Ireland’s social security contributions have traditionally been considerably lower than the OECD average

DEATH AND taxes, it is said, are life’s only inevitabilities. With the budget just days away, most of us will feel the taxman tapping on our shoulders sooner than we’ll feel the bony finger of the grim reaper prodding us on to the hereafter. As we await the details of Budget 2012, looking at the big tax picture might help reconcile us with our fate.

How do Irish taxes compare with those in peer countries, how has the tax mix changed over time and what are the big international trends in taxation? The publication this week of the Organisation for Economic Co-operation and Development’s annual report on how its 34 member countries tax their citizens, Revenue Statistics 1965-2010, OECD, provides some answers.

Taxes have never been anything but controversial and views on taxation are still as varied as they have ever been. Today’s liberals and free marketeers see the taxing by the state of individuals’ incomes and wealth – whether they like it or not – as an assault on liberty. For them, taxation is at best a necessary evil which should be kept to minimum.

By contrast, collectivists and statists of various hues prize individual liberty less (and not at all in some cases). They believe not only in the power of government to make people’s lives better, but also that contributing to the public purse generates cohesion – a sort of societal buy-in if you like.

Conventional wisdom has it that the former group have been in the ascendancy since the 1980s. The OECD’s figures show the conventional wisdom to be wrong.

Since the supposed rise to political dominance of tax-cutters and small staters in the 1980s, governments almost everywhere in the developed world have been putting their hands deeper into citizens’ pockets.

As the first chart shows, the aggregate tax take across the OECD continued to rise in the 1980s and 1990s, albeit at a slower pace than in earlier decades when public provision of services underwent a historically unprecedented expansion. Only over the past decade has there been a stabilisation, a trend abruptly interrupted by the Great Recession which caused tax revenues to fall very sharply.

This trend not only refutes the argument that “neoliberals” have been calling the shots for decades, it undermines the claim that a “race to the bottom” in taxation is under way.

Among those who are hostile to globalisation, it is frequently said that pressure to retain and enhance competitiveness has pushed governments everywhere to cut taxes. The argument is intuitively powerful, but the evidence from across the OECD in general does not support it.

Nor does specific evidence from developing countries. In fact, the evidence from such countries points to their moving in the direction of the high-tax rich world, rather than vice versa.

When compared to Europe and North America, the four OECD countries that were once relatively poor or remain so today – Chile, South Korea, Mexico and Turkey – have all seen taxes as a percentage of GDP rise over the long term. In Turkey’s case the ratio has more than doubled since the 1980s, while in Korea the increase has been slightly less than a doubling over the same period.

Only a handful of countries in the 34-member OECD have recorded a significant decline in tax when measured as a percentage of gross domestic product (GDP). As the first chart shows, Ireland was one of those countries.

Although these figures exaggerate the widening of the gap between this State and the OECD average (when measured as a percentage of gross national product Ireland is much closer to the average) they are among the best comparative data available.

As both charts illustrate, Ireland was a relatively high tax country in the 1980s. The second chart shows that an unusually high proportion of the tax take then came from indirect taxes on goods and services, such as value added tax (VAT) and excise duties.

This will not surprise those who recall the ritualised annual slapping of ever more tax on the “old reliables” in that grim decade.

Once order had been restored to the public finances in the 1990s, Ireland came broadly into line with the average amount raised from most taxes, including indirect taxes, such as VAT and excise, as well as direct taxes on household incomes and corporate profits.

But there has consistently been one big exception. Now and over the long term, the largest difference between Ireland and the OECD average has been in social security contributions, as chart two makes clear. These, which in Ireland are paid in the form of Pay Related Social Insurance (PRSI), have traditionally been considerably lower than the average elsewhere. That is true both for the rates of PSRI paid by the employer and the employee.

For all the talk about property taxes and wealth taxes here, and for all the focus some of our EU partners put on corporation tax, the truth is that in all countries such taxes are of limited fiscal relevance.

Government revenues are overwhelmingly accounted for by income tax, social insurances and indirect “consumption” taxes (mostly VAT). If Ireland is to move towards the average overall level of tax that would imply considerably higher PRSI contributions.