The Finance Bill affords an opportunity to the Seanad to discuss taxation. Indeed, it offers the only real opportunity to do so, since the Budget Resolutions do not come to this House. Taxation can be reviewed at several different levels. First, we can look at the total amount of taxation, that is the burden on the community and its effect on economic growth and stability. Secondly, we can look at the structure of taxation, the different types of taxes involved, and the merits and demerits of each type. Thirdly, we can look at individual taxes and discuss their details, their form and their administration.
I intend to concentrate on the first two aspects, leaving discussion in detail on individual taxes as more appropriate to Committee Stage. If we wish to discuss the burden of taxation, one thing is necessary above all and that is, that we should be absolutely clear about the terms and definitions used. It is necessary to be absolutely clear whether we are talking of central taxation only, or of total tax revenue which comprises both central and local taxes.
When we are relating tax yields to capacity we must also be clear to what we are relating them; there is more than one type of capacity to which we can relate this burden. It can be related to national income which corresponds to the total earnings of the residents of the country arising from their economic activities. It can also be taken in relation to gross national product, which is the total output of the goods and services produced by the nation's economy before reductions for depreciation and such similar expenses. Indeed, we want also to be clear if we are talking about gross national product whether we are talking about gross national product at factor cost, or gross national product at market prices.
These distinctions are all necessary because otherwise constructive debate concerning the burden of taxation is absolutely impossible. Unless we have our terms defined it is impossible to do much else than have an interchange of conflicting figures. Therefore, we should take our taxation and relate it either to national income or gross national product, but we must be quite clear in each case as to what exactly we are doing.
Since the position is that gross national product, particularly gross national product at market prices, is higher than national income, the burden of taxation will always appear lower when taken in relation to gross national product than when taken in relation to national income. I say this because I think it is necessary, even at the risk that, speaking in another place, the Minister may again refer to my comments on these points as gibes directed at the Government.
If we want to look at the burden of taxation in this or any other country we can do two things. We can examine the burden of taxation, properly defined, comparing a given country one year with another, and see how the tendency is going. If we want to look at it from another point of view, we can for a single year compare the burden of taxation among different countries. I think it is appropriate at this time, when we are coming into the first year of theSecond Programme for Economic Expansion, that we should take a close look at our total burden of taxation from both those viewpoints, to see how does Irish taxation in recent years vary. Of course, in looking at this I want to look at the total of taxation, and more particularly at the burden of taxation when we take taxation and relate it to capacity.
In that connection, I should like to quote from the debate on the Finance Bill, 1963, in this House. Senator Nash, in an able speech from the Government side of the House, on that occasion gave us a criterion which we could use in measuring this variation from year to year. I quote from the Official Report for the Seanad for 18th July, 1963, volume 56, column 1229. There, Senator Nash had this to say:
The real test is what percentage of the gross national product does our tax bear; our tax from all sources going into the National Exchequer. Is that percentage going up or going down? If it is going down, of necessity we are doing well; if it is going up we are doing badly. Let us take that basis.
Later in the same debate, I commented that when we came to judge the Budget of 1963 it would be judged properly not on the burden of taxation up to 1962 but on the burden of taxation in 1963 and particularly in 1964.
What is the position if we look now at the burden of taxation, defined as Senator Nash defined it, at the present moment? It is not necessary for me to do any calculations on this score because the calculations have been done and were given by the Minister for Transport and Power in the Dáil on 21st April of this year. In volume 209, No. 1, columns 77 to 79 of the Official Report for the Dáil, the Minister for Transport and Power gave figures for total taxation in relation to gross national product for the years 1962-63 and 1963-64, together with an estimate for 1964-65.
Let us look at these figures according to Senator Nash's criterion and ask ourselves: is the ratio going down —are we doing well—or is the ratio going up—are we doing badly. The figures quoted by the Minister for Transport and Power were: 1962-63, 22.4 per cent; 1963-64, 23.7 per cent; 1964-65, an estimated 24.3 per cent. These figures, quoted by a Minister in Dáil Éireann, can be taken as having been reliably checked. We find from these figures that between 1962-63 and 1964-65, there occurs a rise of 2 per cent in the two years.
If we look at what theSecond Programme for Economic Expansion says about this we shall find that programme is based on a rise, on this same ratio, of 1 per cent or 2 per cent in seven years. This is clearly stated in Paragraph 108, page 63, of the Government White Paper on the Second Programme. Yet in contrast to what the Government envisage in their Programme of a one per cent or two per cent expansion, we find from the figures given by the Minister for Transport and Power a rise of 2 per cent in two years.
Indeed if this figure shows the same tendency for future years, we will find that the ratio of total taxation to gross national product will reach 25 per cent not in 1970 but in 1965. It would be no sign of success if this were the first target of the Programme to be exceeded. We find then, on the criterion suggested by Senator Nash and the figures given by the Minister for Transport and Power, that the burden of taxation is not only increasing but is increasing at a faster rate than the Second Programme has allowed for.
If we turn from looking at conditions in Ireland in the past few years to a comparison with other countries, we find the Taoiseach ready with a new criterion. I should like to quote what the Taoiseach said in the Dáil on 15th April, 1964, reported at column 1770, No. 1, of volume 208 of the Official Report. I quote:
By and large, our tax rates are lower than in other western European countries, indeed lower than in any other country in the world with comparable living standards. Taxation represents a smaller proportion of our national income than it does in other countries. This is not altogether attributable to restraint on the part of the Government but to the fact that we do not have to meet exceptional burdens for national defence which other Governments undertake.
It is quite clear the Taoiseach was talking in terms of national income. When questioned on it, he emphatically reiterated that he was talking about national income. Later, at column 1771, he indicated he was dealing in terms of central taxation as a ratio of national income. Again I quote:
I am talking about Government taxation. In most other countries in Europe Government taxation as a percentage of national income exceeds 30 per cent.
There we had from the Taoiseach clear, unambiguous statements that, by and large, our burden of taxation is lower than that of any other country in western Europe and lower than in any country in the world with comparable living standards.
The Taoiseach made it clear that he was talking about central taxation and national income. I was rather surprised at this flat, unequivocal statement from the Taoiseach and took the trouble to check what the position was in regard to western European countries and countries of comparable income throughout the world from data given in the UN Statistical Year Book for 1962. This is the latest publication in the series and was published in New York in 1963. I have taken as the countries in western Europe the 18 countries of the OECD, our colleagues in OECD with whom we are joined in an effort to increase national income by 50 per cent before 1970.
There are no data in the Year Book for Iceland or Luxembourg but data are available for the 16 other members of OECD. When these data are examined, we find the figure for central taxation over national taxation for Ireland at 22 per cent is not the lowest in western Europe, even if we allow for the qualifying phrase "by and large". If we examine the data and remember the definition on tax burden as central taxation over national income, the figure for Ireland is almost exactly equal to the average for the 16 countries, and there are six countries who have lower ratios than Ireland. They are Denmark, Greece, Portugal, Spain, Switzerland and Turkey.
It is not sufficient to say that four of these countries are low income countries or developing countries. We find among the countries lower than ourselves one of our greatest competitors. Denmark has a national income per head which is twice that of Ireland and yet, according to the Taoiseach's criterion, its burden of taxation is lower than ours. Switzerland has a national income per head 2½ times the national income per head in this country and its burden of taxation is lower.
The burden of taxation compared with these sixteen countries is, as I said, almost equal to the average, whereas our national income per head is only two-thirds of the average in those 16 countries. We can see here that there is no room for complacency and no room for unequivocal statements which may make good rhetoric but do not stand up to statistical examination. It is true the Taoiseach said we should be lower than other countries because we do not have high expenditure on defence in this country. About 5½ per cent of our Government expenditure goes to defence compared with 20 per cent as an average for the 16 countries which I have been examining here and for which data are available in the UN Statistical Year Book. The only other country with comparable defence expenditure is neutralised Austria.
Also when we compare the extent to which we have room for manoeuvrability without involving ourselves in a heavier burden of taxation it is well to look also to what is the position in regard to national debt. If we relate national debt to national income, we find that the burden of national debt in this country is twice that in western Europe as represented by these 16 countries. Indeed, only the United Kingdom and Belgium have got ratios of national debt to national income higher than Ireland.
Neither is the second statement of the Taoiseach supported by such data as are available. A comparison of the burden of taxation in this country with the position in comparable countries in the rest of the world does not show that we have a lower burden of taxation than these similar countries. Our figure, defined in the way in which the Taoiseach defined it, of central taxation over national income is 22 per cent. If we go to the continent of South America we find a comparable country there, Chile. The national income per head in Chile is just below ours and the ratio of central taxation to national income is 17 per cent compared to our 22 per cent. The Argentine, with a somewhat lower national income, has a burden of taxation defined in this way of 14 per cent. If we go to Asia, a continent which is developing, we find a comparable country in Japan, our colleague in OECD. Japan has got a burden of taxation, defined in the way the Taoiseach defines it, of 13 per cent compared to our 22 per cent. If we go to the continent of Africa, a comparable country here is South Africa. We find here again the burden of taxation is well below ours. It has a figure of 14 per cent. If we take the statement of the Taoiseach and examine it again with the data which are available we find that while the statements of the Taoiseach may, indeed, be good oratory there are not good statistics to back them up.
Later in that same debate the Minister for Finance gave some figures of the burden of taxation defined in a different way. Speaking in the Dáil on the 5th May of this year, Volume 209, No. 7, column 1029 the Minister for Finance gives figures for the total taxes, central and local, as a ratio of the gross national product. He gives these figures for a number of countries. It is not clear, from what the Minister for Finance says in this particular passage, what year is being dealt with nor, indeed, is it clear whether GNP is taken at market prices or factor cost, though I assume from the figures given that market prices are involved. In this particular passage the Minister for Finance says:
As a matter of fact, there are 11 countries in Europe higher than we are and only two below us in more favourable positions—Switzerland and Portugal.
The Minister gave as his reference for this the figures for national accounts published by OECD and the annual review tables compiled by OECD. If we look at the OECD publication of national accounts which end in 1961 we find there are given figures for the 18 countries of OECD. If the Minister is referring here to the 1961 values, it seems to me extremely difficult to reconcile his statement that Portugal and Switzerland are the only two countries lower than us with the figures for 1961 which would be obtained for Greece, Spain and Turkey. If, on the other hand, the Minister is taking the figures for 1962 from the annual review volume of OECD, then the material which has been deposited in the Library of this House contains for 1962 data in respect of only 11 countries and is not a complete list.
I should like if the Minister, in his reply, could indicate whether the figures he gave in the Dáil relate to 1961 or 1962 and if he will give the complete list of the values for 1961 and 1962 in relation to the burden of taxation defined in the way in which he defined it in replying to the debates in the Dáil. From my examination of the figures in the Library of this House, which I only saw for the first time yesterday, it appears to me that there are not two but five countries in Western Europe whose burden of taxation is lower than that of Ireland.
It is no good just looking at these lists of figures and saying we can claim a certain virtue because our burden of taxation is lower than that of countries like France, Germany, Sweden, Switzerland and the United Kingdom. These countries all have a national income per head far greater than ours. It seems from the figures given earlier that an effort made to increase our income per head has resulted in our burden of taxation rising rapidly. Indeed, the indications from such figures as are available are that our figures could well exceed the present figures for these high income developed countries long before we would have reached the national income for any of these countries.
Let us turn from the subject of the burden of taxation to that of the structure of our present taxation in this country. A modern Budget, which, of course, is a presentation of national accounts, is also used as an instrument of economic policy and as a means of promoting social equity. Each year there is an opportunity to review the structure of our tax system from these two points of view. From an overall point of view a balance must be struck between equity and incentive. It is important if we want to go any further to distinguish carefully between taxes on individuals and taxes on enterprises. I would suggest that, when we apply the criteria of taxation, the taxes on individuals should, above all, be equitable if the objectives of personal freedom and a wide distribution of wealth are to be reconciled. Such taxes should, if possible, also have favourable effects on economic growth and stability. They should at least be neutral in regard to these matters. When we turn to taxes on enterprises, however, we are no longer dealing with individuals who possess inalienable rights. Here we should promote, above all, the best possible allocation of resources and consequently a high rate of economic growth, while at the same time making sure that no inequities arise as between one enterprise and another.
I think the Government's tax policy in recent years, as judged by these standards, does not come out with high marks. If we look at what has happened with regard to taxation on individuals which should, above all, be equitable, what do we find? In recent years the Government have raised an increased proportion of individual taxes by indirect taxation rather than by taxes on income and wealth. Such indirect taxes are of their nature regressive and inequitable, imposing a greater burden on those least able to pay. Compensatory social welfare benefits given at the time of introduction of the taxes make a poor showing at a later period against the background of rising prices such as we are experiencing at the moment.
The supposed disincentive effects of taxes on income and wealth, of which the Government have made much virtue in recent debates on taxation policy, rest on very flimsy ground indeed. I shall return to that point later.
If we turn to the question of taxation on enterprises we find the Government have, in spite of their supposed devotion to programming and emphasis on growth, made no effort to improve our taxation system with a view to promoting a better allocation of resources by favouring efficient enterprises over inefficient ones. Reform in this direction would, I think, be very worthwhile.
In support of the plea for reform in this direction of taxation on enterprises, I would bring to the notice of the House a recent article by Professor Edward Nevin of the University College of Wales at Aberystwyth, and formerly of the Economic Research Institute here in Dublin. The article is entitled "Taxation for Growth—A Factor Tax". It is published in the Westminster Bank Review for November, 1963. Lest anyone should think that the views expressed in this article by Professor Nevin applied only to the United Kingdom, I would remind them that Professor Nevin had earlier in 1963 given a lecture to Tuairim on the subject of "The Irish Tax System", in which he had applied these ideas to Ireland and dealt with their application to this country in greater detail. I propose in what I have to say, however, to quote from the more accessible source, that is, the article in the West-minister Bank Review.
What has Professor Nevin to say about taxation on individuals? On page 16 of his article, he says:
There can be little doubt what the main function of personal income tax should be. It is generally regarded as broadly neutral so far as allocation effects are concerned —that is to say, it reduces spendable income but does not influence the distribution of consumers' expenditure between different types of commodity. One suspects that it is also neutral from the growth point of view. A good deal of righteous indignation is frequently generated about the evil influence of income tax on incentives to work and incentives to save, but the blunt truth of the matter is that the evidence on this point is scanty and ambiguous, while in terms of logical analysis the effects could work in either direction.
Here we have Professor Nevin denying that there is any economic justification, either from data or from logical analyses of the Government argument, that direct taxation would retard growth. The argument which the Government used against the legitimate objection to indirect taxation, particularly that of last year, is one for which this eminent economist finds no justification whatsoever.
If we turn to what Professor Nevin has to say about taxation on enterprises we find on page 19 of the same paper his views on how such taxes could be designed to stimulate growth. I quote:
At the present time we levy taxes on profits and taxes on goods. In both cases the tax fails to distinguish between the efficient and the inefficient producer. If the tax is levied on producers, it falls with equal proportionate weight on all, efficient and inefficient alike. If it is levied on commodities much the same is true; it does nothing to guide the public towards goods efficiently produced and away from those inefficiently produced. Suppose now that we were to tax an enterprise on the productive resources it used, rather than on its profits. The effective result of this would be that the efficient producer would be taxed at a lower proportionate rate than the inefficient; the tax system would encourage the movement of society's scarce resources into the hands of those best suited to use them, instead of (at best) being neutral in this respect as it is now.
Professor Nevin goes on to give an example to illustrate the effect of replacing a 25 per cent tax on profits by a 3 per cent. tax on the resources used by enterprises. He shows that, even if the indirect taxes affecting industry were left alone, a 5 per cent increase in productivity by a firm over the general average would reduce the effective rate of taxation on the profits of that firm from 25 per cent to 17 per cent, thus encouraging such a firm, allowing it to expand and thus directing resources into the hands of the more efficient enterprises. The advantages of a system such as this would be many—and these advantages are not necessarily confined to the scheme suggested by Professor Nevin. There are other possibilities which could and should be explored in this context.
Let us confine ourselves at the moment to the specific advantages of his particular proposals. These would be first, a powerful incentive to efficiency which would promote a proper structural change in the economy. At the moment, the Government are trying to promote such structural change by various means but one of them is the very dangerous one of unilateral tariff reduction which is eroding our international bargaining power. Surely it would be much more suitable to use fiscal methods as suggested by Professor Nevin in order to achieve the same purpose—less dangerous and probably more effective? Secondly, such a system would discourage the inflation of costs by business enterprises. Thus, excessive advertising, elaborate premises, overgenerous expense accounts and similar expenditure would now become an addition to the tax base and not something which could potentially be offset against profits in order to reduce taxation. Thirdly, the ability of efficient firms to expand would be enhanced and this would help to overcome the structural unemployment which must necessarily result in this country as we continue to move towards freer trade conditions.
If this might be thought as in some way favouring particular individuals, by lightening the tax burden on those who are earning most, it must be remembered that the salaries and distributed profits from these particular industries would still be the subject of personal income tax. If our income tax system were doing its job properly, it would adjust matters so that social equity between these persons and other individuals in the community would be preserved.
In looking, then, on the effort the Minister made in his Budget of 1964 to promote economic growth in this country, to combine growth and stability and to promote social justice, I would, in summary, say two things. First, the burden of taxation in this country is not the lowest in western Europe and not substantially lower than that of other comparable countries. While remembering this fact, we must also remember the unpleasant fact that the burden of our national debt is twice the burden of the national debt of other countries of western Europe. In the second place, the whole structure of our tax system could be improved to give, on the one hand, greater equity between individuals and, on the other hand, greater incentives to efficient enterprises.
The keynote of the Minister's Budget speech and the keynote of the Ministerial speeches throughout the Budget debate in the Dáil was one of complacency. I think that in the economic circumstances of this country at the present moment the note of complacency is a wrong note to sound. If the Minister and his colleagues continue to sound this note of complacency it might not only remain a wrong note but might indeed become a sour note.