Tuesday, October 9, 2012

Income (and taxing income) in Ireland

The forthcoming budget will contain a €3.5 billion set of expenditure cuts and tax increases with a rough breakdown of 2:1.  The objective is ensure the general government deficit is below the limit set out under the Excessive Deficit Procedure.  The table below refers to these are targets but the ECOFIN decision clearly states that they are limits which the deficit “does not exceed”.

Budget Adjustments(2)

There has been much debate about the composition of the expenditure cuts and tax increases to be introduced.  Much has focussed on whether the balance is too heavily weighted in favour of expenditure cuts and that more of the necessary burden of closing the deficit be carried by taxation, particularly tax increases on the “rich”.

Let’s assume that the pre-announced reductions to capital expenditure for 2013 of €0.5 billion are persisted with but we look to income tax to achieve the €3.5 billion total required for the budget.  This is unrealistic but as an exercise it should give an insight into what can be achieved.

Back in October 2010, John O’Donoghue set the following PQ for then Minister for Finance, Brian Lenihan:

To ask the Minister for Finance the amount the tax rate for those earning over €100,000 would have to be increased by for the Exchequer to save at least €3 billion.

The answer provided at the time was that the top rate of income tax for those earning over €100,000 would have to be 84%.  Once Universal Social Charge (7%) and PRSI (4%) are included the marginal rate of tax on incomes over €100,000 would have to be 95%. 

For the self-employed it would be 98% because of the 3% USC surcharge on self-employed earnings over €100,000 and for any public sector workers earning over €100,000 the marginal rate would have to be 105% once the 10% public sector pension levy is factored in.

It should be pretty clear that any suggestions that the budget deficit can be closed simply by “taxing the rich” are not realistic.   For reasons unknown it is generally taken that the “rich” are those earning more than €100,000.   However, there are just not enough of these people and they do not earn enough to raise the tax revenue necessary to meet the deficit targets.

Another PQ shows that the Revenue Commissioners estimates there was around 110,000 tax cases with an income over €100,000 in 2011, with 90,000 earning less than €200,000.  Tax cases with incomes over €100,000 had a combined income of €20.2 billion and paid €5.2 billion of Income Tax (PRSI, USC, PS Pension Levy are not included).

Income Tax Distribution 2011

The excess over €100,000 earned by these 110,000 tax cases is €9.1 billion.  To raise an extra €3 billion would require a minimum extra 33% tax to be applied.  In reality it would be higher because 65,000 of these cases are married couples with both earning.  It is not clear how many individual incomes over €100,000 there are.  Revenue reports show that 75% of the couples over the €100,000 threshold earn less then €150,000 so it seems likely that many have these will have combined incomes over €100,000 without necessarily having one income over €100,00.

This is dealt with in this PQ in July 2011 when is was asked:

To ask the Minister for Finance the extra tax that would be raised by increasing the income tax on all taxable income over €100,000 for an individual and €200,000 for a couple by 1%. 

The answer was that it would raise €59 million in a full year.  To raise €3 billion as outlined above would require 51 such raises.  Thus we can update the answer provided by Brian Lenihan from October 2010.  To raise €3 billion from individuals with incomes over €100,000 would require a marginal income tax rate of 92%.  With USC and PRSI all marginal tax rates would be above 100%! 

Anyone with an income over €100,000 would face an increase in their tax bill of an amount greater than the increase in their earnings.  This is not to say that Income Tax should not be increases (it probably should) but there is no money tree out there that we can shake to eliminate the deficit.  Here are some other PQ answers.

There is scope to raise income tax but raising income tax on high earners alone is not enough. Although the figures are slightly dates here is look at who earns more than €100,000

  • PAYE Employees: 31,516 out of 1,515,648 (2.1%)
  • Public Sector Employees: 15,278 out of 414,623 (3.7%)
  • Non-PAYE/Self-Employed: 70,800 out of 437,585 (16.2%)

Almost two-thirds of the high-earners are in the Non-PAYE category so include the self-employed, company directors and the like.  This is also likely to be the group that shows the greatest fluidity.  That is, a person in this category could have a successful year one year and rise in the €100,000+ income category but fall below it the next year.  The make-up of the PAYE and Public Sector Employees in this group is likely to be relatively static but the largest group would be much more fluid.

Finally, it is often stated that those earning more than €100,000 are “rich”.  Income is a flow so technically they are “high-earners”.  Knowing someone’s income does not tell you if they are rich but it can be a good proxy.  Rich is a stock measure of the difference between a person’s assets and liabilities.  Some previous thoughts on wealth (and taxing wealth) in Ireland are here.


  1. Hi Seamus,

    it's rare to see this level of detail published (once again bloggers outshine the traditional media) and it's a pity that it's not even more detailed (which cases are jointly asessed for instance) and that it took a PQ to get it.

    Is there any chance you could put up that income distribution table in anykind of softcopy format?


    1. Hi Anonymous,

      I have posted an Excel spreadsheet of the 2010 data from the Revenue Commissioners here.

  2. Anonymous -- right click the table in the article, choose "Save Picture As" (or equivalent in your browser). Save the picture (probably called IncomeTaxDistribution2011_thumb3.jpg) somewhere on your computer. Then go here: http://www.free-ocr.com/
    Upload the saved image, you will get something you can read, although it needs a little munging to get into a format you can put in a spreadsheet. If you're handy with a text editor it will be no problem.

  3. Thanks again for your excellent analysis.

  4. In the calculation for increased income from tax rises, there seems to be an assumption that rising taxes will not reduce the quantity of paid work done. My public sector wife is declining additional work now that she will only receive 37c for each additional euro earned.

    Last year VAT was raised nearly 10% (from 21% to 23%) yet VAT receipts only increased by 3.3% so far this year.

    One option for high earners is to incorporate and retain income in their companies, pay 12.5% corp rate and obtain tax free withdrawal at retirement (as permitted). Or they can have their salaries part paid to overseas holding companies. Or they can live 6 months abroad each year. There are endless options and many high earners will be inventive enough to exploit them rather than hand over an unfair proportion of their incomes.

    The net result is that the putative gains from raising income taxes will prove intangible. 63% is right past the boundary of the laffer curve for highest marginal rate of income tax.

    1. Most people can't choose to simply live abroad away from their place of work and it is nonsense to suggest otherwise. A high earning barrister for example has to be the courts to earn

    2. Most people don't earn over 100,000. Most people can't choose to live abroad.

      You are arguing a strawman.

      Above 100k incorporation is common and a set up possibilities open up to avoid paying income tax.

  5. Oops I see you can just click on the link to the PQ, cut from there and paste directly into excel.

  6. Interesting analysis. I wonder how our Country rates in terms of a progressive tax code compared to others. There is slight room for tax income increases or meddling with the credits but soon enough it will be like getting blood out of a turnip. With interest payments of the national debt creeping up to 10 billion past 2014, cuts will have to be more focused and sharper.

  7. Could someone reconcile the €82 billion gross income yielding €11.8 income tax with GDP figure of €158.8 billion (2011)? Thanks.

  8. I can't right now, but start with the income of corporate bodies (the €82bn is *personal* income, I think). That'll take you most of the way to finding the other €77bn, I suspect.

  9. Thanks Fergus.

    The ratio for taxation/GDP per the CSO's Taxation table (Table 22, National Income & Expenditure) varies within 28/32% for the period 2000/2011, and is at the lower end in 2010/11. But because GDP is a 'Gross' figure, including depreciation, I'm not sure if it is a fully valid basis for taxation ratios. I was struck by the lowish 'Income' figure per the 2011 Revenue Report, €82.6 billion compared to the GDP figure of €158.9 billion.

    Table 22 shows tax on 'Income' at around €14 billion compared to the €11.8 figure in the Revenue Report. The CSO Taxation table probably picks up items such as non-company rental profits, interest/dividend.

    Some depreciation is tax-allowable. Some, such as building allowance generally, is not tax-allowable. The depreciation figure within the 2011 GDP figure is €15.8 billion. If the GDP is adjusted downwards for tax ratios by 50%, the revised figure is €151 billion.

    If the Non-Company figure per the Revenue Report, €82.6 billion, is adjusted upwards to include rental income and interest/dividend - to say €96 billion - that leaves a corporation profits income of around €55 billion. The corporation tax per Table 22 is €3.75 billion or 6.8%.

    The corresponding figure for Income, including PRSI and part of capital gains, is €22 billion or 22.9% - quite a difference.

    I googled for an analysis of Taxation/GDP. But no luck, not even as a note to the Commission on Taxation Report (2009). As I'm mentioning that, I may as well mention that CSO's excellent Table 22 is generally published during July/August when perhaps preliminary figures could be published in early January.

  10. Hi Seamus,
    With the suggestion that now we have many more people at work how would the figures translate today if you were to increase income tax to 50% on all incomes over €100,000?
    Alan Lawes