Assessing the Adequacy of Ireland’s Total Tax-Take
The need for a wider tax base is a lesson painfully learnt by Ireland during the 2008-2011 economic crisis. A disastrous combination of a naïve housing policy, a failed regulatory system, and foolish fiscal policy and economic planning caused a collapse in exchequer revenues. It is only through a strategic and determined effort to reform Ireland’s taxation system that these mistakes can be avoided in the future. The narrowness of the Irish tax base resulted in almost 25 per cent of tax revenues disappearing, plunging the exchequer and the country into a series of fiscal policy crises.
As shown in Table 1, tax revenues collapsed from over €63bn in 2007 to a low of €47.4bn in 2010; it has since increased exceeding 2007 levels in 2016 and reaching almost €77bn in 2020 and €109bn two years later. This recovery, while both significant and remarkable, has also been fuelled by short-term windfall revenue from a small number of multi-national companies. The Fiscal Advisory Council estimate that between €11bn-€12bn of annual corporation tax revenue in the period 2022-2026 can be considered ‘excess’.
Table 1: The Changing Nature of Ireland’s Tax Revenue (€m)
Future taxation needs
Government decisions to raise or reduce overall taxation revenue needs to be linked to the demands on its resources. These demands depend on what Government is required to address or decides to pursue. The effects of the economic crisis a decade ago, and the way it was handled, also carry significant implications for our future taxation needs. The rapid increase in our national debt, driven by the need to borrow both to replace disappearing taxation revenues and to fund emergency ‘investments’ in the failing commercial banks, has increased the on-going annual costs associated with servicing the national debt. Similarly, the need for the state to rescue or support so many aspects of our economy and society during the COVID-19 pandemic has triggered large scale borrowing and future liabilities to both service and repay this debt. Ireland’s national debt increased from a level of 24 per cent of GDP in 2007 - low by international standards - to peak at 120 per cent of GDP in 2013. Documents from the Department of Finance, to accompany Budget 2022, moved to express debt levels as a percentage of GNI* given how misleading the GDP has recently become. Those for Budget 2024 indicated that that debt levels reached 82.3 per cent of GNI* (€225 billion) in 2022 and anticipated these will fall to 72.3 per cent of GNI* (€222 billion) in 2024. Despite favourable lending rates and payback terms, there remains a recurring cost to service this debt – costs which have to be financed by current taxation revenues and which are likely to notably rise over time given movements in interest rates. The estimated debt servicing cost for 2024 is €3.68bn.[1]
These new future taxation needs are in addition to those that already exist for funding local government, repairing and modernising our water infrastructure, paying for the health and pension needs of an ageing population, paying EU contributions, and funding any pollution reducing environmental initiatives that are required by European and International agreements. Collectively, they mean that Ireland’s overall level of taxation will have to rise significantly in the years to come – a reality Irish society and the political system need to begin to seriously address and one Social Justice Ireland stressed in our 2022 submission to the Commission on Taxation and Welfare.[2] Given that, we welcome how clearly this was reflected in the first recommendation of the Commission which states that “…the overall level of revenues raised from tax and Pay Related Social Insurance as a share of national income must increase materially to meet these challenges”.
As an organisation that has highlighted the obvious implications of these longterm trends for some time, Social Justice Ireland welcomes this development and the continued inclusion by Government of a section focused on the long-term sustainability of public finances in the annual Stability Programme Update (SPU).
Research by the Department of Finance, using the European Commission 2021 Ageing Report as the basis for its assumptions from 2019-2070, provides some insights into future exchequer demands associated with health care and pensions in Ireland in the decades to come.[3] These findings are summarised in table 2. Over the period, the report anticipates an increase in the older population (65 years +) from approximately 704,000 people in 2019 to 1.2m in 2040 and to a peak of almost 1.8m in 2070. Over the same period, the proportion of those of working age will decline as a percentage of the population, and the old-age dependency ratio will increase from almost five people of working age for every older person today to just over two for every older person by 2050.[4] While these increases imply a range of necessary policy initiatives in the decades to come, there is an inevitability that an overall higher level of taxation will have to be collected.
Table 2: Projected Age-Related Expenditure, 2019-2070
How much should Ireland collect in taxation?
Social Justice Ireland believes that, over the period ahead, policy should focus on increasing Ireland’s tax-take. Previous benchmarks, set relative to the overall proportion of national income collected in taxation, have become redundant following recent revisions to Ireland’s GDP and GNP levels as a result of the tax-minimising operations of a small number of large multinational firms.[5] Consequently, an alternative benchmark is required.
We have proposed a new tax take target set on a per-capita basis; an approach which minimises some of the distortionary effects that have emerged in recent years. Our target is calculated using CSO population data, ESRI population projections, and CSO and Department of Finance data on recent and future nominal overall taxation levels. The target is as follows: Ireland’s overall level of taxation should reach a level equivalent to €15,000 per capita in 2017 terms. This target should increase each year in line with growth in nominal GNI*.
Table 3 compares our target to the Budget 2024 expectations of the Department of Finance. We also calculate the overall tax gap for the economy; the difference between the level of taxation that is proposed to be collected and that which would be collected if the Social Justice Ireland target was achieved. As part of our calculations, we have adjusted the expected Department of Finance tax take to remove an estimate of the short-term excess corporate tax revenue the state is currently receiving; revenues which are likely to go elsewhere as the broader OECD and EU reforms of corporate taxation regimes advances. We use the figures calculated and projected by the Irish Fiscal Advisory Council. In 2024, the overall tax gap is €26 billion, and the average gap over the period 2021- 2023 is €21 billion per annum. While this figure looks large, it should be understood in the context of current windfall taxes from corporations, which are being mostly spent, dramatically reduced income taxes over recent years, a narrow tax-base, and persistent deficits in the provision of public services and infrastructure.
Table 3: Ireland’s Tax Gap, 2021-2024
Increasing the overall tax take to this level would require a number of changes to the tax base and the current structure of the Irish taxation system. Gradually increasing the overall taxation revenue to meet this new target would represent a small overall increase in per capita taxation levels and one that is unlikely to have any significant negative impact on the economy. However, reaching that level would provide a lot more recurring sustainable revenue for the state to invest in public services and improved living standards for all. As a policy objective, Ireland can remain a low-tax economy, but it should not be incapable of adequately supporting the economic, social, and infrastructural requirements necessary to support our society and complete our convergence with the rest of Europe.
Taxation and competitiveness
Suggesting that any country’s tax-take should increase often produces negative responses. People think first of their incomes and increases in income tax, rather than more broadly of reforms to the tax base. Furthermore, proposals that taxation should increase are often rejected with suggestions that they would undermine economic growth. However, a review of the performance of a number of economies over recent years sheds a different light on this issue and shows limited or no relationship between overall taxation levels and economic growth.
[1] https://assets.gov.ie/236053/e0ec55a5-f9bc-4d8c-b132-70560ca9fbe5.pdf & https://www.gov.ie/pdf/?file=https://assets.gov.ie/273322/fd803803-1a3d…
[2] https://www.socialjustice.ie/publication/social-justice-irelands-submis…
[3] A new European Commission Ageing Report, with an update of these projections, is due to be published by mid-2024.
[4] https://www.gov.ie/en/campaigns/586fa-stability-programme-update-2023/
[5] 4 For many years Social Justice Ireland proposed that the overall level of taxation should reach 34.9 per cent of GDP.