A prominent part of ICTU’s ten-point plan campaign has been the proposal to introduce a new third rate of tax on rich people. As far as I know, the proposals have not precisely defined who qualifies as rich. However, it is certainly understandable that the average person may find some appeal in this proposal, particularly as most people don’t consider themselves to be rich.
To calculate the revenue gains from a new third rate, you need to have detailed data on the distribution of taxable income. Unfortunately, the latest such data available from the Revenue Commissioners only covers information for 2006, which is likely to indicate more income available to tax than is there now.
Still, keeping in mind that any revenue calculations based on these figures are likely to be overestimates, it’s useful to look at these figures to get an idea of the potential tax take from a third marginal tax rate. Here’s a spreadsheet that uses the Revenue’s table for taxable income and tax paid by all households. Note that this isn’t the best way to do these calculations: To do them exactly right, the calculations would have to be done separately for single, married and widowed people and I just didn’t have the time. (If anyone wants to send in such an analysis I would happily put up a link to it.)
Two things stand out from the Revenue figures. First, contrary to what many appear to think, the tax rate structure is highly progressive. Those with income below €20,000 pay almost no income tax, the person on the average income of about €35,000 pay an average tax rate of about nine percent, while those with incomes above €100,000 pay over twenty seven percent. This point about progressivity has been well made before by Ronan Lyons.
Second, even if we added in the new levies and PRSI taxes, the income tax burden on average workers is very low by international standards. See this chart from the OECD and note that the additional levies would still keep the combined income tax burden of average workers at the very bottom end of the OECD table.
Now go over to the right-hand-side of the spreadsheet. I have done a set of calculations which detail how much money would be collected by an additional marginal tax rate of ten percentage points on the rich, where the definition of rich is varied from those earning over €60,000 to those earning over €200,000. Based on the 2006 income figures, this higher third tax rate would have brought in an additional €1.4 billion if levied on those with incomes over €60,000, €1.1 billion if levied on those on over €75,000, €787 million if levied on those on over €100,000, €539 million if levied on those on over €150,000 and €430 million if levied on those on over €200,000.
Given that the budget deficit this year (whichever definition you want to use) will be over €20 billion, these figures show that a new third rate of tax on the rich is only likely to be of limited help in restoring stability to the government finances.
Of course, one could argue that an additional ten percentage points isn’t enough of an increase in the marginal tax rate for the rich. However, it should be kept in mind that despite our low average tax rate, Ireland has high marginal tax rates that apply even to workers on moderate incomes. Page 161 of the Commission on Taxation Report shows that once all income taxes are counted (PAYE, PRSI and levies) the marginal tax rate on taxable incomes over €36,400 is now 54%.
Increasing this top marginal tax rate to 64%, as would be implied by these calculations, seems likely to move us into self-defeating territory where the high rate is simply discouraging work and encouraging tax avoidance and evasion. I know that it is a regular (and regularly inaccurate) right-wing talking point that tax increases are self defeating and reduce tax revenue. But at these kinds of marginal tax rates, I suspect this type of argument is more likely to be correct.
The bottom line that I take from these figures is that it is not possible to raise amounts of tax revenue that would make significant inroads into the budget deficit if one insists on convincing the majority of the population that this can be done by taxing other people.