Tax heresies and half-baked truths
Posted on October 01, 2016 by Tom Healy
Every heresy begins with a half-baked truth. Recent weeks have seen claims that the overall level of personal taxation in the Republic of Ireland is too high and that particular groups have been unduly burdened especially since the onset of fiscal austerity in 2009. Certainly, taxes were increased over the period from 2009 to 2013. However, many commentators do not point out that very substantial cuts to income tax had taken place from 1997 onwards up to 2007. Moreover, average levels of personal income tax remain low in the Republic of Ireland compared to most other OECD or EU countries – a point to which I will return in this blog. However, there is a sting in the story
‘marginal rates’ are high for many middle income earners and this is where the tax-cutting consensus focusses its main argument. The higher 40% income tax rate kicks in at an annual income of €33,800 for single persons or €42,500 for a jointly assessed couple comprising one earner.
Let’s talk about marginal rates first because this is where the thrust of the arguments of the Irish Tax Institute [ Perspectives on Ireland’s Personal Tax System ] and associated or similar commentary has focussed. Over on Notes on the Front, UNITE economist Michael Taft has ably dealt with some of the misleading focus of the Irish Tax Institute in the blog Tax, Lies and Statistical Tape.
Chart 1, below, compares a wide range of countries in relation to what I will call the ‘headline marginal rate of tax’. I define this as the extra tax people pay in income tax or USC or pay related social insurance on an extra Euro of income. The information is presented for different levels of income and, to keep things simple, I focus for this entire blog on single persons only (The Republic of Ireland has relatively generous tax credits and thresholds for the higher rate of income tax in the case of jointly assessed couples). Persons are compared at the average (median) wage, below average (67% of the median) and above average (167% of the median). All data are taken from the OECD online database. In the case of the Republic of Ireland the OECD report a figure of €34,178 per annum in 2015.
In debates about international comparisons it would be easy to selectively include some countries to arrive at a particular conclusion. I seek to avoid this by including all European countries included in the OECD database plus a number of ‘English-speaking’ OECD countries because, it will be argued, Irish migrants or potential skilled immigrants to Ireland are influenced by average and marginal tax considerations and there has been a tradition of labour mobility between English-speaking countries.
A number of observations are in order:
- Yes, headline marginal tax rates are high in the Republic of Ireland for single persons at the average wage level. Only Belgium and Germany have higher rates (at least the latter being a generally successful economy in terms of growth and competitiveness performance over the last two decades). At 51%, on the ‘extra euro’ single taxpayers were contributing, in 2015, just over half of their additional income to the State in terms of the three main personal income taxes: ‘income’, USC and employee PRSI.
- Marginal rates at 31% for below average wage earners were not markedly out of line internationally. (People below the average at 67% of the median earned €22,899 in 2015)
- Marginal rates for above average wage earners are relatively high by international standards but by no means the highest (Sweden, Denmark and the Netherlands having higher marginal rates at this level). People above the average at 167% of the median earned €57,077 in 2015).
So far so much. The extra income tax single people pay at a fairly average wage is high. The Irish income tax system has a number of unique features including a steep rise from the ‘low’ income tax rate of 20% to the ‘high’ rate of 40% at a fairly low level of income (€33,800 for single persons and €42,800 for jointly assessed income of a married couple/civil partnership where one is working and €67,600 where both are working). In other words, people hit the ‘top’ tax rate very early (and there are only two rates of income tax unlike many other EU and OECD countries).
What many commentators do not point out is that the average tax paid by tax payers at all levels of income is low in the Republic of Ireland. See Chart 2 where the average total of tax (income, USC, PRSI in the Irish case) paid is compared. A radically different picture emerges to that of marginal rates.
A number of points emerge:
- The average tax bill for a single person is among the lowest internationally. Among EU member states, only Estonia has a lower average rate. However, we should not expect a media headline ‘Ireland has the second lowest tax rate for single persons on average wages in the European Union’.
- The average rate is particularly low for workers on €23,000 a year (67% of the median) while it is below average, internationally, for workers at €57,000 a year (167% of the median).
- We should note that the ‘headline’ average rate reflects the estimated tax paid by a worker taking account of the normal personal tax credits but not tax reliefs on pensions, health or annual travel taxsaver schemes (for example) where higher income earners manage to lower the effective or actual tax paid much more than is the case for lower paid workers. In other words, the ‘headline’ rates presented in charts 1 and 2 exaggerate the actual tax paid by high income earners (it is less than the headline figures shown) compared to lower paid workers. Even still, the Republic of Ireland emerges as a low-tax country when it comes to personal income tax.
This is the big picture and one that is neglected in public debate and commentary. If one digs further it emerges that a significant explanation of the extraordinary gap between marginal and average is the complex way in which personal tax credits including jointly assessed couple tax credits interacts with levels of income and thresholds for tax payable. The huge gap between headline ‘marginal rates’ and headline ‘average rates’ is particularly large in the Republic of Ireland. A feature of the Irish tax system is the exemption of many workers or pensioners from payment of income tax (USC being a novelty in this regard when it was introduced in 2010). This mirrors what I call the ‘Irish social contract’, viz, large income and wage inequalities before distribution coupled with lots of heavy lifting by Government through income taxes and welfare transfers. The crown in the jewel of the ‘Irish social contract’ is modest cash transfers (unemployment benefits and child benefit payments) coupled with very inadequate social, health and education services compared to European norms. But that is a story for another day.
No comparison of personal income tax rates would be complete without reference to the shortfall in employee, but especially, employer social insurance. In the Republic of Ireland, employees typically pay 4% social insurance rate while employers pay 10.75%. In the UK (including Northern Ireland which operates under the same system), employees pay 12% social insurance on annual incomes between £8,064 and £42,996 (and 2%, only, on earnings above the latter figure). UK employer social insurance rates are typically 13.8%. Employer social insurance rates are very significantly higher in most EU States. Among EU member states, only the Netherlands has a slightly lower rate (Denmark is not included due to lack of direct comparability). In Chart 3, the Republic of Ireland stands out in having a very low rate of employer social insurance.
What is the significance of employer social insurance? Like employee income tax or employee social insurance employer social insurance is a payroll tax or a tax on the income from labour. However, all such taxes go to pay for social services as well as income protection during periods of sickness, unemployment, retirement or parental leave. In the Republic of Ireland we promise people more ‘money in the pocket’ while continuing to perform well below other countries in the level of social provision in areas such as health, education and income protection. Put another way, we expect a single person on €34,000 a year to provide for their own health insurance and pay high costs for public transport and accommodation while arguing that we are not competitive with other countries – especially the United Kingdom. However, these data show that the average tax take is still very low in the Republic of Ireland for employees and employers (in the latter case both for corporate taxation and payroll taxes paid by employers) and this surely has implications for the quality of life and attractiveness of Ireland for workers and their families.
We should be competing on quality of life, fairness and access to health and education. Some of the most successful and competitive economies in the world combine high levels of taxation with high levels of productivity and more equitable distributions of income before tax.
This is the big picture and we need to see it.