To tax or not to tax: The relationship between taxation and welfare

pictureAs a newly arrived Dane in Ireland, I have found myself highly puzzled by the public resistance and mass demonstrations across the country against the recent introduction of water taxes. The unwillingness to pay for a utility is unfamiliar to Danish citizens, recognising the fact that the provision of clean drinkable water, as well as maintenance and improvement of network infrastructures, all comes with a price tag. Danes are one of the most “taxed” in the world, with top marginal wage taxes of up to 60-70 % (Kleven, 2014) of income. Despite this, the Danes are also labelled the happiest people in the world. So the high tax rates do not seem to bother the Danish taxpayers. How can that be? In this article, UCD politics student, Ateebah Chaudhry, argues that the difference between the Danish and Irish attitude towards taxation explains the different trajectories of their social states.

Kluft et. al. (2014) suggests, in a report for PwC Ireland, that a possible explanation to this question could be found in the general public satisfaction with the social services that the Danish state is providing – covering all aspects of the life cycle: from affordable childcare, free quality education – even on tertiary level – to free universal health care, including free GP consultations and hospital care. These benefits are reflected in the taxation levels constituting 50% (Kleven, 2014) of the Danish GDP, compared to the Irish level of approximately 30%. (Fitzgerald, 2015)

As Kleven (2014) emphasizes in his report on Scandinavian taxation trends, Denmark while ranking amongst the world’s highest in terms of income per. capita, together with the majority of the other Scandinavian countries, poses an example of the benefits of raising large amounts of tax revenue for redistribution and social insurance.  The economic and social success of Scandinavia is based on the idea of individual contribution to a common public account, to the benefit of all. Taxes are paid with the expectations that the state will provide the necessary public services for all citizens and not only those who are able to pay. The Scandinavian countries have chosen a high level of provision of public services combined high levels of tax burden, ensuring sustainable social outcomes.

In comparison to the rest of the EU, figures (Fitzgerald, 2015) related to Ireland point towards lower average levels of taxation. These low taxes ultimately have an effect on lower supply of public services leading to a higher individual costs for the citizens as they now have to pay for services on the private market that would otherwise be provided or subsidized by the state, for instance childcare. Introducing additional charges and taxes are, in all cases, perceived by the taxpayer as an unpopular move. Unless a direct correlation between higher tax rates and better public service provision is prevalent, the unwillingness to accept new taxes and charges will prevail.

In this context, in order to preserve and possibly increase public services, Ireland could advantageously reform the structure of their tax base. In an analysis of the Irish levels of taxation and their effect of public services, O’Connor (2014) amongst others, points out that in Ireland the middle income group is subject to a tax burden comparable to Danish tax levels. However the amount of tax paid by the lower and higher income groups in society is remarkably lower. As a solution to this uneven taxation of the population, a redistributional method of approach where expansion the tax base, could result in great gains for the Irish state (even though it would be an unpopular move both amongst low and high income families).

In a recently published report from the Irish Think Tank for Action on Social Change (TASC) (O’Connor et. al., 2014), it is concluded that the majority of taxpayers benefit more from maintaining public services provided through government spending rather than paying less taxes. In a scenario where taxes are cut the increase in net income would not outweigh the linked loss in the value of public services.

When discussing the introduction taxation of water in Ireland it is important to keep in mind that water charges, are about more than simply recovering the cost of providing water services. Another TASC (2013) report emphasizes that taxes can be used not only to redistribute wealth or finance public spending but also act as an instrument of behavioral change. The water charges incentivise environmental consciousness in terms of water conservation and consumption, discouraging wasteful behaviour.

In addition, the choice of the taxation and public spending models also reflect the values and norms promoted in society.

An example of this can be seen in the choice of not subsidizing early childhood care could be an expression of preserving traditional family patterns whereby the child is nurtured by family members rather than in institutionalized childcare. High fees in connection with childcare encourage a remnant of core family values in society. This creates a narrative of tax as a proxy of social motivation and cultural influences. The main difference in attitude is emphasized through these, and presents another possible explanation to the different levels of willingness to pay tax when comparing Scandinavian countries with Ireland. The particular example of childcare used above has proven to have further implications for the women’s career opportunities and the gender ratios on the labor market, which is another factor of comparison that proves to be of great difference between Denmark and Ireland.

Thus, based on these observations, the connection between willingness to pay taxes and the quality of public welfare is of particularly clear in the case of water charges. Assessing this situation/case with a foreigner’s eye it has been made clear to me that a problematic relationship between public service provision contra taxes prevails in Ireland. In Denmark the efficient public service delivery by the government is regarded a social guarantee which implies a public right to demand an appropriate level of affordable and quality utilities as you are being taxed with this in mind. With no obvious correlation between increasing taxes and better services, the Irish taxpayers will not want to pay for water.

Further, another important concluding point to emphasize regarding the introduction of water charges in Ireland is the fact that this has been regarded as a breach of the democratic right to clean water, rather than a way to finance public spending on a utility. The narrative around the transition has also been affected by a discourse of a fear of privatization of the utility, and thereby depriving the democratic control of free access to water.

Ateebah H. Chaudhry is a 2nd year undergraduate student in UCD, majoring in Politics and International Relations. The following piece was written in connection with the module Capitalism and Democracy, and touches upon the dynamic relationship between taxation and the welfare state.

Bibliography:

Kleven, H. J. (2014) How can Scandinavian tax so much? Journal of Economic Perspectives. (28)4, pp. 77-98

Convery, F. (2014) Adjusting the tax burden. Public Policy. [internet] Available from: http://www.publicpolicy.ie/adjusting-the-tax-burden/ [Accessed the 21nd of October 2016]

TASC (2013) Paying for water. Equity, Efficiency and Sustainability. [internet] Available from: http://www.tasc.ie/download/pdf/tasc_paying_for_water2.pdf  [Accessed the 30th of October 2016]

O’Connor, N. et. al. (2014) Progressive alternatives to reducing public service through tax cuts.  A Defense of Sanctions. [internet] Available from: http://www.tasc.ie/download/pdf/tasc_a_defence_of_taxation.pdf [Accessed the 2nd of November 2016]

Fitzgerald, J. (2015) “Better public services will inevitably mean higher taxes”, Irish times, 2nd of November [internet] Available from: http://www.irishtimes.com/business/economy/better-public-services-will-inevitably-mean-higher-taxes-1.2414323 [Accessed the 27th of October 2016]

 

Kluft, J. (2014) A comparative study within the EU and the US. Profit taxation and the Public Sector. [internet] Available from: https://www.pwc.nl/nl/assets/documents/profit-taxation-and-the-public-sector..pdf [Accessed the 2nd of November 2016]

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