Most analysis on the equality implications of taxation focuses only on the impact of income tax. But the Nevin Economic Research Institute usefully expanded this analysis recently to look also at the impact of indirect taxes, such as value-added tax.
With a progressive income tax system — where tax rates rise as income rises — we would expect to find that higher earners pay a higher average rate of income tax. And so we do. In its 2012 publication, Taxing Wages, the Organisation for Economic Co-operation and Development (OECD) concluded that the Irish income tax system had the second highest “progressivity outcome” of OECD members in 2011 and the highest among EU members.
With indirect taxes — that is tax spending rather than income — we would expect to find the opposite. Less well-off people spend a higher proportion of their incomes and thus expose themselves to paying more indirect taxes than better-off people, who may be saving some of their income. This expectation was confirmed by the findings of the Nevin report authored by Micheál Collins.
What was surprising was his finding that the lowest income decile paid the second-highest rate of overall tax as a proportion of income. Collins reported that the highest-earning decile pays just over 29% of their total income in taxes and the lowest-earning decile pays nearly 28% while the average person pays just 24%. According to Collins, it’s not the middle of our income distribution which bears the heaviest tax burden but the extremities of very high and very low earners. So much for the squeezed middle.
Collins was using the Central Statistics Office’s (CSO) most recent Household Budget Survey. But that survey’s data concerning the lowest income decile looks odd. For example, the bottom income decile receives weekly state support averaging €160, the second-bottom decile receives €227 and the third bottom decile €316. So the state gives almost twice as much financial help to the third-lowest income decile as it does to the lowest decile? I wonder.
Advertisement
Furthermore, for people in the lowest income decile, expenditure supposedly equals nearly twice income. They are reported to have average household income of €189 but spend €354 each week. The CSO explains: “Households with recently unemployed household members may draw on savings to maintain their expenditures. Self-employed consumers may experience business losses that result in low incomes, but are able to maintain expenditure by borrowing or relying on savings. Third-level students may get by on loans or savings from summer employment, retirees may rely on savings and investments.”
A survey in the US last year reported that 76% of American workers are living pay cheque to pay cheque and have no savings to fall back on if something goes wrong. I find it difficult to believe that unemployed Irish have savings reservoirs that their working American counterparts do not, particularly given the recent alarm when Bank of Ireland was just one day late processing salary payments to public sector workers.
Is it realistic to suppose that Ireland’s serried ranks of the unemployed possess savings cushions that many public servants clearly lack?
In the 1976 movie Marathon Man, Laurence Olivier played a Nazi war criminal who wanted to know whether it was safe for him to retrieve ill-gotten treasure from a safety deposit box in a New York bank. Having abducted the brother (played by Dustin Hoffman) of the CIA man hunting him, he strapped him into a dentist’s chair, tortured him and repeatedly asked him the question “is it safe?”
If you were unemployed and supplementing your social welfare with unreported income from the black economy and some polite, middle-class people came to your door with CSO clipboards, would you feel safe confiding your illicit earnings to them even when they promised to treat that information as strictly confidential? I’m not sure that I would.
Advertisement
The CSO concedes “across all deciles there may be an under-reporting of certain categories of income (for example, shadow economy employment income)” before adding that the phenomenon of expenditure exceeding income among lower income deciles in surveys is not limited to Ireland but “is a common experience internationally”.
In my opinion unrecorded shadow economy income is the most obvious explanation for what is going on here.
Significant unrecorded income in the bottom income decile would throw the Nevin Institute analysis into grave doubt. For, if the income of the bottom decile is seriously understated, then their measure of that decile’s total tax relative to income must be seriously overstated. And if you exclude the anomaly of the lowest income decile from the Nevin report, then its central conclusion — that the incidence of overall tax by income follows a U-shaped path — collapses.
The relevant measure of the impact of state policy on the poor is not the impact of individual policies but the impact of all state policies combined. In particular, we should compare people’s disposable income before state intervention to their disposable income after it. Here the CSO figures are clear.
Advertisement
The system is progressive and, as of 2009 and 2010, the bottom seven deciles were net recipients of state funding (ie, they paid less in tax and social insurance than they received in state transfers). This means that the Irish state is effectively being financed by just its top three income deciles, that is, by households earning more than €50,000 a year.
You might think that, acting on welfare considerations, the state should limit its use of monopoly powers to protect the material position of, say, just the bottom 30% in society.
Instead, acting in my opinion on political considerations, the state applies its powers to advance the material interests of the bottom 70%. I believe this is for structural political reasons. The European social democratic model is simply following George Bernard Shaw’s aphorism that “a government that robs Peter to pay Paul can always depend on the support of Paul”.
There is a broad identity of political interest between Ireland’s public sector, our liberal “knowledge class” (in the media, academia, NGOs and clergy), trade unions and a large underclass dependent upon government.
Advertisement
The trade union-funded Nevin Institute aims to provide this constituency with intellectual ammunition. They all want a growing public sector, extensive welfare and a large but docile government. The answer to any problem is always more government responsibility but only seldom greater personal responsibility.
The political challenge facing those who would reverse this pattern of institutionalised dependency, auction politics and dubious pension accounting is therefore considerable. But at least the facts may be on their side.
PS: The recent death of Albert Reynolds brought understandable focus on his general political performance and on his role in the peace process. Probably his most important economic act as taoiseach was to push for Ireland to join Europe’s Economic and Monetary Union (EMU). Thus it was Reynolds, as taoiseach, who led the May 1992 Dail debate on the second stage of the Eleventh Amendment of the Constitution Bill.
Nearly a quarter of a century later, it is interesting to note the arguments advanced in support of the establishment of a common European currency: “First, economic union implies closer co-ordination of economic policy — with a more beneficial impact on growth and employment than the sum of the individual policies of the state acting alone.”
Advertisement
With youth unemployment rates exceeding 50% in Spain and Greece, it is doubtful that this objective has been achieved.
“Second, the primary aim of the single monetary policy, under an independent European Central Bank, will be price stability — the only sound basis for sustainable economic growth and lower interest rates.” This goal has been attained. But it is a universal feature of the western world today. Clearly, many developed countries did not need to join the EMU to attain it.
“Third, establishment of a single currency will greatly reduce and ultimately eliminate exchange risks and transaction costs — thus giving an impetus to trade, investment, efficiency and confidence throughout the community.” So why does the eurozone seem to be less integrated today than it was when the euro was launched?