Infrastructure development, not low tax, will be key to future competitiveness

While much focus has been placed on tax reductions in Budget 2023, the reality is that Ireland is a low-tax economy. International competitiveness is often cited as a rationale for retaining this low-tax status, rather than appropriately taxing corporations and very high earners. However, a recent report on competitiveness indicates that a low tax rate has less impact on competitiveness than some may think.

The International Institute for Management Development recently published the World Competitiveness Rankings for 2022 earlier this year. Each country’s ranking is based on an analysis of 333 indicators derived from four main factors: economic performance, government efficiency, business efficiency and infrastructure. The Top 20 countries for 2022 is shown below. Ireland is at number 11, up 2 places on 2021.

Table 1: 2022 IMD World Competitive Rankings 2022, Top 20

2022 Ranking	Country	2021 Ranking	Ranking Change
1	Denmark	3	+2
2	Switzerland	1	-1
3	Singapore	5	+2
4	Sweden	2	-2
5	Hong Kong SAR	7	+2
6	Netherlands	4	-2
7	Taiwan, China	8	+1
8	Finland	11	+3
9	Norway	6	-3
10	USA	10	-
11	Ireland	13	+2
12	UAE	9	-3
13	Luxembourg	12	-1
14	Canada	14	-
15	Germany	15	-
16	Iceland	21	+5
17	China	16	-1
18	Qatar	17	-1
19	Australia	22	+3
20	Austria	19	-1

Source: IMD World Competitiveness Center, www.imd.org 

One interesting aspect about this table is how little competitiveness has to do with levels of taxation in society. High ranking regions and countries such as Hong Kong, Singapore and Taiwan collect very low levels of tax compared to GDP (around 15 per cent), while in Qatar and the United Arab Emirates the ratio is extraordinarily low.

On the other hand, Northern European countries like Denmark (47.6 per cent), Sweden (43.4 per cent), and the Netherlands (40.2 per cent) - all ranked among the 7 most competitive countries in the world - have tax to GDP ratios around 40 per cent or higher. (These ratios are from Eurostat, for the year 2020).

Among the countries of the European Union with the lowest tax to GDP ratios are Ireland (20.8 per cent), Romania (27.1 per cent), Bulgaria (30.6 per cent), Lithuania (31.2 per cent) and Latvia (32 per cent) (Malta ranks among the countries with the lowest tax to GDP ratios in 2020, but is not included here as it not referenced in the IMD report). With the exception of Ireland, which ranks 11th, the remaining countries rank 51st, 53rd, 29th, and 35th respectively. It is clear that there is little correlation at all between competitiveness and levels of taxation.

Given the well-documented difficulties with using GDP as a measure of real economic performance, it may also be useful to compare countries according to taxation per capita. The table below ranks the EU countries that made the Top 20 above, according to total taxation collected per capita. (Taxation per capita is not the amount of income tax collected from each person, but is the sum of taxes from all sources in the economy in 2020, plus social insurance contributions, divided by the estimated population of that country that year).

Table 2: Per Capita Tax Take, selected EU countries, 2020

Country	Per Capita Tax Take
Luxembourg	€40,829
Denmark	€25,536
Sweden	€20,129
Netherlands	€18,467
Austria	€18,144
Finland	€18,055
Germany	€16,797
Ireland (with MNC Windfalls)	€15,645
Ireland (without MNC Windfalls)	€14,739

Source: Social Justice Ireland (2022): Social Justice Matters: a 2022 guide to a fairer Irish society, p.82. Social Justice Ireland: Dublin

The other seven EU countries who are ranked in the Top 20 most competitive nations in the world all collect a higher level of tax per capita than Ireland. Luxembourg is something of an outlier, due to the nature of its economic model. However, Denmark, Sweden, Netherlands, and Finland all collect more tax than Ireland and all outrank Ireland in terms of competitiveness.

Not all economies approach economic policy in the same way. For different reasons, Ireland cannot follow the economic model of countries like Qatar or Singapore or Switzeraland. But there is no reason that we cannot move closer to the models followed by other northern-European countries like the Netherlands and Denmark.

The bottom line is that suggestions Ireland must maintain its status as a low-tax economy (by the standards of its peer countries in Western and Northern Europe) in order to be competitive are erroneous. There are a number of factors that facilitate economic competitiveness and prosperity. While Ireland should rightly be proud of our overall ranking, there remain areas of concern. In terms of "Prices" and "Basic Infrastructure", Ireland ranked 42 and 41 respectively. This suggests that, if Ireland wants to improve its competitiveness ranking, or indeed retain it into the future, tax cuts are not the answer. Investment in services are urgently required.

This echoes the assessment of Nobel Prize-winning Economist Joseph Stiglitz who, commenting Ireland's long-term development prospects, has asserted that “all the evidence is that the low tax, low service strategy for attracting investment is short-sighted” and that “far more important in terms of attracting good businesses is the quality of education, infrastructure and services.” Professor Stiglitz added that “low tax was not the critical factor in the Republic’s economic development and it is now becoming an impediment".