The Department of Finance tiptoed into a minefield last week. In its annual look at the country’s tax landscape, its Tax Strategy Group (TSG) posited the potentially explosive notion that Ireland’s income tax system was perhaps too progressive.
The implication being those on higher incomes are shouldering too much of the burden. Most tax systems are progressive but obviously there are degrees.
In its paper on income tax, the TSG noted that Ireland had one of the most progressive income tax systems “in the developed world”.
By way of illustration, it noted that the top 10 per cent of earners here (those earning over €102,000 annually) will pay about 63 per cent of all the income tax and USC (universal social charge) collected this year, while the top 1 per cent (those earning €290,000 and above) will pay 24.4 per cent.
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At the same time, those earning less than €69,000, representing the bottom 80 per cent of earners, would contribute just 21 per cent of total income tax and USC receipts.
It also noted that 7 per cent of earners, equating to 251,000 “taxpayer units”, are exempt from income tax entirely.
And while 64 per cent will pay the standard 20 per cent rate of income tax, a significant portion (about one million) will have their income tax liability covered by their tax credits.
That means at least 1.2 million workers (or roughly one-third of the State’s workforce) are effectively outside the income tax net.
“This raises the question, from an economic and fiscal perspective, as to whether this level of progressivity is appropriate or whether it places an excessive burden on other income earners,” the department said. Note the use of the word “other” instead of higher.
It went on: “The risk is that high marginal tax rates may have adverse consequences inter alia for work incentives and competitiveness including the ability to attract inward investment linked to the availability of high-skilled workers.”
In focusing on the competitiveness issue, the department was merely parroting what business lobby groups have been complaining about for years, namely that the relatively high rates of income tax here undermine the State’s competitive offering when it comes to attracting investment.
These complaints have got louder since the introduction of a global minimum corporate tax rate, which has partially neutralised our chief carrot (a low corporation tax rate) while simultaneously spotlighting some of the drawbacks of basing a business here: housing, energy and, in this case, personal tax.
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Ibec, the State’s main business lobby group, also highlights the concentration risk of having such a small component of the workforce paying the bulk of income tax.
The group’s chief economist, Ger Brady, recently noted there were about 175,000 people employed in IT (information technology) in the Republic and a similar amount (179,000) employed in accommodation and food services. The former, however, paid €3.3 billion in income tax last year while the latter paid €511 million. “Whilst progressive tax systems are good, we have taken it to an extreme,” Brady said.
Highlighting the concentration risk is, of course, subtly different and less controversial than arguing the country’s top earners pay too much tax particularly when many households are struggling to pay rent or to navigate over-subscribed public services.
It’s a sort of universalism to complain about the burden of income tax unless you’re Scandinavian and enjoying best-in-class public services or working in the Middle East and paying little or no income tax courtesy of monster state oil revenues.
An individual’s tax burden also has to be seen in the round, inclusive of the indirect taxes (VAT, capital gains, stamp duty) they pay.
By the same token, how much income these top earners shelter in tax-efficient corporate structures and/or in private pension plans must also be considered.
Many ultra-wealthy individuals have access to tax loopholes and write-offs (some by way of offshore vehicles) to help lower their liability while others generate much of their income from capital gains, which has a lower tax rate than earned income.
That said, to conflate people earning over €100,000 with a small clique of super-rich individuals using specific tax-avoidance structures is patently nonsense.
Author Malcolm Gladwell makes the point that, while countries like the US have a high adherence to the tax code in contrast to countries like Greece where tax evasion (historically at least) has been rampant, the disparity reflects not the respective tax-evasion penalties (they are tougher in Greece than in the US) but the sense of fairness.
In the US, the tax system is perceived as relatively fair and in the main adhered to. In contrast, the Greeks believe the system is patently unfair and gamed even by the elite.
Politicians in Ireland’s centre/centre-left political system would be shot down for suggesting top earners here pay too much tax. But the TSG aren’t politicians and they probably reflect a groundswell of opinion within the department.
