Some People Pay Much More Tax Than Others (ITI Report)

Nat O'Connor: The Irish Tax Institute (ITI) has just published Perspectives on Ireland's personal tax system, which will be discussed on RTÉ Primetime tonight. Their main argument is that taxes are skewed, with those on high and "middle" incomes paying too much, and those on low incomes paying very little.

There are a number of problems with the ITI's analysis, including the prominence given to unorthodox measurements and a lack of context for their comparison with other countries.


The ITI describes itself as follows: 'The Irish Tax Institute is the leading representative and educational body for Ireland’s AITI Chartered Tax Advisers (CTA) and is the only professional body exclusively dedicated to tax. Our members provide tax expertise to thousands of businesses, multinationals and individuals in Ireland and internationally. In addition many hold senior roles within professional service firms, global companies, Government, Revenue and state bodies.'

Unorthodox Measures
The ITI's summary of Ireland's personal tax system (page 5) is odd. They focus on how much more tax one person pays than another. This is not a standard measurement of the impact of personal tax, and the comparisons are between income levels that have been at best arbitrarily chosen. For example, a worker on €25,000 pays 5.6 times the tax of someone on €18,000, while earning 1.4 times the income.

Why pick these income levels? There's no way to compare this with another country, as cost of living and the level of salaries vary too much.

Someone on €18,000 is basically someone working full-time on the minimum wage. A single person on this income will pay €600 in total; €300 in income tax, €300 in USC and no social insurance (PRSI). A person on this income is well below a Living Wage (www.livingwage.ie), and so is likely to be deprived of some basic goods and services that other people take for granted. How much tax should this person pay? Is €600 a reasonable contribution given the cost of rent or energy in Ireland?

Someone on €25,000 pays €3,368 in total; €1,700 in income tax, €668 in USC and €1,000 in social insurance. Indeed, that is 5.6 times more tax. But what does that particular metric tell us? A single person on €25,000 does earn a Living Wage. His or her after-tax income will allow a modest minimum standard of living.

At the other end of the spectrum, someone on €100,000 earns 5.6 times the minimum wage earner on €18,000 but pays 'almost 66 times the amount of tax'.

So what? The person on €100,000 has an income enough to enjoy a Living Wage standard of living four times over. Someone on €100,000 pays €39,492 in taxes; €29,940 in income tax, €5,043 in USC and €4,000 in social insurance. Nonetheless, after meeting his or her essentials, someone on this income has a lot of room for comfortable living and luxuries: a larger home, home ownership, car ownership, foreign holidays, investments, meals out, etc. Is this a fair level of tax?

But wait. The ITI has not taken into account tax breaks, which in Ireland are plentiful and generous for things like private pensions. When these are taken into account, the person on €100,000 pays less tax. If this person puts €10,000 away for a pension, he or she will then pay €4,000 less income tax.

There is another factor to be taken into account. Those on every income pay indirect taxes too, like VAT and motor tax. But these take a bigger amount from smaller incomes, which swings the tax pendulum back again and makes the difference in the amount of tax paid smaller between low and high earners. (A NERI paper deals with this point in detail).

Comparison with Other Countries
The ITI describe someone on €55,000 under the heading of "squeezed middle". People on those sort of incomes are well up the income ladder, nowhere near the middle of income earnings from employment, let alone income from all sources (including pensions and welfare).

The ITI argue that someone on €55,000 pays more tax than someone in Sweden, Spain, Switzerland, the USA or the UK. But the ITI do not take tax breaks into account, which simply do not exist to the same extent in Sweden or Spain for example.

As well as ignoring tax breaks, another problem is that you can't compare countries' tax systems without comparing what goods and services they receive in exchange for their taxes. In fact, the big difference is the much higher rate of social insurance paid in other European countries, which provides for lower healthcare costs, pension security, stronger unemployment security, longer maternity (and paternity) cover, etc.

A further issue is that what really needs to be compared is household taxation, not just personal income tax. For example, how are married couples treated versus singles? What about property tax, water charges and other levies? In most European countries these are significantly higher. So too in the USA, where property tax alone can be ten times higher than what is paid in Ireland.

It is true, as the ITI point out, that someone on €100,000 or €150,000 does pay more personal tax in Ireland than in the USA or UK. But the UK and USA report very high levels of post-tax income inequality. (Deep inequality is seen as a partial cause for the popularity of presidential candidate Trump in the USA as well as UKIP and the Brexit vote in the UK, although there are other important reasons for these events too.) Is emulating UK-USA income inequality something that people in Ireland want to do?

In fact, Ireland has very high market income inequality, but manages to reduce it greatly through taxes and cash welfare transfers. But our ability to do this is stretched, and Ireland could very quickly become much more unequal after-tax, if the tax system is weakened.

The proposed abolition of USC, for example, is an example of exactly that kind of weakening. And as the above examples show, it is the high earners who have most to gain from USC's abolition.

Four Questions
The ITI report poses four questions for the future of Ireland's personal tax system (p.11). What follows are my own answers to those questions.

Can we continue to create and judge personal tax policy on a Budget by Budget basis?
I agree with them, we should not do this. But we do need to talk about the whole tax system, not just personal taxation. And that includes tax breaks too, as well as property tax and all the rest.

Is there a point at which a country's personal tax system becomes overly progressive?
That's a silly question. A better question to ask is whether or not the tax system is fair. Talking about excess "progressively" is just using technical jargon that covers up the basic question of fairness. In my opinion, everyone should pay some level of taxes—as indeed they do, through VAT if nothing else.

What the ITI report implies is that people on lower income should pay more taxes. If the state invests in affordable housing, subsidies for childcare, etc. then it would be absolutely reasonable to ask everyone in society to contribute more to pay for these things, and low income earners in Ireland do pay very little tax compared to what they would pay in other EU countries, precisely because we rely on cash in the private market to provide so many goods and services that have at least greater subsidies if not public provision abroad.

Do high tax rates above the average wage (squeezed middle and upwards) impact our competitiveness and create issues around incentive to work, labour costs and ability to attract talent and skills?
There's a lot packed in here. They are talking about wages from €55,000 and above, so high earnings as far as I am concerned.

Ireland has high GDP growth. These tax levels are not effecting that. Nordic countries have the highest tax levels, and very high productivity. So no problem there either.

The marginal rate of personal taxes does not tell the whole story of labour costs, as employers also pay additional contributions to social insurance. These are spectacularly low in Ireland, where you could double employer's PRSI rate and it would still be lower than the EU average.

Does higher taxation affect talent? If a star employee is put off moving to Ireland from the UK due to an extra few thousand in taxes, employers might point to the lower property tax they'll pay here or just make up the difference. The employer would probably still gain from paying a higher salary in Ireland than UK, because employers' social insurance is lower here.

Ultimately, anyone wishing to work inside the EU may face higher personal tax rates than those in the UK or further afield. Brexit may well lower pressure on Ireland to compete with the UK for lowering taxes on high earnings.

Have we personal tax system in Ireland that meets our social needs but is also suitable for a small open economy?
Denmark is a classic example of a small open economy. They have the higher personal taxation in the world. So the two things are not incompatible.

Most north-western European countries still offer considerably more in terms of public services, social protection, subsidies, etc. So it boils down to very different socio-economic models, and so in the end we need to move our focus off personal tax rates and talk about a much bigger picture about the role of government and public spending in the economy and society...

Dr Nat O'Connor     @natpolicy

Nat O’Connor is lecturer in social policy in UCD’s School of Social Policy, Social Work and Social Justice and part-time policy specialist at Age Action Ireland. Previously Director of TASC, Nat also led the research team in Dublin’s Homeless Agency.

He has taught politics and social policy since 1999. He has a PhD in Political Science from Trinity College Dublin and a MA in Political Science and Social Policy from the University of Dundee. He is a Fellow of the Higher Education Academy (UK), a member of the National Economic and Social Council (NESC) and chairperson of the Irish Social Policy Association (ISPA). You can find him on LinkedIn (natoconnor) and TwitterX @natpolicy