Pedro Solbes's message last week was familiar. Just because the times are good, there is no need to loosen the purse strings, the Commissioner for Economic Affairs and Fiscal Rectitude told us in a report on the sustainability of member-states' fiscal strategies. The hairshirt forever!
The report bears revisiting, however, for its wealth of comparative detail and analysis on the radically different ways European governments tax and spend our money. Here is McCreevy v Social Europe in the raw.
The Solbes study compares the effective rates of taxation on labour, capital and consumption (the ratio of indirect taxes to private and public consumption). That on labour is calculated by adding total social security contributions and payroll taxes, known collectively as "non-wage labour costs", to all other direct income taxes on labour, and dividing by total labour costs.
The overall burden of tax in the EU at 42.6 per cent of GDP is some 15 percentage points above the US, and well above Ireland's 34.1 per cent.
The critical differences between the majority of EU member-states and the US lie in their widely diverging rates of consumption taxation and in the difference between their respective rates of non-wage labour costs, primarily the social insurance contributions needed to pay for developed welfare provisions.
Two clear groups of EU states emerge from the figures, with the UK and the poorer cohesion countries of Spain, Portugal, Greece and Ireland much closer to the US than to the European social model, and all with rates of effective tax on labour of under 30 per cent of GDP.
On the other hand, Sweden taxes labour at 51 per cent, and Denmark, Austria, Belgium, Germany and France all have rates ranging in the 40s.
The gap is qualitative, a chasm.
Indeed, Ireland's rate of non-wage labour costs and its effective labour tax rate, at 12 per cent and 24 per cent respectively (the lowest in the EU), are so close to that of the US as to suggest they have been deliberately pegged to the latter.
Ireland's rate of capital taxation at 20.8 per cent reflects the EU average and is just two percentage points below that in the US. With the burden of capital taxation, specifically corporate taxation, not yet evenly spread because of tax breaks to manufacturing exporters and the International Financial Services Centre, the real level of capital taxation of multinational firms based in Ireland is well below average levels in the US. Put bluntly, our low taxation of labour makes it easy for them to make profits, while our low capital taxes make sure they can keep them.
Mr Solbes also points to the reality that such differences in taxation on labour between the EU and US have been exacerbated over time. In no small measure, this is attributable to the increased mobility of capital, which has made it more difficult to tax.
Between 1970 and 1999, increases everywhere in the burden of taxation, attributable largely to increases in public spending, have been borne most substantially by increased taxation of labour costs. In the last three decades, the effective tax rate on labour increased by almost 14 percentage points of gross wages in the euro area. However, in both Ireland and the US, the increase is roughly half that.
The figures make Ireland the star performer in Mr Solbes's tax competition league, a benchmark of where all Europe should be aiming, but they also put in perspective the anger of our partners who see the gradual and inevitable erosion of their tax base and thus their ability to sustain an alternative social model. And yet, lest we forget, there is a downside, a price to pay for the worship of competitiveness above social cohesion. Ireland is ranked 16th in the UN human poverty index for developed countries, behind all its fellow EU members except Portugal and Greece. The US is 17th and UK, 15th, while Sweden is the best performer, with the Netherlands second and Germany third.
While our fellow member-states can make serious inroads on poverty through social transfers, Ireland and Britain lag well behind.
Eurostat numbers for those below the poverty line before and after redistributive tax and social measures by the state show that the Danes and the Dutch can use taxation to cut the number below the poverty line by about 60 per cent (from 29 to 11 per cent, and 23 to 10 per cent respectively). Yet Ireland and Britain can only manage half that (34 to 21 per cent, in both cases).
The differences are not just of degree, but fundamental differences of philosophy. They reflect a choice by our partners to involve the middle classes in services provided by the state, and only partly for reasons of social solidarity.
Just as importantly, as the UNDP annual report points out, it is based on the experience "that services for poor people tend to become poor services" and that "the more targeted programmes produce more inequality".
Mr McCreevy is right: we have a choice.
psmyth@irish-times.ie
