Effective tax rates in Ireland

A new report has found that Ireland has lower effective tax rates on labour, capital and corporate income than the EU average, a fact which “could be a contributing factor to the country’s strong economic performance”.

The report, Effective tax rates in Ireland by the Economic and Social Research Institute (ESRI), says that Ireland’s “effective tax rates on labour, capital and corporate income are lower to the EU average, while the tax burden on consumption is consistently higher”. When these estimates are related to macroeconomic variables of interest, the ESRI found that “labour taxes are negatively correlated with hours worked, while capital and corporate taxes are negatively related with business investment”. Thus, the policies of Ireland are found to be positively correlated with GDP growth and as such can be considered a contributing factor to the strong economic performance of the country.

These findings are however followed by a disclaimer about the use of the analysis: “We stress that despite the presence of strong correlations, they should not be given any causal interpretation. A more detailed study on the tax structure, based on formal econometric models and testing, is left for future research.”

Between 1995 and 2017, the report finds that taxes on labour in Ireland were on average 8 per cent lower than the EU average. In the same time period, corporation taxes were 7 per cent lower than average, which correlated to a higher consumption tax rate, with the rate in Ireland is 4 per cent higher than the EU average.

Both the Irish and EU average labour tax rates display a “mild upward trend” since 2002. A fall in 2008 is attributed to the “impact of the Irish crisis, which led to a significant decline of the corresponding tax revenues”. From 2008 to 2011, the ‘Troika years’, a noticeable increase is seen that is mostly related to the debt consolidation measures of that era. From then onwards, the labour tax rate “follows a mild upward trend similar to the EU average”. Changes in consumption taxes were found to be more “volatile” in Ireland than they were in the rest of the EU.

Social security costs were also found to be “significantly lower” in Ireland than elsewhere in the EU, with average contribution rates from employers in Ireland standing at 12.07 per cent from 1995 to 2017, compared with the EU average of 17.4 per cent. In recent times, this difference has become more pronounced.

When broken down into four smaller timespans, a trend of employer contributions shrinking in Ireland as the EU average emerges. From 1995-2001, the figures stand at 12.6 per cent and 16.5 per cent for Ireland and the EU respectively; by the period 2012-2017, Ireland’s figure has fallen to 11.9 per cent, while the EU’s average has risen to 18.01 per cent.

In that same time, social security costs on employees have risen in Ireland and the EU, to averages of 5.63 per cent in Ireland and 12.9 per cent in the EU from 1995-2017. These costs have risen at a quicker rate in Ireland, from 5.3 per cent from 1995-2001 to 6.6 per cent from 2012-2017; comparatively, the EU average was 12.8 per cent from 1995-2001 and rose to 13.3 per cent by 2012-2017.

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