We can't push people into such high levels of personal tax that it is not attractive for them to earn promotion
Published 03/09/2016 | 02:30
It is clear that the Government has only a small amount of money to spend on tax measures in Budget 2017, but all eyes must be on personal taxes.
The personal tax burden has started to come down in recent budgets but middle-income and higher-income earners still pay more tax than they did seven years ago before austerity measures kicked in.
It's also interesting to note that the top 50pc of income earners, those earning above €30,000, pay over 96pc of the personal tax take.
Ireland's personal tax system is the most progressive system in the OECD, after Israel, and the most progressive system in the EU.
The OECD measures progressivity by comparing the tax paid by workers on 167pc of the average wage with lower-paid workers.
Their table of those earning 167pc of the average wage (€61,000 in Ireland's case) shows Ireland in the top 10 marginal tax rates at that level.
By the time you get to €75,000, we're a high-tax country by international comparison and that remains the case as salaries increase. Workers on €75,000 pay a 52pc marginal tax rate; they earn twice the average wage but pay 3.6 times the tax.
Those earning €100,000 earn 2.7 times the average wage and pay 5.3 times the tax.
Ireland's 'high rate meets low entry point' combination is at the heart of our personal tax problem. Global calculations carried out by the Irish Tax Institute really drive home the impact of this.
At €55,000, our workers pay more personal tax than those in Spain, the UK and even Sweden. And while it's interesting to see so much attention on the USC, in reality it's the big step jump in our income tax rates from 20pc to 40pc that is causing the big squeeze for the middle earners. A move from just €33,800 to €33,801 means the taxpayer's income tax rate doubles in one fell swoop.
It's vital that Budget 2017 continues to bring personal tax rates down, whatever the mechanism, although with just €300m to spend there's little room for manoeuvre.
Speculation to date suggests that the focus will continue on USC cuts and a reduction is to be welcomed.
However, much road remains to be travelled to truly alleviate the burden for the squeezed middle.
Of course, the personal impact of the high tax burden is one issue, but we must also look at how the tax system impacts our country in terms of job creation, investment, productivity and costs.
From a growth and productivity perspective, we cannot afford to push taxpayers into such high levels of personal tax that it's no longer attractive to earn more, produce more or secure a promotion.
We're in danger of disincentivising productivity with repercussions for growth in the workplace and the economy.
The squeezed middle includes our sales managers, lab supervisors and mechanical engineers. It includes those workers who look after logistics, business development, supplier relationships and projects. The very people we need to be productive and ambitious if we are to drive the growth of thousands of Irish businesses every day.
We also need to end the discrimination of the self-employed; right now they pay higher taxes and enter the PRSI system earlier than PAYE workers.
They are the thousands of men and women around the country who take the risk not only of employing themselves, but others too.
If the growth and productivity curves are to go up, then the personal tax rates must come down.
Mary Honohan is president of the Irish Tax Institute