Friday, January 15, 2010

Say it ain't so, Joe

A recent piece written by Socialist Party Leader, Joe Higgins, states:
"In 2008, the effective rate of tax on profits (including that declared by the self employed) amounted to a miniscule 10.3% (approximately €6 billion tax out of €58 billion profits).  The corresponding figure for wages including PRSI is 28% (€22 billion tax out of €79 billion in PAYE wages). If profits in 2008 were taxed at the same effective rate as wages, a rate that would still be less than the US and the rest of the EU 15, an extra €10 billion would have been available to the exchequer."
This was repeated by Stephen Boyd in another piece and used by Mick Murphy on a recent appearance on Newstalk's The Right Hook.  Listen here (start at 7:30 into the segment to get the relevant piece).

There is much to admire about Joe Higgins.  He is a brilliant orator and is a loss to parliamentary politics in Ireland.  He has great energy and his work and support for the less well off in society is admirable.  Every society needs a Joe Higgins. Unfortunately he tends to talk an awful lot of rubbish, such as the claptrap above.

Joe takes figures for 2008 and argues that we could raise an extra €10 billion in tax revenue if corporation and income taxes were at the same rate.  However, if Joe's sums actually added up he'd find that we would lose revenue if we taxed corporate profits at the same rate as earned income.  Why? Well the average effective tax rate on businesses is higher than the average effective tax rate on income.

I can't find complete figures for 2008 so I will work off the most recent figures I can find.  While the numbers may not be exactly the same, the tax rates are almost the same so the proportions Joe uses should still be the same.

First, looking at corporation tax.  Per the Revenue Commissionsers 2008 Report on Corporation Tax  (although it is the 2008 report it provides data for 2007).  From this report we learn that there was €56.806 billion of net income on which €6.305 billion of corportion tax was paid.  See the bottom corner of table CTS1 on page 2.  This gives an effective tax rate of 11.1%.  Joe's sums give 10.3% so surely we're not failing him for a difference of 0.8%.  No, we are not.  But it goes pear-shaped for him soon enough.

For wages, Joe gives an effective tax rate of 28% claiming the €22 billion in tax is paid on €79 billion in wages.  The 2008 Income Distribution Statistics from the Revenue Commissiones provide data for 2006, and state that €81.518 billion in income was earned from which €11.976 billion in income tax (plus the income levy) was paid. See Table ISD1 on page 6.  This gives an effective tax rate of 14.7%.

Joe now proceeds to muddy the waters by including PRSI contributions.  Details on these are available from the 2007 Annual Report of the Social Insurance Fund, into which PRSI contributions are paid.  On page 5 we see that there were contributions of €9.345 billion made to the SIF in 2007.  Adding these contributions to income tax, as Joe has done gives an effective tax rate of 26.0%.  Again this is not too far from Joe's calculated figure of 28% and surely not enough of a difference to write home about.

But Joe's figure just doesn't stand up. Why? He assumes that all PRSI contributions are made by employees and adds PRSI to income tax.  Surely Joe knows that the greater share of PRSI is paid by employers. See a sample of rates here.  And by moving on to page 8 of the SIF Annual Report we get a breakdown of PRSI contributions (% of total).
  • Employer €5.762 billion (74.6%)
  • Employee €1.539 billion (19.9%)
  • Self-employed €0.421 billion (5.5%)
Employers (firms who pay corporation tax) pay almost four times as much in PRSI as employees (who pay income tax).  The remainder of the contributions in 2007 were made up of €1.107 billion from the health levy (paid by employees) and €0.405 billion from the national training fund levy (paid by employers).

If we now redo Joe's sums with the correct information.  To be honest it's a bit of a moot exercise but we'll proceed nonetheless. 

The tax on firms is the corporation tax plus employer PRSI contributions plus the national training fund levy which gives €12.47 billion and an effective rate of 21.95%.  The tax on employees is the income tax plus employee PRSI contributions plus the health levy which gives €14.62 billion and an effective rate 17.93%.  Wage income is taxed less than corporate income.

Joe, if we taxed firms at the same rate we taxed workers we would LOSE €2.28 billion. You get a fail.

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