Sources of Tax Revenue
Where does tax revenue come from?
The European taxation system can be divided into three broad areas;
(1) Direct Taxation: taxes on income and wealth, capital taxes.
(2) Indirect Taxation: taxes linked to production and imports, stamp duty, VAT, carbon tax.
(3) Social Contributions: social contributions are paid into social security funds or other social security schemes.
Over the past decade there has been a decisive shift away from direct taxation within the Irish system. In recent years, indirect taxes became the main stream of revenue for the Irish Exchequer. In 2005 receipts for VAT alone exceeded those for direct taxes in Ireland. The table below presents revenues by category for 2004-2008 in Ireland. Total indirect taxes (VAT; excise duty and stamp duty) in 2008, at €25.5 billion, exceeded direct tax, at €16.7 billion, by 34.5%. The over reliance on indirect taxes, particularly stamp duty, exacerbated the rate of economic decline following the crisis of 2008. Many indirect taxes are directly related to economic performance and are vulnerable to economic shocks. As a result, the unprecedented decline in the Irish economy led to a catastrophic collapse in the overall tax take.
The shift away from a model which relies primarily on direct taxation towards a model which taxes consumption has raised concerns around the regressive nature of indirect taxation. The Combat Poverty Agency (CPA) highlighted in 2006 how indirect taxes are inherently regressive because they do not take into account the ability of the taxpayer to pay. In other words, everyone pays the same VAT on food or clothes regardless of income. Low income households end up paying a larger proportion of their income on indirect taxes than higher income households. The CPA study concluded that “The indirect tax system appears to be regressive in the sense that households in the lowest deciles…pay a higher proportion of their income in indirect taxes relative to households in the higher deciles.
The structural emphasis on indirect taxation in Ireland is variance with most other EU countries. While most old Member States (EU15) raise roughly equal shares of revenues from direct taxes, indirect taxes, and social contributions, the new Member States often place far less emphasis on direct taxation as a proportion of the total tax take.
Bulgaria has the highest share of indirect taxation as a proportion of the overall tax take (55.1%). Ireland has the fifth highest share of indirect taxation as a proportion of the its overall tax take in the EU 27 (and the highest in the EU 15).
The lowest share of direct taxation as a portion of the total tax-take is recorded in Slovakia (only 20.8 % of the total), Bulgaria (20.9%) and Romania (23%); in Poland at 24.9%. Among the old Member States (EU15) there are some noticeable differences. The Nordic countries as well as the United Kingdom and Ireland have relatively high shares of direct taxes in total tax revenues. Ireland has the fourth highest proportion of direct taxes in the EU27, out of the 10 countries with the highest share of direct taxes in Europe; nine are old member states (EU15). Ireland’s relatively high levels of direct and indirect taxation must be seen in the context of the low impact of the social insurance contributions.
Social Security Contributions
In terms of social contributions, the Czech Republic has the highest share at 44.2%, while Slovakia, Germany and France, are also characterised by a high level of social contribution. Ireland has the second lowest contribution of social contributions in total tax revenues at 15.9%, the country with the lowest share is Denmark at 2%. There is a specific reason for the extremely low share of social contributions in Denmark; most welfare spending is financed out of general taxation. This requires high direct tax levels and indeed the share of direct taxation to total tax revenues in Denmark is by far the highest in the Union.