Transcript Document

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
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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?
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Discussions and commentary around Budget time tend to focus on fairness,
equity and progressivity concerns
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Limited focus on the potential for growth orientated reforms
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Revenue neutral tax shifts – potential output gains?
What does the burden of taxation look like in Ireland
Total Taxes as % of GDP
60
36
50
29
40
30
20
10
0
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Using GDP as a measure of economic output it might appear that Ireland has the
capacity for greater tax revenue by European comparisons.
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But is GDP the appropriate measure of tax base?
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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
What does the burden of taxation look like in Ireland
Total Taxes as % of GDP
60
50
40
36
33
36
29
30
20
10
0
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Using GNP, Ireland has a greater than average share
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Using the IFAC Hybrid Measure Ireland approaching EU average
Other Issues – Social Insurance Contributions
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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?
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SSC an insurance in some countries and more akin to a tax on labour in others
Total Taxes excl SSC as % of GDP
50.0
24
40.0
30.0
20.0
10.0
0.0
25
Labour taxation comparisons also distorted by SSC
30.0
Labour Taxes as % of GDP
25.0
17
20.0
12
15.0
10.0
5.0
0.0
Share of GDP
Labour
SSC
Labour
SSC
including
excluding
Ireland
Ireland
Rank in EU27
12%
23
7%
8
EU Average
17%
6%
Distribution of tax burden
Top 1% of earners
Top 5% of earners
Top 23%
Bottom 77%
Income
Share of tax paid
> €200,000
> €100,000
> €50,000
< €50,000
20%
40%
77%
23%
Income Tax and USC, all Tax Units, Cumulative, 2012
Share of Tax Units
100%
80%
81%
77%
59%
40%
23%
0%
99%
95%
60%
20%
Share of Tax Paid
Irish income tax system is one of most progressive in OECD
300%
250%
Progressivity Measure, Single Taxpayers
Ratio of Effective Tax Rates
200%
150%
100%
50%
0%
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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
Low effective rates
60.0%
Average Tax Rate
Marginal Tax Rate
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
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
70%
60.0%
60%
50%
40%
30%
20%
10%
0%
16
14
12
10
8
6
4
2
0
52.0%
Top Marginal Tax Rate
Threshold for Top Marginal Tax Rate as multiple of AW
4.2
4.2
1.0
Consumption Taxation
12
16.0
10
14.0
12.0
10.0
8
8.0
6.0
6
4.0
2.0
0.0
Consumption Tax
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VAT
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
Corporation Tax
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
In line with EU average as share of GDP
2.7
2.4
Above average as a share of taxation
25.0
20.0
15.0
10.0
5.0
0.0
8.3
7.5
Other
 Environmental taxes
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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
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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
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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
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Using IFAC hybrid measure, Ireland in line with EU-27 average
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Low social security contributions explains the difference in GDP terms
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Consumption low relative to EU average in GDP terms
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Income taxation highly progressive
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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 growth
Y = F(L, K, A)
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Total Factor Productivity the key driver of long run growth in GDP per Capita
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Endogenous Growth Models
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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
Taxes
 Corporation
 Labour
 Consumption
 Property
GDP per Capita
Labour productivity
 Physical capital
 Human capital
 TFP
 Research by the OECD suggests a hierarchy of harmful taxation exists
Property
Consumption
 Do not affect decision of economic
agents to supply labour, invest in
human capital, to produce, invest and
innovate
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Personal 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
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
Corporate Income Tax
 Affects FDI and technology spillovers
 Affects productivity by distorting factor
prices
 Affects after tax return on investment
and R&D
Growth orientated reforms
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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)
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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)
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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 consumption
QUEST III – Commission’s DSGE macrosimulation model (Public Finance in EMU, 2008)
Revenue neutral shift of 1% of GDP
Years
reform
after
Year 1
Year 2
Year 3
Year 4
Year 5
GDP
0.12
0.17
0.19
0.2
0.2
Employment
0.14
0.22
0.24
0.25
0.25
HERMES – Structural model of supply side of Irish economy
Revenue neutral shift of €1bn
Years after reform
Year 1
Year 2
Year 3
Year 4
Year 5
GDP (%)
0.00
0.16
0.26
0.32
0.32
Employment (%)
0.00
0.00
0.11
-0.07
0.26
-0.08
0.41
-0.12
0.43
-0.14
Unemployment rate
Simulation Results for Ireland
Labour to Property
HERMES
Revenue neutral shift of €1 bn
Years
reform
after
GDP
Employment
Unemployment rate
Year 1
Year 2
Year 3
Year 4
Year 5
0.00
0.00
0.00
0.17
0.11
-0.09
0.30
0.26
-0.17
0.42
0.41
-0.24
0.38
0.43
-0.21
Concluding comments
 Presentation only addresses growth impacts of taxation
 Progressivity and redistribution also important
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Income tax highly progressive
Tax and transfer system highly redistributive (pre and post tax/transfer gini
coefficient)
Thank you!