Taxation

Taxation Overview

This resource seeks to provide EAPN Ireland members with a brief overview of taxation in Europe and in Ireland. In the coming months, we’ll continue to develop this and other sections as a resource for members and visitors. Feel free to leave comments here on the website, or contact us directly at enquiries@eapn.ie.

Any comparative analysis of European taxation systems poses considerable methodological and statistical challenges. Taxation mechanisms in European member states differ greatly from one another in their design and delivery, with some member states relying on taxation to fund public policy programmes while others rely on social security contributions. Similarly, certain states favour indirect taxation (e.g. value added tax and excise duty) over direct taxation (e.g. income tax).

Diversity and complexity in taxation frameworks has remained a feature of the European Union since its inception.  The Scandinavian countries are typically at the high end of the European tax spectrum while Ireland, Greece, Spain and Portugal are generally regarded as low tax states. In general, the new member states have lower tax ratios than the older member states.

It is important to acknowledge that there have been some changes in Irish taxation policy in recent years. Indeed, Budget 2009 had a number of redistributional effects. The tax implications of Budget 2010 were limited, though the Minister for Finance has announced his intention to overhaul the tax system over the next two years.

Principles of Taxation

Taxation is the mechanism through which the state gathers revenue to fund its public services (such as health, education, and social transfers) and public infrastructure. As a result, taxation is directly related to the provision and quality of public services. For instance, the high quality and standard of public services in the Scandinavian countries is generally attributed to the relatively high level of tax in those states.

Taxation is theoretically based on the principles of ‘ability to pay’ and equity. The ‘ability to pay’ principle ensures that the burden of tax will be imposed on individuals while taking into consideration their capacity to bear it. The principle of equity encompasses the redistributive element of taxation and aims to reduce the discrepancies between incomes that are a direct result of the market economy. However, taxation can also serve other purposes, for example carbon tax is linked to changing behaviours and protecting the environment, and is used to fund the protection of the environment.

Tax and Inequality

The taxation system is an effective and efficient mechanism for tackling inequality. Income inequality is a notable feature of the Irish social and economic landscape. It is estimated that the top 1% of the population holds 20% of the wealth, the top 2% holds 30% and the top 5% holds 40%. If the value of housing wealth is excluded and the focus is primarily on financial wealth, the concentration of wealth increases. In this instance, 1% of the population accounts for around 34% of the wealth. This is in stark contrast to the 14.4% of the population that are ‘at risk of poverty,’ the 4.2% of the population that are living in consistent poverty, the 18% of children live in relative poverty and the 6.3% of children who are living in consistent poverty.

Research conducted by British academics Richard Wilkinson and Kate Pickett develops and proves the notion that more equal societies almost always perform better across a broad range of social and economic criteria. The research in “The Spirit Level: Why More Equal Societies Almost Always Do Better” starkly shows that societies characterised by high levels of inequality are likely to suffer a drop in the standard of education; increased levels of physical and mental illnesses; a rise in drug abuse; more imprisonment; less social mobility; a deterioration of trust and community life; the proliferation of violence; more teenage births; higher levels of obesity; and a significant decline in child well-being.

Taxation & Competition

The arguments against raising certain taxes often cite competitive factors as a disincentive. However, in the world competitiveness scoreboard developed by the International Institute for Management Development (IMD), Ireland fell from 12th to 19th place between 2008 and 2009. In fifth place overall, Denmark is the highest of the EU15, then Sweden (6th), followed by Finland (9th); the Netherlands (10th); Norway (11th); Luxembourg (12th); Germany (13th); Austria (16th) and Ireland (19th). Ireland is nineteenth overall and ninth out of EU15, but interestingly all the EU countries which surpass Ireland have higher tax revenues.

More Information

Tax in Ireland and Europe

Sources of Tax Revenue

Tax & Recession