A curious feature of public debate in the run-up to Budget 2015 in the Republic of Ireland next month is the extent of focus on reducing income tax for the top 20% of workers (those paying the top income tax rate). These account for just under 400,000 persons at work and make up 18% of all tax cases.
[There has been remarkably little attention paid to those who have taken the greatest hit as a result of the recession:
- Those who lost their jobs.
- Those who are new to the labour market (typically the young) and finding it difficult to gain a foothold.
- Particular groups who typically depend heavily on the welfare system and for whom employment or adequate training is not available (these are represented by the unemployed under 26 years of age, lone parents and those in precarious employment).
(to the above must be added those in negative equity and who were out of work at the same time). It would be untrue to claim that senior citizens and those who have retired were protected from the impact of recession. Between a collapse in private pension schemes, withdrawal or curtailment of community supports and changes to welfare payments and eligibility as well as rising health and heating costs our senior citizens have also taken a hit. Perhaps a very vocal and electorally powerful group (more than 90% typically vote in elections) were effective in holding off some of the worst ravages of recession. Not so for our young people – especially those forced to emigrate, those who are on almost permanent temporary and precarious employment (some infamous cases of job training programmes included) and those for whom the job seekers allowance has been cut to €100 per week (not even the most ardent proponents of laissez-fair social policies could argue that €100 per week is a living income for a young adult). A new unemployed person who is 24 has the same human economic and social rights and need as a new unemployed person who is 26 years of age.
The sharp rise in unemployment among the young and among first-time seekers of employment is a feature of most European countries that were hit by the ravages of the financial meltdown followed by fiscal austerity. Ireland is no exception. The absence of job opportunities even for those who are well qualified has driven a return to emigration as well as the rise of a new type of precariat – young, temporary, un-pensioned – with no prospect of acquiring, in Ireland, a job or career path that was expected by previous generations. The rising phenomenon of ‘zero-hour contracts’ abroad and at home (even though there are no official statistics for its incidence in Ireland) provides a particularly extreme example of how large parts of the labour market have become casualised. A two-tier or even a multi-tier labour market with different levels of pay for the exact same work and level of skill should be a wake-up call for research, analysis, dialogue and effective policy response.
Meanwhile, the suggestion has been made, in some quarters, that high personal taxes are driving out young people or discouraging return migration. Such suggestions do not stand up to critical empirical inquiry.
Chart 1 provides a summary of some comparator countries across the OECD (including English-speaking ones to which Irish young single emigrants might be disposed to go to). Using the OECD tax-benefit modeller and applying standard tax reliefs (but not other reliefs such as for pensions, health or property) the estimated income tax rate (including employee social security contributions) was just below 18% in the Republic of Ireland. This was lower than all other countries shown in the chart.
Source: OECD Tax Benefit Modeller
What about higher-paid workers who might be deterred from moving to Ireland because income taxes are too high with a marginal headline rate of 52% for employees paying the top income tax rate? Lets look at the case where a couple are both working (no children) and one is earning 167% of the average wage while the other is earning 200% of the average (Chart 2) giving a total combined income from work of €119,000 per annum. While the headline average tax take is moderately above that in all of the other English-speaking countries (New Zealand was the lowest) it is well below that in countries such as Germany, Belgium, France and Denmark. Care is needed in such a comparison because headline rates do not equate to taxes actually paid. It is likely in many countries, but especially Ireland, tax payers can offset various reliefs against tax such as in relation to pensions, health, property and other tax-deductible expenses. The actual tax paid can be significantly less than the average headline rate. The average headline rate is, in turn, much less than the marginal headline rate which, in the case of the Republic of Ireland, is made up income tax, USC and PRSI. So, staying with the example of a couple jointly assessed and earning, between them €119,000 per annum, the estimated average tax bill (PRSI and USC included) came to 32.7% in 2012. This contrasts with a combined marginal rate of 52% if they were assessed as employees or 55% if self-employed. The explanation of the difference lies in the tax credits to which the couple is entitled. However, the actual tax paid might be significantly less than 32.7% depending on how much pension, health and other tax relief is being claimed.
While care is needed in comparing the ‘average wage’ across OECD countries the broad picture is clear: income taxes paid by workers are not above international norms. If anything they are much below them. That young people emigrate is a sad fact of a lack of job opportunities and career structure in many cases. It is not to do with income taxes. When indirect taxes, public water charges, property taxes including Local Council taxes in England and other jurisdictions are factored in it is likely that Ireland is even further below other countries (at least up to now).
We need to get our priorities right. Cutting taxes is not a good idea. Our ‘social wage’ is poor and we need to invest more, not less, in public education, health and care for the elderly/young. And cutting taxes for the top 18% of tax payers is definitely not a good idea.
If we have €195 to spare (the cost of reducing the top income tax rate from 41 to 40% or, alternatively, the cost of raising the threshold for paying the top tax rate by €1,300 per annum 
) then it would be best to use that money to invest in areas of greatest social need including for example:
- target training for young people at risk of long-term under-employment
- reverse the cut in JSA for young people under the age of 26 (estimated cost of €32 million)
- invest in community health services
- invest in homes including emergency accommodation.
Choices at budget time tell a lot about our values and priorities as a society.