The Irish tax slump and Irish competitiveness

THE SECOND Budget that was presented to Dáil Éireann by Brian Lenihan TD, the Minister for Finance on 7 April was based on achieving a tax revenue target of €34.4 billion in 2009. Taxation receipts to the end of July were €18.68 billion. While this was 97% of the July target, a shortfall of €574 million was recorded.  This shortfall could be construed as a €13.5 billion shortfall if the 2007 tax revenues are the basis of comparison.

“Put simply, Irish tax revenues are close to 26% of GDP while voted government spending is 34% of GNP”.

To put this in context – total tax revenue in 2007 and 2008 was €47.5 billion and €40.77 billion respectively.

The 2009 target is therefore just €13.1 billion shy of the 2007 outturn so the shortfall must be seen against this background because this is what determined the government spending profile.

The make-up of the shortfall was spread across all tax categories, except excise, which is surprising given the severe downturn in new car sales. Excise is levied on transactions or events and not by reference to any time period. The main components of the €5.53 billion in excise duties in 2008 were:

Alcohol	19.24%
Tobacco	21.17%
Oil, gas and petrol	39.23%
Vehicle registration	20.36%

Sources of Shortfall

	€ Million
Customs	14
Capital acquisition tax	23
Capital gains tax	40
Corporation tax	75
Stamps	86
Income tax	185
VAT	447
Unallocated taxes	37
31 JULY 2009	-574

Business Sector Impact

Five business sectors that directly contributed €25.87 billion of the 2007 tax revenue of €47.5 billion are currently under pressure. Three banks, Bank of Ireland, AIB and the nationalised  Anglo Irish Bank have been provided with €11 billion this year by the taxpayer to prop up their capital base.

Corporation Tax

The 2009 target for corporation tax is €3.74 billion compared to corporation tax revenue of €5.06 billion in 2007.

Financial intermediation and manufacturing alone paid corporation tax of €3.93 billion in 2007

Income Tax

The 2009 target for income tax is €12.47 billion but unemployment and the number on the Live register is 30% higher than last March when these targets were established.

The large sources of income tax in 2007 were financial intermediation €1.17 billion, manufacturing €1.21 billion, construction €857 million, real estate related activities €1.62 billion and wholesale / retail – including the motor sector, €5.56 billion.

Income Tax from self employed

The total income tax derived from self-employed in 2007 was €2.3 billion and over 39% was derived from the self-employed in the real estate business.

Tax component of Irish agriculture

I have written several times in this blog about Irish agriculture, pointing out that while EU subsidies have remained at around €1.4 billion over the past several years, the slack has been taken up by the Irish taxpayer and, now, by those who borrow on behalf of the Irish taxpayer. Agriculture subsidies are the equivalent to 90% of output.

The contribution of agriculture to the Irish Exchequer in 2007, a time when land was changing hands at extortionate prices was €747 million out of a total tax take of €47.5 billion.

The make-up of this is interesting.

 

	€ Million
VAT	-€35,041
PAYE	50,775
Income tax – self employed	201,345
Corporation tax	24,933
Capital gains tax	501,095
TOTAL TAX FROM AGRICULTURE	743,107

Clearly, the sale of farm land to developers and the capital gains arising was the critical component of agricultural taxation in 2009.

The sector was reported to have employed 118,700 at the end of 2007. An average income tax payment of €427.75 per employee would suggest that there were very few prosperous people working on farms!

Value Added Tax

The value added tax paid in respect of professional services in 2008 was €33,541,000, a shade higher than the VAT paid in 2007.  You might think this encouraging.  But was it paid by a sector that was internationally competitive?

Competitiveness of professional taxpayers

The Annual Competitiveness Report 2009 has just been published by the National Competitiveness Council.  It discloses:

• Accountancy fees charged in Ireland by a major international accounting firm for a junior accountant in Ireland at approximately €115 per hour was significantly ahead of the same charge in London and Copenhagen and almost double what is charged in Singapore and my beloved Boston.
  
• The fee charge by a major legal firm in Ireland for a junior legal assistant per hour, excluding VAT was €300 her hour – significantly dearer than what is charged for counterparts in Boston, Maastricht, Copenhagen, London and Budapest.  This level of charge is almost 300% higher than in Singapore.
  
• The cost of an ad-hoc service site visit by an IT technician in Dublin, €180 per hour,  was the second most expensive of the locations benchmarked.  The comparable charge in Boston was €50, Budapest €40, Maastricht €35, Copenhagen €25 and Singapore €20.

I never cease to be fascinated by the passive language of government reports.  Imagine an infant sucking its thumb.  This Report advises “cost competitiveness is showing signs of improvement after years of deterioration” and it proceed to inform readers that “overall lending declined by 1.4% in the year to March 2009, compared to an annual increase of 12.5 per cent in the year to March 2008”.  Allelluia! 

But when you realise that non-government credit is close to €400 billion, would it not be more candid to state that borrowing is so high the only trend open is a reduction?  Get real.

“Are we at the stage where we must acknowledge that the restoration of credibility must precede the restoration of competitiveness?”