Thursday, 22 May 2014

Most people won't benefit from any change to the 41% higher tax rate

Talk of cuts to the 41% higher rate of income tax ignores the fact that two-thirds of people paying income tax do not pay any tax at that rate. The main beneficiaries will be those on higher incomes, whereas everyone will lose from cuts to public services.

A new report launched today by TASC provides a detailed analysis of the Irish tax system. While some higher earners will benefit from tax cuts, everyone will lose from the resulting reduction of public services like health, education and social protection. Tax cuts will also reduce funds available for public investment in the economy, which has a vital role in sustainable economic recovery. 

Main findings:
  • A single person on €40,000, despite paying some tax at the "higher rate”, actually pays less than 10% income tax. On an income of €275,000, actual income tax paid is only 30%.
  • If PRSI and USC are included - for a "marginal tax rate" of 52% - in fact a single person on €40,000 only really pays 15.5% of their gross income.
  • Two-thirds (65%) of people who pay income tax do not pay anything at the higher rate.
  • Only five per cent of people who pay income tax actually pay the higher rate of tax on more than half of their gross income.
  • Everyone is a taxpayer, and families on the lowest incomes pay more than a quarter of their income in consumption taxes like VAT and excise.
  • The public cost of tax reliefs and tax breaks, which greatly benefit the highest earners, is equal to more than a quarter of all taxes raised. This is far above the European average, and the cost of tax breaks has increased despite the economic downturn.
The report has six recommendations:
  • Maintain, and if possible increase, public service provision. Everyone in Ireland benefits from the ‘public value’ of public spending and most people in Ireland would be better off maintaining public services rather than paying less tax.
  • If the Government wants to cut tax in one area, they should offset it elsewhere. Introducing a third marginal rate of income tax of 48% on incomes above €100,000 would affect less than one in 20 people who pay income tax, but would raise €365 million to pay for public services or tax cuts.
  • Likewise, tax cuts and public services could be funded by reducing Ireland’s high level of non-basic tax reliefs, which cost €9.6 billion in 2010.
  • One equitable tax cut would be to remove a 'step effect’ in the PRSI system. At worst, the current system can require an employer to pay €1,680 to give a low paid employee a net annual raise of just one euro.
  • In terms of income tax changes, increasing tax credits rather than changing the 41% rate or the bands would benefit nearly all workers equally in real terms, although some part-time workers would still not benefit.
  • Lowering the VAT rate by 1% would benefit far more people than income tax cuts.


kirneh98 said...

Hi Nat

I've just finished reading A Defence of Taxation. The placing of a monetary value on public services is a really interesting idea and one that public service unions should take up and begin to publicise.

I was wondering though, how would you counter the argument that because of the discrepancy between Ireland's GDP and GNP, comparative tax calculations with EU partners should express our tax revenue and public spending as functions of GNP rather than GDP?

Pat Crowe INTO

Nat O`Connor said...

Hi Pat,

On the public spending side, the TUC commissioned a much more detailed analysis for the UK, here:

On tax, Ireland and Luxembourg have significant differences between GDP v GNP, but % GDP is the standard measure. All economic activity should be eligible for taxation and MNCs in Ireland (responsible for GDP being higher than GNP) also avail of publicly-funded infrastructure, from roads and street lighting, to water, waste, broadband, energy transmission, etc. They also gain from publicly-funded education of their Irish employees. Plus the package they offer employees includes the benefits of Irish public services alongside salary. All in all, there are many reasons to see tax as %GDP.

None of this is to say we should fixate on achieving the 'average' level. On the contrary, we should work out how much the services people want would cost and therefore how much tax is required to provide them. This might result in a lower tax-as-%GDP figure for Ireland than for other countries due to the gap between GNP and GDP. But then again, every country will have their differences - in demographics, sectors of employment, etc. Tax as %GDP is therefore simply a useful comparison, not a benchmark. Especially as we don't have good comparable data on what public services some countries provide while other countries (like Ireland) require people to reach into their own pockets to pay for more of them.

Those who advocate using tax as %GNP are arguing for Irish exceptionalism, which is usually followed by arguments like "it wouldn't work here" or "Irish people wouldn't go for that".