Last week, an annual review by the Tax Strategy Group (TSG) of the Department of Finance cautiously suggested that Ireland might have an overly progressive income tax system. The inference of this notion implies that individuals with higher wages may be shouldering a larger portion of the overall tax responsibility. It’s generally recognised that most tax systems are progressive to varying extents.
The TSG, in an analysis of income tax, highlighted that Ireland boasts one of the world’s most progressive income tax systems developed countries. It was demonstrated that the income tax and Universal Social Charge (USC) expected to be collected this year, will be provided approximately 63% by the top 10% earners (those earning more than €102,000 annually) while the top 1% earners (those earning over €290,000) will contribute 24.4% of total.
On the contrary, those earning less than €69,000, accounting for the bottom 80% of wage earners, are expected to contribute a mere 21% of the total income tax and USC collection. It was also highlighted that 251,000 earning entities, accounting for 7%, are entirely exempt from paying income tax. While 64% individuals will be paying the standard 20% income tax rate, a significant group (roughly one million individuals) would have their tax liabilities addressed through their tax credits.
This indicates that a significant segment of the workforce, approximately 1.2 million, are effectively exempted from paying income tax. The Department posed the question about whether this level of fiscal progressivity is apt or if it results in overloaded tax responsibility on other income earners. It highlighted the associated potential risk of high marginal tax rates resulting in adverse consequences for work incentives and competitiveness, including its impact on attracting inward investment relying on highly skilled workers.
The department echoed the long-held grievances of business advocacy organisations when it scrutinised the issues of competitiveness. Predominantly, these groups believe the comparably high rates of personal tax in the country jeopardise our ability to draw investments.
The grumbles have only increased in intensity after the establishment of a global baseline corporate tax rate. This development has somewhat devalued our main incentive of a low company tax rate while concurrently highlighting certain pitfalls of establishing a business here such as housing, energy, and most pertinent to this case, personal tax.
Ibec, the nation’s leading business advocacy organisation, also underscored the inherent risk of placing the primary burden of income tax on such a small fraction of the labour force. Ger Brady, the chief economist of this organisation, pointed out that nearly 175,000 individuals work in the IT sector of the Republic and the number of those employed in the hospitality sector is approximately the same; however, the former contributed €3.3 billion in income tax last year, while the latter paid out only €511 million. According to Brady, our progressive taxation system has become excessively stern.
Signalling the risk inherent in this reliance on a concentrated tax base is a manipulation cleverly more subtle, and thus less polemic, than suggesting that the highest earners in the country are overtaxed, particularly when many families can barely afford rent or oversubscribed public services.
Unless you’re a Scandinavian benefiting from first-rate public services, or an individual in the Middle East enjoying low to non-existent personal tax due to significant state oil revenues, complaining about income tax seems universal.
A person’s total tax obligation should be understood holistically, considering the indirect taxes such as VAT, capital gains, stamp duty. Equally, it’s important to consider the extent to which high earners shield their income in tax-optimised corporate entities or private pension schemes.
A number of extremely affluent individuals have the advantage of tax breaks and deductions, some via offshore mediums, to alleviate their liabilities, while others earn a significant portion of their income from capital gains that attract a lower taxation rate than earned income.
Nevertheless, it would be wildly inaccurate to lump together individuals earning more than €100,000 and a small elite of the super-rich using particular tax evasion schemes.
Malcolm Gladwell, a renowned writer, asserts that the significant disparity between nations such as the United States and Greece in adhering to tax laws does not derive from penalties for tax evasion, which are arguably more stringent in Greece. Instead, the dissimilarity emerges from the perceived equity of the tax system. In the US, taxpayers generally view their regimen as considerably just and as a result, comply suitably. Conversely, Greeks regard their system as patently inequitable and manipulated, often by those in elite circles.
In Ireland, politicians from the central or left-leaning political sphere would face severe criticism if they ever hint that the top-tier earners are overtaxed. However, the TSG, not being part of the political class, likely echo a considerable opinion from within their department.