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Friday 30 September 2016

Workers hit with an extra €5bn a year in income tax since crash

Published 05/08/2016 | 02:30

Dermot O'Leary, Chief Economist of Goodbody Stockbrokers. Photo: Maxwell's
Dermot O'Leary, Chief Economist of Goodbody Stockbrokers. Photo: Maxwell's

Ordinary workers are bearing a massive burden of higher income taxes to bail out the State since the crash.

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New calculations show that workers are now paying €5bn a year extra in income tax alone since the boom.

This is despite fewer workers in the system as unemployment remains elevated.

Workers are bearing the higher burden to run the State and pay for services like health and public sector wages since the boom in 2008.

Overall tax revenues over the past 12 months have returned to boom-era peaks, economist Dermot O'Leary of Goodbody said, based on the latest Exchequer returns.

And income tax payments are now the biggest element of the tax take.

Mr O'Leary said this was proof workers have borne the burden of the adjustment over the period.

"Given that employment is still 7pc below those 2007 levels this highlights the degree to which workers have taken the burden of the adjustment over that period," he said in a research note.

A series of adjustments to tax bands, the introduction of the universal social charge (USC), and the restriction and abolition of tax reliefs has hiked the amount of income tax paid by households.

Income taxes in the last year amounted to almost €19bn, up by €5.2bn since the peak of the boom in 2007/2008.

The controversial USC makes up €4bn of the income tax take.

And this does not include another €8.45bn in pay related social insurance payments (PRSI) paid by workers.

Mr O'Leary said the number of workers was now around two million, down from 2.16 million during the height of the Celtic Tiger. Workers are now paying €4 out of every €10 of the total tax take, according to documents issued by the Department of Finance last month.

The Department's 'Income Tax Reform Plan' lists two-and-half A4 pages of changes to the income tax system since 2009. The list only includes changes to income tax, USC and PRSI, but leaves out other charges and levies introduced since the financial collapse.

It states: "Income tax and USC now comprise the single largest source of tax revenue to the Exchequer, having surpassed the proportion contributed by VAT in 2009."

The document shows that 36pc of workers pay no income tax.

Over the past eight years, the tax take from stamp duty and capital gains tax has collapsed. Middle and upper-income workers have been forced to take up the slack.

Corporation tax was the only other segment of the tax take to rise, up €1bn since the boom.

Mr O'Leary said: "It is noteworthy that tax revenues over the past 12 months are now back above their previous peaks.

"While categories such as stamp duty (-61pc) and capital gains tax (-78pc) are still well below those previous levels, this has been offset by income tax (+39pc) and corporation tax (17pc)."

Government spending is down €1.7bn since the boom.

Asked where the extra income tax money is going, Mr O'Leary said: "It is not to bail out the banks. It is simply to keep the State running and pay for various services such as the health system and wages."

The higher amounts of income tax do not include the introduction of the property tax and water charges, along with the increase in the higher rate of value added tax (VAT) to 23pc.

This means that instead of broadening, the tax base has narrowed.

The revelations come just a week after the International Monetary Fund said Ireland's income tax system was hurting middle-income earners.

It criticised welfare traps, which make it more attractive to stay on benefits rather than take up work, and said the system was undermining female participation in the workforce.

The revelations about the tax burden being borne by ordinary workers are set to be contentious in the run-up to October's Budget.

Finance Minister Michael Noonan wants to continue to abolish the USC.

But to do this, up to 270,000 workers will end up paying more income tax.

This is because he is likely to taper off the employee tax credit to ensure those earning more than €70,000 are not big winners from USC cuts.

The Irish Tax Institute said this would see 270,000 workers being hit with a marginal tax rate of 70pc - one of the highest in the western world.

The marginal rate is the tax you pay on higher amounts of income.

The tax body said this would mean workers earning more than €70,000 would end up facing higher income tax bills than workers in Paris, London and Stockholm.

But Fianna Fáil is expected to oppose the measure.

Irish Independent

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