Tax Breaks and Tax Rates for Top Earners

There has been a lot of discussion in recent months about the scale of tax reliefs in Ireland and I’ve been planning to write a couple of posts on this topic. In relation to this issue, an opinion that is commonly expressed by leading figures in the Irish media is that the very richest in Ireland pay very little in tax because of these reliefs.

Income Taxes Too High and Too Low

I’ve criticised Pat McArdle on a couple of occasions recently so I’m happy to say that this article on tax makes some useful points. In particular, the following points are correct and are simply not being said enough by our economic and political commentators:

Income taxes are both too high and too low. Too high because marginal rates have gone above 50 per cent – Irish people seem to be averse to parting with more than half of their extra euro. Too low because half the population does not pay any tax.

The problem is not just high rates but, critically, the low levels at which they kick in. It is astonishing that a PAYE earner on a lowly €40,000 has a marginal rate of 51 per cent.


From now on, the challenge is to broaden the income tax base not increase the rates.

Perhaps unsurprisingly, there some points of emphasis in the article I’d disagree with. That the 2009 tax yield has fallen below its 2008 level despite tax rate increases is not proof that “we’re into negative Laffer curve territory”. It’s proof we’re in a very severe recession. But yes, the top marginal income tax rates are too high and they could be pushed into Laffer curve territory if we’re not careful.

Moreover, whatever about the upcoming budget, it will be essentially impossible for the government to stabilize the public finances over the next few years without finding extra tax revenue. Hopefully, this can be done, as McArdle recommends, by broadening the income tax base and by implementing some of the revenue-raising recommendations of the Commission on Taxation, such as a property tax. But getting these measures through won’t be made easier by comments such as McArdle’s jibe here that “tax increases are the last resort of a weak Government.”

A Flat Tax for Ireland?

When addressing the issue of raising income taxes, two objections tend to come up. The first is that the combined marginal tax rate (including PRSI and levies) is already up to 54%  (see page 161 of the Commission on Taxation Report) and this marginal tax rate kicks in at fairly low incomes. Further increases in this marginal tax rate are likely to trigger increased tax avoidance and can also have negative side effects in terms of work incentives.

The second objection is that we don’t want to raise taxes on low earners because they already don’t make much money and we have to be careful about not creating poverty traps in which people are better off earning unemployment benefit than working (Suzanne Kelly’s Irish Times article on this presented some interesting calculations.)

One way to address these objections is to introduce a flax tax with a large exemption limit. This would keep the lower paid out of the tax net and keep marginal tax rates from reaching dangerously high levels. But this approach could raise additional revenue, essentially because it would abolish the 20% tax band.

Limited Gains from Taxing the Rich

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.

Irish Times Article on Tax

Here‘s an article I wrote for today’s Irish Times on tax.  The article was slightly edited in a way that might obscure one of the points I wanted to make. I understand that the Commission on Taxation were not really given a mandate to think about what is the “correct” level of taxation but the fact is that we are going to have make serious Boston-versus Berlin-style decisions over the next few years and this issue will come up time and again.

I don’t favour raising income taxes in the upcoming budget and I do favour full implementation of the McCarthy report. But after that point, a decision to keep income taxes at current levels will have major implications for spending. I heard the Minister for Finance on the radio yesterday say that there is was “no further room” for income tax increases. It is possible he is referring only to the upcoming budget but the idea that income tax has hit some very high level that can’t be increased doesn’t strike me as correct in light of the facts.