Pearse Doherty (Donegal, Sinn Fein)
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60. To ask the Minister for Finance his views on assertions in the European Commission’s 2016 country report on Ireland that our tax revenue to gross domestic product ratio is low compared with the European Union average and is marginally decreasing, that tax cuts provided in the 2016 budget are likely to reduce further this ratio and that although Ireland's tax system is highly progressive overall recent measures on personal income tax are regressive; how he will address these concerns; and if he will make a statement on the matter. [12257/16]

Michael Noonan (Limerick City, Fine Gael)
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The European Commission's 2016 Country Report makes a range of comments in regard to the Irish tax system including those highlighted by the Deputy. In addition, the accompanying Country Specific Recommendations for Ireland include a number of recommendations concerning the Irish tax system.

With regard to the ratio of tax revenue to Gross Domestic Product (GDP), on this measure, Ireland has a relatively low tax burden by European standards according to the latest data. In 2014 total taxes amounted to 30.5% of GDP compared to the EU-28 average of 37.1%. However, given the exceptional gap between GDP and Gross National Product (GNP) in Ireland, the Irish Fiscal Advisory Council (IFAC) have argued that a more appropriate measure of fiscal capacity is a hybrid measure taking GNP plus 40 per cent of the gap between GDP and GNP.  On this basis, the tax take share rises to 33.2%.

If social security contributions (SSC) are excluded from the comparison (given the stronger insurance character of these systems in other EU countries compared with Ireland), the tax take at 24.7% of GDP is marginally below the EU-28 average of 25.6%. As a percentage of the IFAC measure this rises above the EU average to 26.9%.

The April 2016 Stability Programme Update indicates that the tax burden is forecast to fall to 28% of GDP in 2016 from 29.2% of GDP in 2015. Comparing 2015 and 2016, the reduction in the tax to GDP ratio can be primarily attributed to the growth in nominal GDP from €214,625 million to €230,950 million rather than the change in tax revenue from €62,675 million to €64,650 million.

The progressivity of the tax system should be looked at in conjunction with other elements such as welfare and public expenditure which in combination give a more comprehensive picture. Although this is more difficult to do, the ESRI's Social Welfare and Income Tax Changes (SWITCH) model captures the main changes in the income tax and welfare system on equivalised household disposable incomes. The Social Impact Assessment (SIA) of Budget 2016, published by the Department of Social Protection and contributed to by my Department used this approach. It showed that the greatest percentage gains in household income were for the second income quintile at 2 per cent, followed by the first quintile (the bottom 20% of households by income) at 1.8 per cent. The 3rd, 4th and 5th quintiles gain just below the average, at around 1.5 per cent.

However, this SWITCH analysis is a static analysis. Separately SWITCH calculates Marginal Effective Tax Rates (METRs) which measure what part of any additional earnings are "taxed away" through the combined effect of increasing tax and decreasing benefit. The Social Impact Assessment found that over three quarters of people employed are estimated to experience a reduction in their METR as a result of Budget 2016. To the extent that individuals take up employment as a result of reduced METRs they would be better off than the distributional analysis indicates.

The Irish income tax system remains highly progressive. The most recent data from the Organisation for Economic Cooperation and Development's (OECD) for 2015 shows Ireland has the most progressive income tax system of the EU members of the OECD and is the second most progressive of all members of the OECD.

Finally, it should be noted that the elements of the Commission's 2016 Country Report highlighted by the Deputy did not feature in the Country Specific Recommendation for Ireland. These emphasised the importance of an efficient and growth friendly tax system as well as broadening the tax base as the most important issues for the Irish tax system.