From top: Minister for Finance Paschal Donohoe; Michael Taft
Put the cat out, pop the popcorn and pull up a chair: the great pre-budget tax debate is commencing. For the past few years we have heard that our income taxes are high, very high, too high and this is creating all sorts of economic havoc. Enjoy the show.
One example of this is the claim that Irish taxpayers enter the top rate of tax earlier than any other EU country (bar Denmark). This is true – but the claim that this shows Ireland has high income taxes ignores two issues.
First, in many EU countries low-paid workers pay a much higher marginal tax rate (marginal tax rate is the tax you pay on the next Euro you earn; it is not the effective tax rate – that is, the tax paid as a percentage of income).
For example, at €30,000, Austrians pay 35 percent marginal income tax rate while Belgians pay 40 percent; and this doesn’t include much higher social insurance (PRSI) rates. In Ireland, taxpayers pay only 25.5 percent.
So, yes, Irish taxpayers enter the top rate of tax earlier than Austria and Belgium – but they pay much lower marginal tax rates on lower income.
A second issue is that most other EU countries have more than two tax rates; therefore, their taxpayers progess through a number of tax rates before reaching the top. Ireland has only two rates (discounting USC): 20 and 40 percent. For instance:
Austria has six tax rates – from 25 percent at entry level to 50 percent at the top
Belgium has five tax rates – again, from 25 to 50 percent
France has four tax rates – from 14 to 45 percent
Netherlands has four rates – from 8.9 to 52 percent
Luxembourg tops them all – with 18 tax rates from 8 to 38 percent. The point here is that the reason Irish taxpayers enter the top rate of tax early is that there are no intermediate rates between entry and top level.
But you won’t hear any of this in the debate. You’ll get sound-bites and ‘oh, isn’t this terrible’; but an analysis of comparative tax structures will be lacking.
Fortunately, we can make relatively robust comparisons between Irish personal tax levels and other EU countries courtesy of Eurostat’s informative Taxation Trends in the European Union.
The two ways of measuring this tell similar stories.
First, we look at employees’ personal tax (including social insurance and sur-taxes like the USC) as a percentage of gross, or aggregate, wages.
We find that personal taxation on Irish employees is slightly higher than our peer-group average. It ranks 4th and is ahead of ‘high-tax’ Sweden (which surprises many).
When we look at employees’ personal tax as a percentage of national income we see a similar story.
In this measurement we see Ireland (using the CSO’s special GNI*) falling below our peer-group average – but only marginally so.
These measurements do not speak to the progressivity of different tax systems – they just take the total amount of personal tax revenue as a proportion of wages and national income. In essence, both these measurements show that Irish employees’ personal taxation is approximately average.
We will still hear arguments – about how the Irish personal taxation system is a disincentive to employment creation.
The broad parameters of the tax system have not changed in the last four years, although there has been a slight reduction in marginal tax rates with the cuts to USC. And yet during that period employment has increased by 270,000, or 14 percent. That doesn’t look like much of a disincentive.
Or you will hear that our tax system is a disincentive to earning more. Yet, in the last four years we see the weekly income of managers and professionals – who are likely to be in the top tax rate – rise by 11 percent compared to an economy-wide average of five percent. Again, the tax system doesn’t seem to be a disincentive to top rate taxpayers.
Could we devise a more efficient taxation system? Yes, of course. Is personal taxation a priority in this budget? No.
We are an average personal–taxed economy, and clearly our structure is not a disincentive to employment creation and wage increases.
The priorities lie in housing, childcare and education; in infrastructural deficits; in the quality of our public services and in a social protection system that can provide security to everyone – including those in the workforce.
Next up: the ‘we-spend-too-much’ show. Let’s get some more popcorn.
Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front.
Rollingnews
“Or you will hear that our tax system is a disincentive to earning more”
I’m sorry, this is nonsense. No one has ever been disincentivised from earning more. They’re disincentivised from working more. If people’s wages went up, they’d earn more without working more. They wouldn’t be disincentivised from accepting that pay increase because of high taxes. There’s no evidence that people are either working harder or working longer hours in the data cited.
Also, this seems like an argument in favour of higher marginal tax rates on low paid workers?
I thought that too, Taft hasn’t proven that our marginal taxes aren’t punitive, rather he has demonstrated that our tax system is very progressive, that the average tax payer has quite a low effective tax rate by international standards, and that the system is unbalanced against he squeezed middle. My marginal tax rate is 52%. My effective tax rate is 35%, and climbing.
I’m all for a 3rd and 4th rate of tax – 10%. 20%, 30% and 40% – instead of continuously bringing people out of the marginal bracket, or out of the tax bracket altogether.
I’m guessing the article is aimed at not giving us a tax cut in the budget, which I happen to agree with, but not for the same reasons. I don’t want a tax cut, I don’t think it’s the right time, I’d rather the books were balanced first, with any spare money invested in services. We should be running a surplus by now but we’re still patting ourselves in the back for overspending by less than 3% of GDP.
If you were earning 185K (like, say, the Taoiseach) your effective tax rate would be only 45% (top 2%)
To be in the top 1% of earners[1] you would need to earn €204K and your effective tax rate would be 46%;
But you would need to earn over 650K to break the 50% effective tax rate.
[1] The unit of analysis in the data are tax units and not individual taxpayer
Owen C – no, this is not an argument for a higher or lower marginal tax rate on any taxpayer. Just a comparison of the different structures which doesn’t feature in the debate. As I tried to show, we are an income tax-average economy. Issues regarding distribution of taxation are important and I hope to address these in the future. Personally, I wouldn’t be in favour of a higher marginal tax rate on lower income groups given that wages in hospitality and retail are so low compared to our EU peer-group and the lack of collective bargaining coverage: http://notesonthefront.typepad.com/politicaleconomy/2018/02/the-following-is-a-story-about-how-a-single-stat-that-seemingly-tells-a-positive-story-actually-conceals-a-structural-economi.html
Ireland has only two rates (discounting USC):
Is USC optional or something? so it doesn’t have 2 rates, it actually has effectively 6 rates
5 rates:
€1 to €12,012 @20.5% (but with tax credits, this is effectively 0.5%)
€12,013 to €19,372 @22%
€19,373 to €34,550 @24.75%
€34,551 to €70,044 @44.75%
€70,045+ @48%
do those %s include usc, cian?
yes. this includes USC
Cian – you are correct. However, the EU database doesn’t provide a breakdown of the rates for what it calls ‘sur-taxes’ of which USC is included. It just provides the top rate: 8 percent – which isn’t applied across the board. So I could compare with other countries and their sur-taxes. I also didn’t include sub-central tax rates (that is – regional and local governments like Spain, Germany, etc.). You include those and the tax rate thresholds go all over the place.
‘EU Peer Group Average’ seems like a very carefully chosen term, but it doesn’t appear in the source document that’s linked. It’s not difficult to make a statistic look favourable compared to an average if you get to cherry pick the data points used to calculate the average. So can Michael explain which countries are included in the ‘peer group’? If it’s not the EU-28, then why not?
bt1000 – Our EU peer-group refers to countries with a similar income level as ourselves. They refer to the Northern and Central European economies which excludes the poorer Meditrerranean countries (Greece, Portugal, Spain and Italy) and the New Member States which are even poorer – such as Bulgaria, Romania, etc. The Nevin Economic Research Institute uses the same concept (though they include Luxembourg which I don’t due to the fact that so many people employed there don’t live there and their over-reliance on the financial sector). The IMF also uses ‘small open economies’ which have a similar economic structure as Ireland – small domestic economy, reliance on exports.
The problem is not that we pay too much income tax.
The problem is the lousy quality of public “services” we get for it.
Another agenda driven piece thinly veiled to argue for higher taxes. Any increases will be swallowed up an inefficient bloated public sector and health service.
Increased spending in recent budgets has mostly been blown on restoring public service pay to unsustainable Celtic bubble era levels. The architect of ‘benchmarking’ a dimwit who directly benefits each time he receives his pension cheque.
I assume he cashes it in the pub as he has no need of a bank account?
This is self-serving nonsense
He highlights that we have the 4th highest personal tax rate, and then claims we are an average personal taxe rate economy. Which is it?
MaryLou’s ArmaLite – using the gross wages calculation, Ireland ranks 4th at 28.6 percent; the average for all the other countries are 27.0 percent. So it’s pretty close to average. In the GDP/GNI* calculation, Ireland ranks 8th (out of 10 countries). However, the average is 10.9 percent while Ireland stands at 10.4 percent. So while below average it’s only marginally. That’s why in both cases I use the term ‘approximately average’.
Thanks as usual Michael. Solid work, and good comments.
Solid agenda-driven self serving work, dressed up as something else.
do you disagree with Michael? Specifically:
“We are an average personal–taxed economy, and clearly our structure is not a disincentive to employment creation and wage increases.
The priorities lie in housing, childcare and education; in infrastructural deficits; in the quality of our public services and in a social protection system that can provide security to everyone – including those in the workforce.”
and if so, what is your proposal?