Dáil Éireann Debate, Tuesday - 13 February 2018
114. Deputy Dara Calleary asked the Minister for Finance the independent economic evidence and analysis that concludes that Ireland's income tax regime and rates are prohibitive in terms of job creation or attracting foreign direct investment. [6651/18]
View answerThe average tax wedge is used by the OECD to measure the extent to which taxes on labour income discourage employment. The tax wedge is defined as the ratio between the amount of taxes paid by an average single worker without children (i.e. a worker on 100% of average earnings) and the corresponding total labour costs for the employer including employer social insurance costs.
Ireland historically has one the lowest tax wedge levels both within the EU and the OECD at average wages. In 2016 (the latest year of data available), Ireland’s average tax wedge was 27.1% of labour costs. This compares very favourably to the OECD-average of 36.0%, and has been the lowest of the EU28 member states since 2000.
However, this comparative difference in tax wedge is eroded as incomes increase. Analysis published in the Income Tax Reform Plan in 2016, available online at http://www.finance.gov.ie/wp-content/uploads/2017/07/Income-Tax-Reform-Plan.pdf, shows that in 2015 the Irish tax wedge for a single person was comparatively low at income of up to 125% of average earnings. It then surpassed the UK and USA at c.125% and 150% respectively and surpassed the comparative French tax burden at c.210% of average earnings, while still remaining below Denmark and Germany.
In Budget 2015, the Department of Finance undertook an Economic Impact Assessment of Ireland’s Corporation Tax Policy available online at http://www.budget.gov.ie/Budgets/2015/Documents/EIA_Summary_Conclusions.pdf. As part of this work, ESRI researchers estimated that the corporate tax rate has a negative effect on the location decision of multinational companies. In other words, the higher the corporation tax rate in a country, the lower the probability of FDI locating there. Although not the main focus of this research, they also examined the relationship between labour costs and FDI. The researchers found that the higher the labour costs in a country, the lower the probability of FDI locating there. This negative relationship between labour costs and FDI is borne out in other international studies such as:
- Johansson et al. (2008) “TAX AND ECONOMIC GROWTH”, OECD, https://www.oecd.org/tax/tax-policy/41000592.pdf
- Hajkova et al. (2006) “TAXATION, BUSINESS ENVIRONMENT AND FDI LOCATION IN OECD COUNTRIES”, OECD, http://www.oecd.org/eco/public-finance/37002820.pdf
All else equal, it implies that countries with higher tax wedges than other countries are more likely to deter FDI.
I would also note that it is important to look at the effects of budgetary measures over time and not ignore their broader impacts. The contribution of budgetary policy to employment growth over the past number of years is a case in point. Employment is the best route out of poverty and is crucial to ensuring the sustainability of Ireland’s prosperity. Therefore the importance of the role of budget measures in creating an environment conducive to employment creation should not be understated. As such, it remains a key Government priority to maintain competitiveness and support employment growth. The Department of Finance will continue to monitor developments in this evidence base closely.
