708
2490832400
3280040000
5410864800
97200
100001
150000
2000000.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%Average Tax Rate Marginal Tax Rate
66% of AW 100% of AW 166% of AW
Income tax (incl USC) and SSC
Ireland 11.5% 18.0% 31.5%
OECD average 21.1% 25.1% 30.5%
Top MTR not the highest in OECD but entry point one of the lowest
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lgium
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venia
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ceNe
ther
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Japan
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alia
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any
Italy
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stria
Unite
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itzer
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Chile
Hung
ary*
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ublic
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tonia
*
0%
10%
20%
30%
40%
50%
60%
70%60.0% 52.0% Top Marginal Tax Rate
02468
10121416
4.2 4.2
1.0
Threshold for Top Marginal Tax Rate as multiple of AW
Consumption Taxation
Consumption taxes low relative to EU average – hybrid measure also below average Share of taxation at 21% is within 1 percentage point of EU average VAT at 6 % of GDP also second lowest in 2011 (same share in 2012) Commission identified consumption as a tax in Ireland as having potential for a ‘tax shift’
due to its low share of GDP
DK SE FI BG RO EE HU CY SI PT PL MT LT AT
EU A
vera
geIE-
GNP UK DE EL
IE_Hy
brid CZ FR BE NL SK LV LU IT IE ES
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0 1210
86
Consumption Tax VAT
Corporation TaxIn line with EU average as share of GDP
CY MT LU SE CZ PT UK BE DK FI
EU 2
7 DE SK IE AT FR IT NLRO EL PL BG ES SI LV EE HU LT
0.01.02.03.04.05.06.07.08.0
2.7 2.4
Above average as a share of taxation
CY MT LU CZ PT UK SK IE SE RO
E BG BE DE EL PL FI ES DK NL AT IT FR LV SI EE LT HU
0.0
5.0
10.0
15.0
20.0
25.0
8.3 7.5
Other
Environmental taxes At 2.6% of GDP equal to EU average in 2011 At 9% of total taxation, in excess of EU average of 7%, and sixth highest overall
share
Property taxation 1.3% of GDP - in line with the EU average Above the EU average in terms of the share of total taxation (4% v 3.5%) Recurring tax on immovable property in line with EU average (0.9% v 0.8%) Below other English speaking OECD countries (3%)
Benefits of higher recurrent property taxation on immovable property include their relatively stable source of revenue, which is important in small open economies with volatile tax bases such as Ireland (Norregard, 2013)
Summary on Structure
Capacity for additional taxation depends on ones view of appropriate measure of economic output for the purposes of taxation taking into account the structure of the economy and the size of the foreign owned sector
Using IFAC hybrid measure, Ireland in line with EU-27 average
Low social security contributions explains the difference in GDP terms
Consumption low relative to EU average in GDP terms
Income taxation highly progressive
Effective tax rates low up to average wage but entry to top marginal tax rate happens very quickly
The Theory – Macroeconomic Principles
Distortions to decisions affects components of output and growthY = F(L, K, A)
Total Factor Productivity the key driver of long run growth in GDP per Capita
Endogenous Growth Models Explicitly models the process through which growth is generated Models are results of choices of economic agents – taxation can influence these
choices Human capital (Romer) – accumulation of human capital - taxation affects the
decision to undertake investment in education Innovation (Aghion and Howitt 1992, 1998) – Schumpterian idea of ‘creative
destruction’, expenditure on R&D results in better quality inputs which are more productive – effect of taxation on decision to innovate is key
Technology transfer – spillovers from human capital arising from FDI
How taxes affect the determinants of economic growth
Labour utilisation Employment Hours Worked
Labour productivity Physical capital Human capital TFP
GDP per Capita Taxes Corporation Labour Consumption Property
Research by the OECD suggests a hierarchy of harmful taxation exists
Do not affect decision of economic agents to supply labour, invest in human capital, to produce, invest and innovate
Property Consumption
Neutral to savings and investment Same impact on after tax wages as labour
taxes – public finance economists view! But not the view of behavioural
economists (Blumkin et al. 2012, EER) Differential rates can improve labour
supply for goods complementary to work An inefficient form of redistribution
Personal Income Tax Corporate Income Tax Affect labour utilisation and
productivity Typically progressive – more harmful
than consumption Affects TFP by distorting factor prices Capital income taxation affect savings
and investment decisions
Affects FDI and technology spillovers Affects productivity by distorting factor
prices Affects after tax return on investment
and R&D
Growth orientated reforms
Empirical and theoretical evidence suggests that there could be gains in terms of long run GDP per capita from increasing the use of consumption and property taxes relative to income tax without changing overall tax revenues (OECD, 2010)
Largest gains if reduction in MTR rather than increases in thresholds (though latter at expense of equality outcomes)
Options for Ireland
Scope for shift to consumption (EC, 2012)
Scope for further property (relative to English speaking OECD countries)
Very low entry point to top MTR, (and very low effective tax rates) – shift burden within labour
Shift within Labour
Reforms within labour taxation (Abbas 2012) Phase out PAYE tax credit between minimum wage and average wage – positive income
effects Raise entry point to top MTR – positive substitution effects Lower standard rate – positive substitution effects
Regressive in nature – but effective rates would still remain low vis OECD
But did not simulate the impact on GDP and employment
Simulation Results for Ireland
Labour to consumptionQUEST III – Commission’s DSGE macrosimulation model (Public Finance in EMU, 2008)Revenue neutral shift of 1% of GDP
Years after reform
Year 1 Year 2 Year 3 Year 4 Year 5
GDP 0.12 0.17 0.19 0.2 0.2Employment 0.14 0.22 0.24 0.25 0.25
HERMES – Structural model of supply side of Irish economyRevenue neutral shift of €1bnYears after reform Year 1 Year 2 Year 3 Year 4 Year 5
GDP (%) 0.00 0.16 0.26 0.32 0.32Employment (%) 0.00 0.11 0.26 0.41 0.43Unemployment rate 0.00 -0.07 -0.08 -0.12 -0.14
Simulation Results for Ireland
Labour to PropertyHERMESRevenue neutral shift of €1 bn
Years after reform
Year 1 Year 2 Year 3 Year 4 Year 5
GDP 0.00 0.17 0.30 0.42 0.38Employment 0.00 0.11 0.26 0.41 0.43Unemployment rate 0.00 -0.09 -0.17 -0.24 -0.21
Concluding comments
Presentation only addresses growth impacts of taxation
Progressivity and redistribution also important Income tax highly progressive Tax and transfer system highly redistributive (pre and post tax/transfer gini
coefficient)
Thank you!