How do so many people in Ireland escape the income tax net entirely? Because recent budgets have made sure that this was the case, that’s how.
During the run-up to the economic bust, ministers happily boasted every year that they were taking more and more people out of the tax net by raising the entry point at which income tax is levied.
The crisis era budgets saw this reversed – just over one in 10 were out of the tax net in 2011, after the introduction of USC. But recent budgets have moved the dial back in the other direction again.
Taxes on lower incomes are significantly less here than the international average – and the numbers exempted entirely from paying tax are also unusually high. More than four in 10 taxpayers were out of the income tax net entirely when the crisis hit. The figure has now recovered to 3.7 in 10.
The big reversal came with the introduction of the USC in 2011, which kicked in at an income level of just over €4,000. This exempted just 12 per cent of the lowest earners.All but the very lowest earners should make some contribution, according to the then finance minister, Brian Lenihan.
But since budget tax relief restarted in 2012, not far off 500,000 people have been taken out of the net. The amount you have to earn to be caught by USC is now €13,000. Earn above this level and a 0.5 per cent USC rate is charged on the first €12,000 you earn. The rate rises on income above this level.
The USC is the first charge to hit people’s incomes. Allowing for tax credits, income tax kicks in around €16.500 for most people and PRSI at around €18,300. So it is the adjustments in the USC which have been key to taking lower earners out of the net completely in recent years.
As reported today, the latest Revenue data shows that 956,200 tax units – single people and jointly assessed couples – will not be liable to pay any income tax this year, about 37 per cent of the total. Some of these will be caught in the USC net. But even when this is taken into account, some 769,800 will pay no income tax or USC – about 29 per cent of total earners.
There is limited international comparative data on the numbers of people excluded from the tax net entirely in different countries but it is clear that, in general, the income tax burden on lower earners here is well below the average. Irish Tax Institute data show that an employee on €18,000 paid just over €500 in tax and USC in 2017, compared to €4,818 in Germany, €4,032 in France and €1,696 in the UK.
Of course these comparisons can be complicated by the benefits people receive in return for tax and social insurance payments in different countries.
OECD data shows the tax and social insurance charge to an employee on an average income of around €36,000is about 19 per cent here, compared to an OECD average of 25 per cent.
The flip side is that the Irish tax system is, according to the OECD, the most progressive among its EU members and the second most progressive in the OECD as a whole. This means that the gap between what the highest and the lowest pay in tax in Ireland is particularly large.
The flipside of reducing the tax burden on lower earners in recent years is an increased reliance on higher earners to pay tax.
Higher earners have got some relief in recent years also, but the proportion of income tax coming from higher earners has still risen. For example, the very highest earning 1 per cent paid 19 per cent of all taxes on income in 2015 , rising to 24 per cent last year. The bottom 50 per cent of earners pay 3.6 per cent of the total.
There are a few key policy issues here. One is the need to have a progressive system to fund welfare and social services. A second is to have a solid and wide tax base. There have been warnings from international bodies like the IMF and the European Commission that Ireland needs to take care not to narrow the base too significantly.
The reliance on income tax as a source of revenue has risen significantly in recent years. A further concern is that very highest earners can be mobile internationally and subject to big income swings.
And the final issue is competitiveness, with warnings from business that high taxation on those earning above the average – and particularly above about €70,000 – can limit competitiveness and make it harder to attract investment.
The political issue for Minister for Finance Paschal Donohoe is that once you take people out of the net, it is very hard to put them back in.
The Government has spoken about increasing benefits people get in return for social insurance and of possibly merging the USC and PRSI. But it will know that imposing new burdens on lower earners would be a politically fraught exercise.