The welfare state and taxes

Explain what the welfare state is and what services taxes fund in Ireland. Where does the money for a state school or a public hospital come from?

Make a list of five things you use or benefit from that are paid for with taxes, even if you do not notice (the tarmacked street, your school, the health centre, the fire brigade, the sports centre). Explain why taxes are said to be "the price of shared services".

What is Social Insurance (PRSI, Pay Related Social Insurance) and what does it fund in Ireland (pensions, part of healthcare, unemployment benefits)? Explain who contributes (employer and worker) and why it is described as a compulsory collective insurance.

Explain the principle of solidarity in funding the welfare state and apply it to this case: a healthy person with a good salary pays taxes that fund a hospital they might not set foot in for years. Why do we accept this system?

Distinguish between direct and indirect taxes and classify the following: VAT, IRPF (personal income tax), corporation tax, and fuel duty. Who pays them and what are they levied on?

A bicycle costs $\text{€}\ 400$ excluding VAT and the standard rate of $21\ \%$ is applied.

1. a) Calculate the VAT and the final price.
2. b) Explain why VAT is considered an indirect tax.

Taxes can levy income, consumption or wealth. Classify the following: VAT, IRPF (personal income tax), the property tax (IBI) and inheritance tax. Explain what each one is levied on.

In Ireland, not everything has the same VAT: there is a standard rate ($21\ \%$), a reduced rate and a super-reduced rate. Explain why bread, medicines or books have lower rates than a mobile phone or a television: what fiscal policy criterion lies behind it?

What is the tax rate? Calculate how much is paid with a rate of $10\ \%$ on a taxable base of $\text{€}\ 1,000$ and with a rate of $21\ \%$ on the same base. What is the difference between the taxable base and the tax due?

One country has a single tax rate of $20\ \%$ on income; another uses tax brackets: $10\ \%$ up to $\text{€}\ 10,000$ and $30\ \%$ above that amount.

1. a) Calculate how much a person earning $\text{€}\ 10,000$ and another earning $\text{€}\ 30,000$ pay under each system.
2. b) Which system is progressive and which is proportional? Explain the difference.

The figure compares two income taxes: a flat-rate tax and a progressive bracket tax. On the horizontal axis, annual income; on the vertical axis, the effective rate paid.

1. a) Read what effective rate an annual income of $\text{€}\ 40,000$ pays under each system.
2. b) Explain which curve corresponds to each system and what it means that one increases while the other does not.

An income of $\text{€}\ 15,000$ is taxed as follows: $0\ \%$ on the first $\text{€}\ 10,000$ and $15\ \%$ on whatever exceeds $\text{€}\ 10,000$.

1. a) Calculate the total tax due.
2. b) Calculate the effective average rate and explain why it is lower than the $15\ \%$ (marginal rate) paid on the last bracket.

An annual salary of $\text{€}\ 24,000$ is taxed in brackets: $0\ \%$ up to $\text{€}\ 12,000$, $20\ \%$ from $12,000$ to $\text{€}\ 20,000$, and $30\ \%$ above $\text{€}\ 20,000$.

1. a) Calculate total tax and the effective average rate.
2. b) Compare the average rate with the marginal rate (the rate paid on the last euro earned) and explain why confusing them leads to mistakes in public debate.

You are asked to design the personal income tax of a fictitious country with three objectives: raise enough revenue, be progressive and not punish effort with sky-high marginal rates.

1. a) Propose a bracket table with specific rates and justify it.
2. b) Calculate how much an income of $\text{€}\ 20,000$ and one of $\text{€}\ 60,000$ would pay under your table, and the resulting average rates.
3. c) Defend the degree of progressivity you chose against a flat rate of $25\ \%$.

The Government needs to raise more revenue and is hesitating between raising VAT on cinema tickets or creating a tax on large fortunes.

1. a) Analyse who is affected by each option (incidence): who goes to the cinema and who owns large fortunes?
2. b) Compare both options using the criteria of expected revenue and equity, and reason what data you would need to decide.

The Irish Government, through Revenue, creates a deduction in income tax for young people's rent.

1. a) What objective does the tax incentive pursue?
2. b) Anticipate a frequent unintended effect of housing aid (it gets passed on to rental prices) and explain when this happens.
3. c) How would you evaluate whether the deduction has worked? State indicators and the comparison.

In a parliamentary debate on taxation, one member of parliament states: "If we raise the top marginal income tax rate from $45\ \%$ to $60\ \%$, revenue will fall because high earners will stop making an effort or leave the country." Another MP replies: "On the contrary, to maintain their net standard of living after tax, professionals will have to work even more hours, so we will collect more."

1. a) Identify the two opposing microeconomic effects (substitution effect and income effect) underlying each MP's argument and explain how each affects the labor supply.
2. b) Use the logic of the Laffer curve to predict under what empirical conditions the first MP would be right and under what conditions the second would be right.
3. c) Imagine you are advising the Ministry of Finance: what empirical variables or indicators (labor supply elasticity, international tax mobility, avoidance opportunities) would you ask to analyze before setting that $60\ \%$ rate, comparing it to a moderate rate of $20\ \%$?

Consider two taxpayers with the same annual income level (€60,000):

• Aoife, a surgeon at a public hospital, is taxed entirely on earned labor income in the general personal income tax base (subject to an effective average rate of $28\ \%$ and a marginal rate of $45\ \%$).

• Seán, an individual investor, earns exactly €60,000 in capital gains from the sale of stock on the stock market, taxed in the savings base (subject to an effective average rate of $21\ \%$ with rates ranging from $19\ \%$ to $23\ \%$).

1. a) Evaluate this situation in light of tax equity principles: is horizontal equity fulfilled? What about vertical equity? Justify your answer using the data for Aoife and Seán.
2. b) The government is considering unifying both tax bases so that capital income is taxed at the same rate as labor income. Predict what possible behavioral responses (tax avoidance, capital flight/offshoring, reduction in savings) could mitigate the expected revenue increase.
3. c) Based on your analysis, justify whether it is efficient and equitable to maintain a dual income tax system (reduced rates on capital compared to labor) or whether a single tax schedule should be applied to all sources of income.

The tax on sugary drinks is paid at source by the distributor, but the price on the shelf rises by almost the whole tax.

1. a) Explain how a tax is passed on to the price and who bears it in the end.
2. b) What does it depend on whether the shop can pass it on in full or has to absorb part of it (think about the elasticity of demand)?
3. c) Analyse who bears this tax more, in proportion to their income: is it progressive or regressive? Justify your answer.

The government is considering raising a tax and is deciding between VAT on cinema tickets and VAT on sugary drinks.

1. a) Analyse each option using three criteria: expected revenue (think about the elasticity of demand), health impact, and equity (who is affected most).
2. b) Decide on and defend your proposal as if you were the tax adviser.

A CO₂ tax that makes fossil fuels dearer is proposed. Low-income households spend a larger share of their budget on energy.

1. a) Explain the regressivity problem of the tax.
2. b) Design compensation mechanisms (an annual green cheque equal for everyone, cuts to other taxes on labour) and reason how they can make the reform environmental and fair at the same time.
3. c) Evaluate your design: does it still encourage saving energy after the compensation? Justify your answer.

Distinguish between tax avoidance (exploiting legal loopholes to pay less) and tax evasion (hiding income, which is a crime). Give an example of each and explain why some people's fraud ends up being paid for by the rest of the taxpayers (fewer services or higher taxes for everyone).

An Irish subsidiary of a tech multinational has a turnover of $100$ million euros in Ireland. However, its pre-tax accounting profit in Ireland is only $2$ million euros, after deducting $85$ million euros paid to its parent subsidiary in the Netherlands for "royalties for the use of software and patents". When applying the official corporate tax rate of $25\ \%$, the company pays $0.5$ million euros in Ireland (an effective rate of only $0.5\ \%$ on its gross turnover).

1. a) Interpret the case: explain what tax engineering mechanism (transfer pricing and base erosion) the company is using to shift profits to low-tax jurisdictions.
2. b) The OECD has promoted an international agreement to set a global effective minimum tax rate of $15\ \%$ (Pillar 2). Predict how this measure would affect the multinational's strategy and whether it would completely solve the loss of tax revenue in Ireland.
3. c) Justify why it is so difficult in practice to get all countries to implement this minimum rate, using the concept of tax competition and the incentive for certain States to act as "free riders".

Analyze the following stylized facts about two European Union economies:

• Country A: Tax burden of $43\ \%$ of GDP. Estimated shadow economy rate of $9\ \%$. Very low corruption perception index ($82/100$) and high citizen satisfaction with healthcare, education, and infrastructure.

• Country B: Tax burden of $33\ \%$ of GDP. Estimated shadow economy rate of $22\ \%$. Medium-high corruption perception index ($50/100$) and continuous protests over healthcare waiting lists and the deterioration of public services.

1. a) Interpret the paradox: why do citizens in Country A evade taxes far less and accept paying higher taxes than those in Country B, despite bearing a tax burden $10$ points higher? Relate this to the concept of "tax morale".
2. b) Use the characteristics of pure public goods (non-rivalry and non-excludability) and the "free rider" problem to refute the claim that "taxes are an illegitimate expropriation and all services should be freely contracted on the market".
3. c) If the Government of Country B decided to raise tax rates to collect more revenue without addressing corruption or the quality of spending, predict what effects this would have on the shadow economy and the legitimacy of the tax system.