Tax tables are hardly the stuff of drama but new research by the Central Bank on the flow of revenues to the Government tells a sobering story of partial recovery from folly and drastic decline. Ahead of the election campaign to come there are lessons here for everyone.

The parameters of this sorry tale are well known. The State collected no less than €47.25 billion in tax in 2007, just before the eruption of full-blown crisis. In the turmoil that followed annual receipts dropped in three years to €31.75 billion in 2010. The loss of a cumulative €15.5 billion in annual tax-raising capacity devastated the public finances.

The path back was arduous. Last year the State collected €41.28 billion in tax, only the first time in six years that receipts exceeded €40 billion. But, as Central Bank researchers Rónán Hickey and Diarmaid Smyth note, total revenues in 2014 still “remained some 13 per cent below their peak”.

They recount how receipts had grown by 75 per cent between 2000 and 2007, with the proportion coming from “relatively stable” sources such as income tax replaced by more cyclically-sensitive taxes such as stamp duty and the capital gains charge. Thus the contribution from income tax declined to one-quarter of receipts in 2006 from one-third in 2000.

At the same time the property boom drove a doubling in the contribution from stamp duty and capital gains tax, and was instrumental in a big rise in VAT receipts.

Trouble followed. “The increasing reliance on property-dependent taxes...meant that the sensitivity of revenues to cyclical conditions in the economy became unusually high. This left the Irish tax base increasingly vulnerable to both internal and external economic shocks, and ensured that the housing market crash, and subsequent movement into recession, had a much bigger impact on the fiscal position than would have otherwise been the case.”

But where are we now? Rather tellingly, Hickey and Smyth note that the ongoing recovery in overall receipts has been driven by income tax. Indeed, they point out that income tax is the only major tax head to have surpassed its pre-crisis level. Such receipts have grown significantly.

Pre-crash times

The 2014 return was some 26 per cent stronger than in 2007, and the total income tax return these days now contributes about 41 per cent of all tax revenue. That’s well up from pre-crash times and reflects the fact that returns from “other” tax heads – including the new property tax and the private pension levy – were still less than half their value in 2014 compared with 2007.

Crucial here is universal social charge (USC) , introduced in 2010. Citing the Revenue, the writers say the USC was responsible for 21 per cent of the €17 billion of income tax generated in 2014. Between 2010 and 2014 the USC and the income levy preceding it contributed almost 40 per cent of the €5.9 billion increase in income tax receipts. PAYE changes drove more than half the increase in these years.

Golden egg

As the election looms all of this underscores both pressure to cut income tax and the practical difficulty in doing so given the State’s reliance on it. This is especially the case in respect of the USC, a golden egg in tax terms and the butt of relentless political attack as a result.

There’s hardly a politician around who won’t promise to overhaul or scrap the USC but this is a slow-burn thing.

The Government has promised to cut income tax next year by between €600 million and €750 million, its aim being to cut tax by some €2 billion over the next three years if it returns to power and the recovery proceeds. This follows a €478 million income tax cut in the current year. These figures are chunky enough but even a €2.5 billion cut between 2015 and 2018 would amount to less than half the €5.9 billion cumulative increase between 2010 and 2014.

This is where political rhetoric around income tax cuts meets the reality of tax increases since the crash. While Hickey and Smyth note that VAT and other taxes are now back to their share of total revenue at the very start of the century, corporation tax and excise duties are still down marginally.

Another factor to note is that the State was a beneficiary in the aftermath of the crash of non-tax revenues arising from emergency support for the banking system. Such inflows, estimated to have brought in close to €13 billion between 2009 and 2014, are in decline as the impact of the crisis dissipates. So taxes drawn from the expansion in regular economic activity will have to compensate. It follows that that the scope for tax cuts will be narrow enough.

* Government revenues in Ireland since the financial crisis -- Central Bank of Ireland, Economic Letter Series, Vol. 2015, No. 7.