Funferal

Regressive VAT tax generates more revenue than income taxes in Ireland

News today that tax receipts in Ireland are up. So much so good for government finances. However, as Joan Burton points out:

Today’s Exchequer Returns confirm yet again that Value Added Tax has become the largest element in the government’s tax coffers, continuing to outpace Income Tax Receipts by €821 million for the four months to the 30th April, 2006. Value Added Tax receipts for the four months amounted to €4.4 billion as compared with Income Tax receipts of €3.6 billion.

The problem with having VAT as the largest source of income – it constitutes 31.25% of receipts at present – is that it is essentially a regressive tax. Income tax, in comparison is only 28.125% of receipts – stamp duty and corporation taxes each account for between 7 and 8%.
VAT is regressive because those on lower incomes spend a large proportion of those incomes on spending, while those on higher incomes can save or invest money. In Ireland we have one of the highest VAT rates in Europe, at 21% – I think there is, or at least was until recently, only one Nordic country with a 25% rate, with most countries on between 17 and 20%. We did see a drop to 20% for a brief period in the late 90s, but that only lasted around a year, if I recall correctly. Incidentally, that rate change caused huge headaches in the unit I worked for, where all formulae and publications had to be retooled not once but twice.