Last week’s exaggeration statements, complemented by the release of Revenue’s main results for 2021, suggest that by accident, if not intentionally, Ireland has found itself with a taxation model that makes public funding more resilient. than that available in many other countries.
As a rule, when an economy grows, tax revenues increase in direct proportion. Last November, the European Commission estimated that the Irish economy would grow by almost 15% in 2021. Yet tax revenues in 2021 have increased by almost 20%.
How did this happen and what makes the Irish tax system so resilient?
It is clear that Irish taxpayers and Irish businesses are very tax friendly. Revenue’s main results for 2021, which provide details on the mechanics of the tax system, show rates of tax compliance among large and medium taxpayers – primarily businesses that collect and pay most of the money – at around 98 %. Businesses are required by law to collect taxes, primarily through the PAYE and Vat systems. Compliance therefore has a stabilizing effect on tax revenue. The average value of each tax payment made to the tax authorities is around € 8,000.
The pandemic disruption has hit employees the most in industries such as travel, hospitality and retail. These sectors often do not pay as well as the information and communications, civil service, law, accounting, health or engineering sectors, where employment levels have been lower. affected by the pandemic disruption. As a result, the disruption to overall income tax returns has been less than might be expected.
Although not shown in tax revenue, EUR 12.6 billion was collected in the PRSI in 2021. Normally, this is mainly the PRSI paid by employers, not employees. The high amount of PRSI will improve the situation of the national social insurance fund, which finances pensions and other professional benefits.
Related to this, for several decades Irish industrial policy has focused on bringing in foreign direct investment, especially high tech and the pharmaceutical industry. The products and services of these sectors are in high demand around the world due to the pandemic. This had a positive effect on the profitability of companies, and therefore on corporate tax revenues, but also on the dynamism of employment and wages in these sectors.
The government’s policy response to the individuals and businesses most affected by the pandemic has also kept tax revenues at a good level. Programs like the Pandemic Unemployment Payment and the Wage Subsidy for Jobs program have helped people keep money in their pockets even when their jobs have been cut short.
This has resulted in continued consumer spending on products and services.
Although it is largely out of government control, inflation does have an impact on the returns to the chessboard. For example, VAT and some other fuel duties are calculated on wholesale prices, rather than just volumes. As gasoline prices in international markets rise, so does the Exchequer’s revenue from fuel taxes.
A government is unlikely to design its economy to be pandemic proof. The pull on public spending due to Covid-19 overshadows improved tax revenue for 2021. No state, especially one with an economy as small as this, could cope with too many years of pandemic disruption. Treasury figures suggest, however, that Ireland, at least from a fiscal perspective, is doing better than most.
- Brian Keegan is Director of Public Policy at Chartered Accountants Ireland