Revealed: How tax rules hit middle incomes hardest
Published 20/09/2016 | 02:30
People on middle incomes here are paying more income tax than workers in Spain, the UK, the US and Switzerland.
Workers in the squeezed middle have been hit hard over nine austerity budgets in a row, a new report from the Irish Tax Institute shows.
There have been some 50 different tax changes in those tax-hiking budgets.
This means that workers on a typical income of €55,000 are paying €800 more in income tax than someone on the same income in Britain.
The big gap between the lower tax rate of 20pc and the 40pc higher income tax rate is the main reason that middle-income people are hit so hard, rather than the Universal Social Charge.
According to the 50-page report into the personal-tax system: "While much discussion in recent times centres on the USC, the big driver of higher effective tax rates for Ireland's squeezed middle is income tax rates."
The tax practitioners said the income tax system was now full of distortions at most income levels.
It has called on the Government to use next month's Budget to start a process of simplifying the income tax system.
The report found that there were a large number of income levels where an increase in pay pushes workers into paying vastly more tax.
The report looks at the overall impact of the nine austerity budgets, instead of analysing each budget separately.
It comes just weeks ahead of the Budget, where Finance Minister Michael Noonan has just €300m to spend on tax cuts.
Most of this is expected to go on reducing the USC burden.
The president of the Irish Tax Institute, Mark Barrett, said the system had become distorted and was no longer fit for purpose. "It is time to take stock of a personal tax system that has been bent out of shape," he said.
Middle-income earners had been hit hard over the last seven years.
"Those workers in the 'squeezed middle' - €55,000 - pay more tax than in Sweden, Spain, Switzerland and the US and over €800 more than a taxpayer in the UK," he said.
Close to €16,500 in income tax, USC and PRSI is paid by someone on €55,000 in this country. This compares with just €12,000 in the US.
Low-income workers are hit particularly hard if they move up the income scale.
Just earning a euro over €33,800 means the income tax take doubles on each additional euro earned.
A worker on €25,000 is earning almost one-and-a-half times that of someone on €18,000.
However, the amount of tax paid is 5.6 times greater for the person on €25,000. This is because they pay more tax on their income at the 20pc rate.
And the fact that marginal tax rate - the income tax paid on higher levels of income - is more than 50pc has been criticised by the Tax Institute.
Ireland's marginal rate is one of the 10 highest in the Organisation for Economic Co-operation and Development.
People in Ireland end up on a marginal rate of 52pc on income above €70,045. In Spain, you have to earn €300,000 to hit this level of tax, and €152,000 in France, which is considered a high-tax country.
Efforts to make the system progressive mean that those on higher incomes pay high levels of tax. A progressive tax system is one where the more you earn, the more income tax you pay.
A worker on €75,000 earns three times more than someone on €25,000.
Yet the Irish Tax Institute calculated that a worker on €75,000 ends up paying eight times more in tax than someone earning a third of this.
A worker on €120,000 earns almost seven times the amount of a person on €18,000.
But this high earner then pays over 83 times the amount of tax.