Responding to IBEC's Analysis of Taxation

Nat O'Connor: IBEC have claimed TASC's analysis of income tax is "factually incorrect and technically flawed" (report: Irish Independent). Having looked at IBEC's analysis, published here, what follows is just some of the flaws and errors in IBEC's headline five arguments.

1. Ireland is not a low income tax country, particularly for middle and high earners: Since 2010, income tax as a percentage of national income has risen from 8.7% to 11.6%, well above the EU average of 9.5%. Ireland is now the fifth highest personal income tax jurisdiction in the EU.

IBEC are using an unusual measure 'personal and household tax' rather than the standard Eurostat comparison of all Direct Taxes as % GDP (see Table 14, p. 187 of Tax Trends in the EU). In this table, Ireland ranks 10th out of 28th, not 5th. IBEC's analysis ignores the very low employer's social security contributions in Ireland, which reduces total labour taxes. An unusual omission, since total taxes on labour is the standard unit of analysis for employers when calculating the cost of employing people.

2. Over half of all taxpayers would benefit from a cut in the marginal rate: Suggestions that only 17% of income taxpayers pay tax at the marginal rate and that the average tax rate is only 14.1% are factually incorrect. The analysis shows that the majority of taxpayers are paying tax at the marginal rate.

Minister Noonan said "I am informed by the Revenue Commissioners that they estimate that just over 17% of income earners were liable to Income Tax at the 41% rate in 2013". Minister Noonan also said "Regarding a reduction in the marginal tax rate, it is assumed that the Deputy refers to a reduction in the 41% Income Tax rate. On this basis the Revenue Commissioners estimate that, a reduction of that rate would affect approximately 392,000 (18%) income earners." That's where TASC's one-in-six comes from.

IBEC arrive at the figure of 'half' (actually 54%) by some contortions of the data. Firstly, they identify that some people are liable to pay a small amount of tax at 41%, but their tax credits are sufficient to take them out of the higher tax net, and Revenue do not count them as part of the one-in-six who currently pay some income tax at the higher rate. IBEC estimate that 607,000 people may be liable to pay the 41%, although many have sufficient credits not to. The point, which is valid, is that a change to the rate would benefit some of these people, although it may be marginal in some cases - e.g. a single person on €32,801 who pays 41% on just one euro would gain 21 cent if the 41% rate occurred at a higher income but would count as a '41% payer' in IBEC's calculation.

Even if one accepts the sum of 607,000 people, this only represents 25.3% of the 2.4 million people represented by Revenue's 2.1 million tax units in the relevant data. But IBEC then exclude pensioners and seasonal workers, and others, and reduces the total of tax payers to around 1.2 million. A further estimated 50,000 are added in on the basis that although they are not currently eligible to pay tax at 41%, they are within two hours of overtime per week of doing so. This brings up the total affected by changes to the higher income tax rate, allowing IBEC to claim 54% of income tax payers would benefit. Except, as shown, this is only achieved by contortion and by ignoring many people who do not have the opportunity to work full-time but who are nonetheless income tax payers.

3. The Irish tax system is highly progressive and redistributive in a European context: The income tax system is the most progressive in the developed world and Ireland’s tax and transfers system is the most redistributive in Europe.

Great. So why change it? But also, Eurostat show that Ireland has the fifth highest level of income inequality after tax, but before social transfers and pensions (2012 data). More strikingly, the OECD database shows that Ireland has the highest level of income inequality before tax and transfers in the whole OECD (data here). So, Ireland needs a progressive tax system to reduce some of this inequality. Even so, Ireland doesn't reduce inequality to the same extent as some others do. After tax and transfers, Ireland is around the EU average for income inequality.

4. Middle and high earners pay the vast majority of tax: Low earners pay less tax than the OECD average, but at the average wage and above Irish tax rates are relatively high. Those earning €39,000 upwards are taxed higher than their OECD counterparts.

It is certainly true that low paid workers pay less tax and social insurance in Ireland, but they also face more out-of-pocket costs for health, education, etc. that would be provided as public services in other countries. Total labour taxes - the 'tax wedge' - is low on average wage workers too. Again, employers' social insurance is very low in Ireland. The tax wedge on average and above average workers can be seen in these OECD charts (choose Ireland from the drop-down menu to highlight Irish data in the bar charts). In every chart, Ireland is below average for taxation.

For higher earners, Ireland does increase income tax, USC and PRSI, to higher levels - but this is for relatively few workers. Note too, that married couples don't pay the higher rate until their joint income is between €45,400 and €65,600 (see post here). Sharing tax credits takes a lot of married couples out of the higher tax rate. Tax breaks - like the generous pension tax breaks - also reduce the actual amount of tax paid by people on higher incomes.

5. Certain features to the Irish tax system are a major disincentive to work, especially the marginal rate at average earnings: A skilled graduate moving from gross pay of €20,000 to gross pay of €60,000 over the first ten years of their career will see an increase of annual net pay of just €22,888 in Ireland; the same person would see an equivalent increase of €30,287 in the UK; a difference of €7,399.

The argument here seems to hinge on Ireland competing with the UK on low tax, which is a race to the bottom. The UK has announced major cuts to public services and social transfers (see, for example, The Guardian's coverage). Ireland has the option of taking a different path, by following a North-West European model of higher quality public services, real security against ill health, strong pensions, public investment in infrastructure, and an overall higher quality of life. Ireland can surely offer much more than 'tax incentives' for its own people to remain in the country!

Dr Nat O'Connor     @natpolicy

Nat O’Connor is a member of the Institute for Research in Social Sciences (IRiSS) and a Lecturer of Public Policy and Public Management in the School of Criminology, Politics and Social Policy at Ulster University.

Previously Director of TASC, Nat also led the research team in Dublin’s Homeless Agency.

Nat holds a PhD in Political Science from Trinity College Dublin (2008) and an MA in Political Science and Social Policy form the University of Dundee (1998). Nat’s primary research interest is in how research-informed public policy can achieve social justice and human wellbeing. Nat’s work has focused on economic inequality, housing and homelessness, democratic accountability and public policy analysis. His PhD focused on public access to information as part of democratic policy making.