Taxation & Recession

Taxation and as a Response to Recession

The taxation system is the key mechanism for redistributing wealth in society. Taxation fundamentally reflects societal values and impacts on the quality and provision of public servces. In 2007, the Irish total tax ratio as a percentage of GDP (including social security contributions) was the lowest in the EU15. In the EU27, Ireland’s total tax ratio is fifth lowest. It is worth noting however, that if social security contributions are excluded Ireland comes ninth in the EU27. Ireland has the second lowest share of social contributions in total tax revenues in the EU27. A more redistributive tax system could facilitate a fairer and more equal society and promote quality public services.  In its present form, Ireland’s taxation system is seriously imbalanced. The over-reliance on indirect forms of taxation coupled with the proliferation of generous tax reliefs has contributed to the enormous and unsustainable deficit in the public finances.

Since the start of the recession, many European countries have favoured stimulus packages rather than spending cuts in response to crisis. These packages often include decreasing tax bands for income tax, reducing VAT on particular items, offering incentives for businesses and introducing reforms to assist and empower the poorest and most vulnerable in society. The structural fragility of Ireland’s taxation system meant that Ireland’s revenue stream was seriously vulnerable to economic shocks.

The swiftness of the Irish economy’s decline highlights the need to develop counter cyclical actions – a new model of development – to avoid the repetition of such a crisis in the future. Ireland’s low-tax status has often been linked to the creation of the Celtic Tiger however the unemployment crisis, dependence on indirect taxes, reduced economic activity and the exodus of many multinational companies have put a huge strain on Government revenue. It is clear that wholesale reform of the tax system is inevitable and essential to the recovery and long-term sustainability of the public finances.

Many actors have begun to articulate clear arguments for broadening the tax base in Ireland, and generating sustainable forms of increased revenue.  This factsheet has demonstrated that from a European comparative perspective Ireland would appear to have significant scope for increasing revenue, with a view to generating more equitable redistributional impacts.  Indeed the 2009 Budget had a series of redistributional effects, increasing the taxation burden on the wealthiest and redistributing additional resources to those on low incomes.

Minister Lenihan announced in Budget 2010 that he will initiate significant tax reform measures in preparation for Budget 2011. EAPN Ireland will lobby independently and through its alliances and networks for a tax system that will support a sustainably economic recovery while also contributing to a fairer and more inclusive society.