How Does Ireland’s Income Tax Compare?

A great deal of political debate in Ireland rests on the assumption that Ireland’s rates of taxation are prohibitive. This is generally taken to mean that Irish taxes on income, specifically, are particularly onerous. This perception is rarely, however, assessed with reference to available statistics.

A new NERI Research inBrief by Paul Goldrick-Kelly uses the Organisation for Economic Co-Operation and Development (OECD) data concerning estimates of the effective direct taxes paid by households of varying income and marital status in 2014 to assess Ireland’s rates of taxation on income relative to those observed in other comparable nations.

 

The NERI Research inBrief series are short four page research notes on various topics of socio-economic interest. Other contributions in the series are available here.

The NERI is on twitter: @NERI_research

24 thoughts on “How Does Ireland’s Income Tax Compare?”

  1. To get these figures they’ve decided USC is neither income tax or a social contribution. For a 200% average wage earner it’s an extra 3000e in taxes.

  2. A more relevant comparison is with the UK , given the free movement of labour between the two markets ( for now) and the possibility of UK labour moving to Ireland. If one simply uses the standard deductions on a single person it is striking that tax rates are much lower in Ireland than in the UK up to and somewhat above average pay, but that on much higher earnings the differential swings the other way. For example, someone earning 30k ( euro and sterling) pays only 16.1% tax in Ireland against 21.4% in the UK. For 40k it is 22.6% against 24% and for 50k the rates start to shift in favour of the UK, with 28% against 27%.That differential increases at income rise, and for 100k it is 39.5% in Ireland against 34.5% in the UK.
    So simply on tax alone, Ireland is relatively attractive for average income earners and below but the UK is better for higher earners.

  3. And so we have more “evidence” supporting the continuous clamour from the the left and the pseudo-left that we can never have enough taxation or public spending – and that we should close the apparent gap with our peers in the OECD and the EU. It’s interesting though that there isn’t a corresponding clamour about the fact that the household cost of living in Ireland is more 20% above the average for the EU15 – even though actual individual consumption is more than 5% below the average. Much of this gap is caused by rent-seeking and inefficiencies. And, because it is either authorised officially or receives formal official support, most of this rent-seeking is in effect a form of taxation.

    Therefore, it is not surprising that the majority of ordinary citizens deeply resent any expansion of this rent-seekers’ taxation. Nor should it be surprising that will strongly oppose it when they see, as was the case with water charges, that the amount they are being required to pay directly is pure economic rent being captured by powerful and influential special interests in the public and semi-state sectors and in the sheltered private sector. It appears that they quite rightly believe that they are paying more than enough via direct direct and indirect taxation that is explicitly authorised by the Oireachtas and that they’ll be damned if they have to pay more of the officially authorised – but not explicitly sanctioned by the Oireachtas – rent-seekers’ tax.

    But you’ll hear very little from the left or the pseudo-left about this rent-seekers’ tax. The specific special interests they support all have their snouts in this trough. Instead one gets ludicrous spin to distract and divert public attention from this rent-seekers’ taxation. In the case of water charges the spin was the totally ridiculous yarn that the Government was planning to privatise Irish Water. And this brings us back to these serious-sounding “research briefs” which are actually intended to make the case for more rent-seeking opportunities for the usual powerful and influential special interests favoured by the left and the pseudo-left.

      1. Ah, Brian. I can’t be sure about whether or not these are serious questions. I suspect you have your tongue in your cheek.

        But if you haven’t and if you can’t distinguish between the deluded who spout out-dated marxist clap-trap (either because they still believe it or because they’re not too sure but it gets them some attention, and some political support from the equally deluded) and those who have clearly defined political ambitions, who will pursue these ambitions ruthlessly and singlemindedly and who use some of this out-dated marxist clap-trap purely on a tactical basis (because it helps to rustle up political support in certain demographics and social groupings) and who will drop it when it longer serves their purpose, then I fear you are far beyond the point where you might benefit from any guidance or direction I might be able to provide.

  4. This isnt a particular surprise to me. I have written on it about half a dozen times in the Irish Examiner and on my blog. Each time the bare facts get denied, or conflated with “but we have low services/high cost of living/ high VAT” etc. The reality is that if we were to levy tax on the same basis, gradients and levels as the Danes or similar we would be wondering what to do with the loot.
    We live in a post truth world – we decry Trump while trumpeting that we are uniquely crushed by tax. We aint. But there is no political constituency to say that.
    https://brianmlucey.wordpress.com/2016/04/12/taxing-wages-oecd-2015/ as an example

    1. It is also worth noting that Ireland’s average wage seems to be much lower than that of our nearest neighbour, and that of other EU countries. See the chart section 2.5 (Page 20 approx) of the recent Dept of Finance paper (below).

      Does this indicate that the capacity to bear higher rates is lower in Ireland, because average rates of pay are lower in Ireland?

      http://www.finance.gov.ie/sites/default/files/Income%20Tax%20Reform%20Plan-FINAL_0.pdf

      The other side of the coin, is that the countries with higher rate of taxation and social security, generally have better benefits.
      eg Health service in the UK, income related unemployment benefits and pension benefits in many EU countries (as mentioned below by C McC).

    2. I’m sure, Brian, that you’re as well aware as the rest of us that any observable feature or phenomenon in the Irish economy – such as the design and application of the income tax regime in this instance – falls under the heading of, or may be explained in terms of, (1) a “convenient fiction”, (2) an “optical illusion” or (3) an actual or perceived “political reality” – with these categories varying with the perception of the social or economic grouping using them. That’s what makes it all so much fun. It really is “leprechaun economics” land.

      But those who exercise power and influence (and the armies of officials, advisers, tame academics, functionaries and flunkies they retain) are well aware of a few key economic and political realities – even if a huge amount of time and resource is deployed to conceal, or to divert public attention from, these realities. For example, they are well aware of (1) the fact that the pre-tax, pre-welfare transfer distribution of income in Ireland is the most unequal in the OECD (as Eamonn Moran highlights below), that (2) much of this inequality is due to orchestrated and officially authorised rent-seeking from which they primarily benefit (but which also allows them to ensure the acquiesence of other rent-seeking and potentially disruptive special interests), that (3) this rent-seeking generates much of the gap between the cost of living in Ireland and the average for the EU15 and finally (4) that the tax and welfare transfer system must be designed and applied to reduce this blatant and excessive inequality to ensure as far as possible the consent of the masses to be governed.

      The income tax and welfare transfer systems focus primarily or re-distribution rather than on the effective and efficient provision of universal public services – as they would in the more social democratic polities (such as the Scandinavian ones). The intent is to ameliorate the malign impact of this offically authorised rent-seeking – or informal taxation. But this extraction of the rent-seekers’ taxation reduces the ability to levy formal income taxes on lower levels of income and so we have a structure and incidence that removes large numbers of citizens from income tax, then gradually increases the rates and incidence until it becomes much more progressive at relatively low levels of income and finally levels out again for the incomes of the really wealthy and powerful – who have no end of ruses to evade or avoid tax.

      This is the particular Irish trade-off between the perception of the political power exercised by the “demos” and the greed of the wealthy and powerful and their legions of hangers-on. Every advanced polity has it own trade-off. It’s just that the trade-off is between greater extremes in Ireland and more skill, cunning and effort is required to construct the convenient fictions and optical illusions required to conceal these extremes. As I say, that’s what makes it so much fun.

  5. A very rarely mentioned fact is that Ireland has the most unequal pre tax income distribution in the OECD. This means there are more people in Ireland below the 67% of average than in most places. The increase of the taxbands which removed some lower earners was a bad political choice i think. Far better to have kept that income strem and increased services.

    My biggest annoyance on this topic is the deliberate distortion by many industry financiers and economists who focus solely on the abstract “marginal” rates. 9 times out of 10 this focus is ideologically driven propaganda. Academics have a role here to call this kind of thing out and they rarely if ever do.

  6. Michael it would be helpful to account also for the redistributive impact of the Irish PRSI system regarding pensions – the Irish PRSI pension is flat-rate while contributions (to the non-existent fund) are proportionate. In several EU countries the pensions are pay-related. Makes a significant difference to the progressivity of the overall system.

    1. Depending on your profession you can game this very well.

      I know a qualified nurse in her early 60s with high household net wealth.

      She spent her 30s and 40s outside of paid employment. She now works one shift per fortnight and will qualify for a full contributory state pension at 66. It is a very good deal indeed.

      1. Th qualified nurse is in for a bit of shock, if she has your expectation that she will get a ‘full contributory pension’ at 66.
        The rules were changed for all those private sector employees retiring after April 2012. These new rules reduced the amounts of pension for all people with an average of less than 48 weeks full contributions since 1990.

        The new rules are particularly disadvantageous to women working in the private sector who took time out rearing children, before April 1994.

        After April 1994, PRSI was introduced to the public sector and, naturally, new rules were put in place to allow women take time out to rear families and not suffer contribution loss for pension purposes.

        Last weekends SBP has reports of another attack on private sector contributory pension aspirants, an attack being mounted by bonanza pension scheme members on the precariat. The latest attack is on top of the above changes to benefits, and on top of pushing pension ages out to 66 and to 67 in 2021, and 68 in 2028.

  7. What is the purpose of this document?
    Given the timing of its release I wonder if it is an attempt to debunk the comments made by the Irish Tax Institute that income tax rates are very high and are a barrier to attracting corporate executives or high earners into Ireland?

    NERI’s report found the following:
    “An assessment of the effective rates of tax
    (income tax and social insurance
    contributions) as a percentage of gross
    income does not find evidence that Irish
    taxes on income were high relative to
    international comparators in 2014.”

    Based on their analysis they are correct.

    However they’re analysis is incomplete.
    The report only looks at income tax paid by the following:
    – Single income tax cases with incomes up to €68k
    – Dual income tax cases with incomes up to €68k for the primary earner and €57k for the secondary earner.

    However, from the Income & Tax Distribution table from the 2016 budget document we know the following:
    1. 65% of all income tax is paid by tax cases (earners) earning above €70k.
    2. Only 14% of tax cases earned over €70k.

    From this we can take the following:
    1. While NERI looked at approx 86% of income tax cases they only looked at approx 35% of Income Tax paid.
    2. The 14% earning above €70k are really doing the heavy lifting – while they only account for 14% of tax cases they pay 65% of all USC and Income Tax.

    The ITI’s comments were not aimed at low or middle earners but at higher earners – presumably those at €100k/€200k+

    As an emigrant one half of a dual high income family I will not be eager to return to Ireland until either (i) income taxes on high earners (300%+ of average income) are reduced, or (ii) public services are improved. Either or both of these options can be achieved and appeal to my family by (i) either squeezing more & more out of the existing public service budget or (ii) by raising income taxes on lower earners.

    As NERI’s report show’s there is significant scope for increasing taxes on low earners. I for one look forward to hearing NERI call for increased taxes on low and middle income earners…………….

    Andy

  8. There is nothing incorrect about the analysis in this paper.

    The issue is that these stylised examples are a function of median earnings and miss important information in the actual earnings distribution.

    In Ireland’s case the earnings distribution has a long right tail. High skills are well rewarded in Ireland because of the presence of multinationals.

    Also, to be in the earnings distribution you have to have labour income. The issue here is that labour force participation by the low-skilled in Ireland is very low. Employment of those with lower secondary education or below has fallen 10 percentage points since 2005. It has only fallen by 4 percentage points for those with tertiary education.

    So what about tax? For example a married couple each on 200% of average income would have a household income of a little under €150k. In 2014 about 2% of tax units earned above€150k. But they took in 13.5% of total income and paid 26% of all income tax and USC.

    So Ireland manages to have a personal income tax regime for high earners that is quite like the EU-15 except:
    -High-skilled people are likely in employment, earning very well, and paying a lot of tax as a result
    -A lot of potential low earners don’t have labour income as they are not in employment at all

    Which gets us neatly to the fact that Ireland has both the highest level of market income inequality as well as the most effective tax-and-transfer system at reducing it.

  9. Michael,

    Would you to comment on how the OECD arrive at these gross and net income figures. I scanned through the OECD table but it made little sense to me, yet is clearly fundamental to the comparative exercise. The OECD document seems to impute a rent equal to 20 % of gross income for all households?, which would be a bit strange?

    I have some difficulty in accepting the seemingly generally accepted wisdom that lower paid workers pay more in taxes/social contributions in other countries than in Ireland. My reason for having difficulty in accepting this generally accepted wisdom, is that surviving on low pay seems a very big challenge in Ireland, particularly in the high rental cost Dublin area, where rents can be up to 50% of net income. Being asked to believe that low paid people in other countries are left with less disposable income, albeit with much more free public services at their disposal, is a little counter intuitive for me.

  10. https://brianmlucey.wordpress.com/2013/05/04/we-need-an-honest-debate-on-tax/
    and
    http://www.irishexaminer.com/business/deluded-perception-of-tax-not-borne-out-by-fact-230283.html
    “It is sobering to realise that if we collected the same percentage of GDP in tax as does Denmark, we would be collecting 60% more. In 2013, this would amount to €75bn+, and we’d be running a massive surplus. If we had the average EU 27 tax take, we would still take in about 24% more and be in budgetary balance.Can we really expect sympathy from our EU partners when our tax take is so much lower than theirs?”
    Our hindenberGDP , a function of how we have decided to organize our society, keeps coming back to explode all over us.

    1. GDP? In Ireland? Next year we might claim billions of dollars of Brazilian cows as contributing to Irish GDP, on top of international aviation fleets. It’s a fiction. And certainly doesn’t represent a realistically taxable base. So let’s at least be serious. A debate on Irish taxation – well worth having – should at least count on realistic numbers.

      H

  11. There are two issues that skew the outcome:

    1) Public health costs account for a fifth of Irish current government spending – the highest ratio in the EU28 – but despite reform efforts and lots of cash invested in the hybrid public-private system, working families who are not affluent feel compelled to pay for private health insurance because of lack of confidence in the public service. These people are in effect subject to an unaccounted tax that is not necessary in for example Denmark.

    2) Colm above referred to pensions – 60% of the private sector workforce is reliant only on a public system that pays less than a third of average earnings while the occupational pension coverage level is among the worst in the developed world and should be a national embarrassment but is not (wonder why it is not on the radar of politicians, senior policy makers, academics, trade union officials, and mainstream media employed journalists????).

    So the employer and employee PRSI tax contributions are low compared with for example the main economies of the EU15 with the exception of the UK but there is a higher risk of pensioner poverty in Ireland.

  12. I venture to suggest that the vicious circle will only be broken when the electoral balance between the main interests shifts i.e. when a majority make the necessary connection between being “taken out of the tax net” and sitting on an out-patient waiting list of half-a-million people.

    The secret of the success of the Northern economies in Europe is the willingness to pay tax because (a) it is fairly equitably distributed (although this is always the subject of dispute) and (b) public services are organised on a proper and efficient basis i.e. almost invariably with some form of market mechanisms putting managers in a position to manage, which shakes the rent-seeking which Paul Hunt decries out of the system. (As one medical specialist commented on RTE radio today, patients (or should that be clients?) have become a bit of a nuisance in our totally disorganised hospital system. They would work really well without them).

  13. Michael Taft stirs the pot…
    http://notesonthefront.typepad.com/politicaleconomy/2016/08/what-does-irish-business-really-really-need.html
    Why so much employment dense entrepreneurship in high tax nations,?


    This can lead us to a provocative observation: enterprise flourishes in societies marked by high levels of social cohesion, social protection, strong public services and wages. In other words,equality and social cohesion are the necessary ingredients for enterprise development’

    1. @ brianlucey

      60 years of tax incentives have failed to create a significant exporting indigenous sector — of course there are other factors too.

      A 2014 on a survey of 150 US high tech founders found that “two factors that are often discussed by policymakers and business leaders — low tax rates and business-friendly regulations — were mentioned only a handful of times in our surveys and interviews.

      http://www.finfacts.ie/Irish_finance_news/articleDetail.php?Irish-tax-break-addiction-and-failed-entrepreneurship-651

    2. For goodness sake: is this another “why can’t we be more like the Scandinavians” moan? I’m not too sure what Irish business really needs, but it’s very clear what it wants and gets in spades. And that’s opportunities for rent-seeking. And this desire is shared by the upper echelons in the public and semi-state sectors. Just to put Michael Taft’s analysis of these “Other SOEs” (Austria, Belgium, Denmark, Finland, Sweden and Norway) in context:

      The average market income Gini coefficient for these countries is 0.463 (with relatively little deviation). Ireland’s is 0.575. It’s the highest in the OECD and higher than the US’s (0.508) or the UK’s (0.527). The average post-tax, post welfare transfer Gini coefficient for the Other SOEs is 0.265. Ireland gets its down to 0.309.

      The average volume index of the Other SOEs GDP per capita (with the EU average at 100) is 127. Ireland’s is 145. The average Actual Individual Consumption (AIC) volume index for the Other SOEs is 117; Ireland’s is 95.

      Ireland spends proportionately more of its lower tax take reducing its Gini coefficient than the Other SOEs. One reason is that their starting Gini coefficients are much lower. But that’s the outcome of a long sequence of policy decisions – as is Ireland’s much higher coefficient. For Ireland with a lower tax take relative to GDP there is much less to spend to enhance AIC as the Other SOEs do – and rent-seeking and inefficiencies seriously depress the Irish AIC.

      But it seems that’s the way Irish people want it. They keep electing the clowns and scamps that perpetuate this system.

    3. Absolutely spot on! Except in the case of Norway! The missing ingredient in that country, and in Ireland, is a strong history of industrial production. They still managed to achieve, in common with neighbouring countries such as Sweden and Denmark, strong associated trade union involvement, apprenticeship schemes, board representation, universal health and pension rights etc. Without North Sea oil, Norway would find it difficult to stay in this league, as Finland is currently experiencing.(I bought a Tandberg tape recorder, still working perfectly as an amplifier, and I use a Nokia phone).

      Ireland is in a somewhat parallel situation. The difficulties lie with the participants in the decision-making, unions included. The missing ingredient? Willingness to recognise that we live in a “social market” economy (as signed up to under the Lisbon Treaty). All the emphasis is on the social, without regard to the market.

    4. Mr. Taft and Unite often stir the pot, but the analysis is always partisan in the extreme and the selected data is used in ways that could prove Genghis Khan was a first cousin or Mother Teresa.

      Without having any idea of the real situation as regards to startups or entrepreneurship, I’d suggest a couple of thoughts. One is that a raw count of startups is meaningless. How big are they? How long do they last? Does 4 failed companies started in 1 year by the same person count as 4 startups (with employees).

      Plus, quite simply put, Irish entrepreneurs often go to the USA or UK. Irish people speak the languages already. There may or may not be any validity in anything in the Taft article. The numbers shown could support any conclusion you like.

      And finally, of course, the Norwegian comment on quality of services is telling. Ireland’s quality of public services is not world class. A question – as always – for Mr. Taft and his union buddies. “Do you care about public services, or about public servants?”. The answer is clear and obvious, as always.

      H

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