Our personal tax system is skewed - and leans too much on a small group
It was never going to be easy to make waves on personal tax in last Tuesday's Budget with just one quarter of the overall Budget allocation dedicated to tax. The Minister made clear he had limited resources to address some of the challenges in the personal tax system and what he did have was targeted at the lower and middle-income earners.
Some €335m on USC cuts might sound like a lot of money, but when spread over 2.5 million income earners the individual impact is quite small. Large numbers of taxpayers were involved because the Minister made a half percentage rate cut across three USC rates, resulting in tax cuts for all income earners in the country. He also made one small change in the entry point to the third USC band so that minimum wage earners would not be pushed into that band and have their gain wiped away.
So what was the impact? The person on €18,000 who paid €600 got a €90 reduction, in effect a 15pc saving on their tax bill. Earners on €35,000 who paid over €6,500 in tax last year received a €178 annual saving, close to a 3pc cut. The €75,000 earner who paid close to €26,500 in tax last year received €353, accounting for a 1.3pc cut in their tax bill. In fact, the maximum USC gain that could be made by any taxpayer, regardless of income, was €353. This is because of the steps the Minster has taken over the past three budgets to cap any gains on rate reduction at income levels of €70,044. Taxpayers may have felt the gain was small when you look at the weekly figure, but it is only fair to acknowledge that the Minister has continued his journey of tax reductions.
Whatever the opinions on Budget 2017, the wider issue at stake continues to be the overall shape of the personal tax system. Ireland's personal tax regime is highly skewed and leans largely on a small group of taxpayers. Despite reductions for all, the system will become even more skewed in 2017, with middle and high income earners accounting for an even greater percentage of the overall personal tax take. Why is this the case?
Post Budget 2017, workers on €35,000 will pay 12.5 times the tax of someone on €18,000; it was 10.9 times before the Budget. Workers on €75,000 will pay over 51 times the tax of someone on €18,000; up from a multiple of 44 times the tax prior to the Budget. We must recognise that we are pressing more of the tax burden on a smaller group of people. The Minister spoke about the importance of putting in place economic shock absorbers to enable us to deal with future shocks and so we must ask ourselves if this current system is sustainable. With our global lens on, we must also wonder about our international competitiveness. The fact is Ireland is only one of 13 countries in the OECD with a marginal rate in the 50s. The Minister acknowledged that "high marginal tax rates act as a brake on employment."
The combination of this high rate with the low income tax entry point of €33,800 increases the tax burden for workers above that level. The weight of the system is felt by them with every extra euro taxed at 49 cents. For those over €70,044 the weight increases, with every 52 cents in the euro earned going to the exchequer. This is what is pushing Ireland to the higher ranks of the international personal tax tables.
Just this month the World Economic Forum released its Competitiveness Index for 2016/17 providing further questions for us on tax. While Ireland may be ranked 23rd out of 138 countries overall we are 85th in terms of the "effect of taxation on incentives to work".
Of course we appreciate that finding the balance between social and economic needs is important and that redistributing income is a key function of the system. In fact, the Irish personal tax system works harder than any other country in the EU to redistribute income.
But with the system becoming more skewed every year, it is time to ask about how we best balance the social needs of the country with the economic needs if we are to be truly shock absorbent.
Mark Barrett is president of the Irish Tax Institute