Wednesday, September 26, 2012

NERI Income Tax Proposal

The third Quarterly Economic Observer of the Nevin Economic Research Institute contains a specific income tax proposal for the upcoming budget.  The proposal is to raise the effective income tax rate of the top 20% of income tax cases by 1.5 percentage points.

We propose a modest increase in the effective income taxation rate faced by the top 20% of tax cases. Overall we suggest that the effective income tax paid by this group rises by 1.5% in 2013; meaning that on average the top 20% of tax cases would pay almost 23% of their income in income taxation in 2011.

Income Tax Proposal

The data used is from this Parliamentary Question tabled to the Minister for Finance in July.  Here I propose to use the data from another Parliamentary Question to assess the impact of this proposal on different income levels.  This provides us with the following table for 2011 incomes.

Income Tax Distribution 2011

The table does not allow us to work out exactly the top quintile of tax cases (to which the NERI proposal would apply) but a quick calculation shows that the number of tax cases in excess of €50,000 is equal to 22.8% of the total.  It is likely that any change to the tax system would apply to a certain income threshold rather to a certain proportion of tax changes.  We will proceed by applying the proposal to this group.

Here are the average incomes, average amount of tax paid and the effective tax rates for the income brackets given in the PQ.

Average Incomes and Tax Paid

The table shows the progressive nature of the Irish tax system with the effective Income Tax rate rising from 4% for those earning between €20,000 and €30,000, to 14.5% for those earning between €50,000 and €60,000, to 25% for those between €150,000 and €175,000, up to a high of 34% for the ultra-high earners over €2,000,000.  These effective tax rates and the progressiveness of them would be even greater if PRSI and USC were included.

The final column gives the new effective Income Tax rates under the NERI proposal.  These are unchanged for all incomes up to €50,000 and thereafter are increased by 1.5 percentage points.  The report is silent on how this would be achieved but makes some suggestions that could be considered such as tax credits and the USC.  The report does rule out increases in the marginal tax rate (page 26)

Further changes in the marginal rate of tax (which currently is at 52% when maximum USC and PRSI rates are included) are not proposed.

The final table looks at the impact of the proposed increase in the effective tax rate by 1.5 percentage points for all tax cases above €50,000.  All incomes up to €50,000 are omitted are there are no changes proposed here.

Proposed Tax Rates

The impact is an extra €690 million of tax revenue.  This compares to €650 million estimated for the NERI proposal.  As that only included 20% of tax cases and the above table is applied to the top 22.8% of tax cases it is clear that they are similar.

Of the extra €690 million that would be collected €388 million (56%) comes from tax cases with incomes of less than €100,000.  Those in the €50,000 to €60,000 income bracket would see their income tax bill rise from €7,911 to €8,731 (a rise of 10.4%).  Those in the €500,000 to €750,000 income bracket would see their income tax bill rise from €167,145 to €176,138 (a rise of 5.4%).

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