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Saturday 20 September 2014

Poor pay more of their income in tax than the middle class - study

Published 29/08/2014 | 02:30

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New research suggests middle earners aren't suffering as much as low earners
New research suggests middle earners aren't suffering as much as low earners

THE poor pay more tax than the middle class as a proportion of their income because VAT and other indirect taxes hit the badly off more than the middle class, according to a new report by a trade union-funded think tank.

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The study from the Nevin Institute says the poorest 10pc pay a slightly larger share of their income than the richest 10pc. It also concludes that the middle pay the least of all.

While most people equate tax with income tax, most citizens pay almost as much in indirect taxes such as VAT and excise duty as we do in income tax.

This hits the poor harder because they pay the same tax for a bottle of wine or packet of cigarettes as their middle class counterparts, the Nevin Institute says.

VAT is higher in Ireland than anywhere else in the western world outside Scandinavia. Income tax is also high for single people on above average salaries.

The Nevin Institute does not question the contribution from the richest people in the country but believes that the middle class is not paying its fair share.

The figures show that wealthy people undoubtedly contribute more income tax; the richest 10pc pays 23pc of all income tax while the poorest 10pc contribute just 0.3pc.

The Nevin Institute's research concludes however that the bottom 10pc of the population paid just over 30.5pc of their income in direct, indirect and total household taxation (as a percentage of gross income). In the top 10pc, the figure was 29.6pc.

The figures would appear to challenge the idea of a squeezed middle class.

The International Monetary Fund has also questioned the idea that the middle class is bearing the brunt of the financial crisis - but other organisations, such as the Government-funded Economic and Social Research Institute, have concluded that the squeezed middle does exist and is being hit hardest by the tax system.

The Nevin Institute's research found that the top 20pc of households and the bottom 10pc pay the biggest proportion of income in direct and indirect taxes, while the remaining 70pc pay less.

"This gives a U-shape to the overall household tax contribution curve - households at the bottom and top of the income distribution contribute the most, with contributions as a percentage of gross income declining to their lowest points in the third, fourth and fifth deciles and then increasing after that towards the top decile," researcher Michael Collins wrote.

More than €50bn will be collected across all taxation categories during 2014. While companies and other businesses contribute a sizeable proportion of this sum (through profit taxes, local authority charges and employer PRSI) the largest proportion flows from ordinary households.

The research flies in the face of many other findings.

Earlier this month, the ESRI reversed previous findings to conclude in a report by John FitzGerald on income distribution that the brunt of the budgetary adjustments have been borne by middle-income earners.

Dr FitzGerald's findings note that welfare payments have been protected and high earners have been wiped out, leaving the tax burden to be shifted to Middle Ireland.

"This means that somebody else has got to pay and in this case it was those in the middle-income range," Prof FitzGerald concludes.

Irish Independent

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