Cormac Staunton: Chris Johns in the Irish Times has written an article attacking all sides in the debate on income tax in the Budget, which includes TASC’s recent commentary.
The reason this debate on income tax is happening is that the Government have repeatedly claimed that they are going to reduce the higher rate of tax in order to benefit for low and middle income earners. TASC’s analysis of the tax system shows that it is impossible to help people on low and middle incomes by cutting the higher rate of tax. By putting this analysis forward, TASC seeks to show who would benefit from a higher rate cut. In the context of Budget discussions, this distinction is fundamental.
To address Mr. Johns’ criticisms directly:
1) The number of people benefiting from a higher rate cut
In the article, Chris Johns claims TASC ‘distorts’ the numbers who would benefit from a higher rate tax cut. To be clear, the assertion that “18% of tax payers will benefit from a higher rate cut” is a Revenue figure, used by the Minister of Finance in the Dail. It is not a TASC calculation. The exact quote is:
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.
The full written answer is available here, after Q.107
There are two issues raised with regard to the ‘18%’. The first is the total number who will benefit, and the second is the choice of population.
On the total who will benefit, Revenue identify 392,000 tax units as paying the higher rate of tax, out of a ‘population’ of roughly two million tax units. This gives the figure of 18% of all tax units, and was the basis for their response.
This number does not include a cohort of people who are liable for the higher rate, but whose tax credits exceed the tax at the higher rate. Revenue does not consider these people to be higher rate tax payers. This may be a fine distinction, but it is one made by Revenue, not TASC.
There is a valid argument to be made that people who are liable for the higher rate, but are not classified as paying the higher rate by Revenue, would still benefit from a higher rate cut, despite the phrasing of the response to the Parliamentary Question. The number of people in this group is hard to quantify (because of the way Revenue data is presented) but it is possible to estimate that it is somewhere in the region of 200,000 additional cases. In this case, IBEC’s figure of 607,000 who would benefit is valid.
In seeking to identify other people who would benefit, IBEC also add in a group who might benefit if they were to receive a salary increase or overtime to bring their estimated figure to 657,000 cases.
In identifying the ‘population’, IBEC narrow the definition of “taxpayer” by removing pensioners, low-paid and part-time workers and those on their first jobs (without reference to how these were identified).
In this way they shrink the population of “taxpayers” to 1.2 million cases, and can claim that more than half of “taxpayers” benefit from a cut to higher rate tax, despite the fact that Ireland has 1.9 million people in employment. Deliberately excluding the low-paid and pensioners from a discussion on income tax is poor analysis.
657,000 is 35% of the 1.9 million people at work in Ireland, but it is not “more than half”.
However, 657,000 is still only 18% of Irish adults, and in the context of the Budget, and the claims of ‘giving something back’, it is fair to point out (and factually correct) that a higher rate tax cut only benefits a minority of Irish adults.
2) The Marginal rate
While a single person on €32,900 may face a marginal rate of 52%, their effective rate is only 18%. That is a difference of 34 percentage points, or €11,186. In this context, focusing on the marginal rate of 52% is irrelevant to this discussion, rather than irrelevant entirely. In addition, because of the variances within tax systems, simple cross-border comparisons of marginal rates are not useful. In the Irish system, while it is true that the marginal rate comes in at below average earnings, this is off-set by tax credits and tax reliefs.
3) Focus on income tax
All of TASC’s analysis distinguishes where appropriate between “income tax” and “income tax, USC and PRSI”. The focus on the actual level of income tax paid in this instance was based on the available Revenue data and in the context of a discussion on the 41% marginal rate of income tax (which is made very clear in the report).
A maximum 30% average effective rate of income tax, even on earners above €2 million, is factually correct. At no point does TASC claim that this is the only type of personal taxation. However, it is not accurate to simply bolt USC and PRSI onto the Revenue “tax paid” data, as this is a composite of couples and singles and they will have different USC and PRSI liabilities.
Cormac Staunton is Policy Analyst with TASC. You can follow him on Twitter @Cormac_Staunton