Monday, December 28, 2009

Economics 28/12/2009: Irish Earners - amongst highest taxed

Ireland now has some of the highest tax rates in the developed world, and this tax burden shows one of the highest rates of progressivity when it comes to the state dipping into higher earners incomes. Table below illustrates (source here):
Note how dramatic is the tax burden for higher earners in Ireland.

Now, give it a thought. We want to build a 'knowledge' economy. The main input into such an economy is individual skills of the employees. This high skills-intensity of production in the 'knowledge' economy means paying key employees more than in the 'dumb' traditional economy, where physical capital takes up much larger share of total value added. In other words, 'knowledge' economy must compete globally for human capital. The higher the quality of the talent, the greater is the intensity of competition and thus, the more important are the tax rates charged on such labour. Our tax rates simply are inconsistent with such competitiveness.

Funny thing is that most of our media - especially the Irish Times and RTE - keep on banging about the need for creating a vibrant 'knowledge' economy, while at the same time calling for higher taxes on top earners in the private sector.

Given that both papers have absolutely no real economics analysts on board, this contradiction is not surprising - it takes a real economist, with a wide knowledge of economic theory and empirical analysis, to understand the complex nature of productivity and returns to various forms of capital. Ex-banks folks and ex-political correspondents simply won't do here.

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