Monday, January 7, 2013

Irish Examiner 04/01/13

The unedited text of a recent article from The Irish Examiner is continued below the fold while the published version can be read here.

Lower paid would be hit if State were to raise taxes

Friday, January 04, 2013

Ireland is not a low-income tax economy and collects more income tax relative to the size of the economy compared to many of our EU peers. There have been many calls to raise income tax in Ireland to levels in other countries. What these suggestions fail to acknowledge is how these countries raise more income tax than us. They do so by levying significantly more taxes on low and middle incomes than we do.

It is a common refrain that Ireland is a low-tax economy. This is not true. In 2011, the EU average for tax receipts as a percentage of gross domestic product (GDP) was 26%. The figure in Ireland was 24%, and using gross national product (GNP), which may be a more appropriate measure for Ireland, the figure is 28%. Ireland does not collect a low amount of taxes.

Where government revenue in Ireland does fall short is for social insurance contributions. Ireland’s only social contribution is pay-related social insurance (PRSI). Although there are different classes the typical rates are 4% of gross salary for employee contributions and an additional 10.75% of gross salary for employer contributions. PRSI contributions were equal to 5% of GDP in 2011. The EU average for social contributions was 13% of GDP.

PRSI contributions are paid into the Social Insurance Fund (SIF) and these are expected to be around €7,100 million in 2013. Claims on the SIF are expected to be €8,600 million.

The main expenditures of the SIF are the contributory state pensions which will cost around €5,500 million in 2013. There will be around €1,100 million of supports to those in the labour market such as Jobseeker’s Benefit, Maternity Benefit and Redundancy Payments, while around €1,500 million of supports will be provided under Illness and Disability Benefits.

There is a deficit of around 1% of GDP in the Social Insurance Fund but this is only a portion of the 7.5% of GDP deficit we will run next year. The main reason for the deficit is that tax-funded expenditures exceed tax revenue.

Personal income tax revenue in Ireland as a percent of GDP is the eighth highest of the 27 countries in the EU. Ireland is not a low income tax country and collects the equivalent of nine percent of GDP in income tax. In 2011, Eurostat reported that there was €14.2 billion of personal income tax collected in Ireland with GDP of €156 billion. This level is more than Germany, France, Spain and the Netherlands.

There are six countries in the EU that collect more than ten percent of GDP in personal income taxes. Unsurprisingly, these include the Scandinavian countries Denmark, Sweden and Finland, as well as Belgium, Italy and the UK.

Ireland has to close the largest budget deficit in the EU. There are many who argue that the gap should be closed with more tax increases, particularly income tax increases on the rich. The coalition government have made a commitment not to increase income tax but arguments are made that raising income tax revenues to more than 10 percent of GDP would help close more of the deficit.

This is true and the argument generally moves to a claim that we should increase income tax on 'high earners'. The argument usually stops there and what is rarely presented is how those countries who collect more income tax than Ireland achieve it. There are no proposals that we should introduce a particular country’s tax system in order to meet this objective of collecting more income tax from high earners.

So how do the countries generating more than 10 percent of GDP from income tax achieve it? Research from the OECD allows us to compare the effective income tax rates at different incomes: below average income, at the average income and above the average income. In Ireland, this income levels are €22,000, €33,000 and €55,000.

At present, in Ireland if these incomes are earned by a single person with no children they will face an income tax plus universal social charge bill of €2,000, €5,000 and €15,000. Ireland has a progressive tax system. Through the income levels used the effective tax rate rises from 9% to 15% to 28%.

At the same relative income levels the average effective income tax rates in the six 'high-tax' countries go from 18% to 22% to 30%.

There would be an increase in income tax at all levels. What is noteworthy is where the tax burden falls. Below average earners would see their income tax bill double, while above average earners would see their tax bill rise by around one-twelfth. These tax increases would cost someone on €22,000 around €2,000 a year while someone on €55,000 would just pay an extra €1,000 in tax.

High-tax countries do not have higher rates of income tax on higher earners than Ireland. The high-tax countries raise more tax revenue by levying more tax on average incomes and substantially more tax on lower earners than is presently the case in Ireland.

Ireland has the most progressive tax system in the EU. Irish income tax is above the EU average for high incomes and below the EU average for low and middle incomes.

If we are to align our income tax revenue with high-tax countries there appears little scope to raise additional revenue from high earners. To narrow the gap in the manner they raise tax we would have to substantially raise taxation on average and below-average incomes. Somehow I don't think that's what many of those who say we should be more like Denmark, Sweden and Finland.


  1. Dear Seamus

    Many thanks for this very useful article. I'm just wondering do you have a reference for the OECD research (saying Ireland has progressive tax system). I've tried to look for this before and had no luck.

    Kind regards

    Matt Lynch

  2. Hi Matt,

    All the OECD data is available on this page. You can look at the progressiveness of the Irish income tax system using the tables in section 3.

    Clicking the 'Income Tax' label in the sidebar will bring up a couple of recent posts on this site using the OECD data as well as some aggregate data from Eurostat.

    Here is a piece from on the issue of progressiveness.