A recent OECD report olooks at the progressivity of income tax systems in their 34 member countries. A progressive tax is often simply defined as one where you pay a higher rate at higher income, but the OECD goes a little further, incorporating social security contributions, child benefits and some other measures. They also consider different sorts of taxpayers – single people and single-income couples, both with and without children. The big limitation of their analysis is that they only look at how progressive the tax system is up to the level of twice the average wage. This matters because countries with a welfare system targeted at low earners will tend to be progressive at those levels. In fact, across the OECD, taxes are more progressive at low incomes, and less so as incomes rise. Despite this caveat, the report has interesting analysis, and gives a really interesting picture of where Ireland is, albeit at lower income levels.
So how do we fare, as a country? Well, we stand out in a number of ways. The headline result is that on average our tax system looks really progressive – we’re at or near the top of most tables across the OECD. When you drill into our individual charts, however, you can see that this is largely driven by how our system works at the lowest income levels. We are progressive here, particularly when social security contributions are taken onto account because the USC is charged a lower rate in this level. As you reach and exceed the average industrial wage, our progressivity drops dramatically, which is why in Ireland in particular it would be nice to see this study extended into higher income brackets.
We show a few interesting kinks in our system especially when you compare tax wedges and tax rates for taxpayers with and without children. Much of this kicks in at income levels of around €50,000 and probably derives from the shift from the low to the high tax bracket.
The analysis is tantalising, but because it only looks at incomes up to around €85,000, it sheds no light on the fairness or otherwise of higher taxes on the higher-paid. The full report is available here