2013 06 17 BOC conference presentation final

 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 neu

The structure of Ireland’s tax system and options for growth enhancing reform

Brendan O’Connor, 19 June 2013

 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

capacity for greater tax revenue by European comparisons

 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

 Using GNP, Ireland has a greater than average share

 Using the IFAC Hybrid Measure Ireland approaching EU average

36 36

33

29

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?

Labour taxation comparisons also distorted by SSC

5.0 10.0 15.0 20.0 25.0 30.0

Distribution of tax burden

Income Share of tax paid

Income Tax and USC, all Tax Units, Cumulative, 2012

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

d Israel

New

Zeala

nd Finlan

d

Kore

a

Sweden

rage

Neth

erlands

Denm

arkEs

Progressivity Measure, Single Taxpayers

Ratio of Effective Tax Rates

Low effective rates

Top MTR not the highest in OECD but entry point one of the lowest

Consumption Taxation

due to its low share of GDP

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

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

quickly

The Theory – Macroeconomic Principles

 Distortions to decisions affects components of output and growth

Y = F(L, K, A)

 Total Factor Productivity the key driver of long run growth in GDP per Capita

 Endogenous Growth Models

choices

decision to undertake investment in education

destruction’, expenditure on R&D results in better quality inputs which are more productive – effect of taxation on decision to innovate is key

How taxes affect the determinants of economic growth

 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

 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

productivity

than consumption

and investment decisions

prices

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)

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

Simulation Results for Ireland

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

Simulation Results for Ireland

Concluding comments

 Presentation only addresses growth impacts of taxation

 Progressivity and redistribution also important

coefficient)

Thank you!