We must take stock of our skewed tax system and ask ourselves if it is even fit for purpose
As Budget 2017 approaches, the topic of tax is never far away, although this year there are limited monies available and some small measures will quickly account for the €300m set aside.
What is far more interesting, and indeed important, is the need to take stock of our personal tax system in its entirety and to honestly ask if it is fit for purpose. It is particularly timely to carry out such an exercise for a few reasons.
Firstly, 50 different tax changes have impacted Ireland's personal-tax system in the past seven years and have led to 53 moving parts in personal taxes. We now have three different tax charges, each with a different entry point and a total of 10 rates, 15 bands and 22 main personal tax credits.
Perhaps it's not altogether surprising, given the amount of heavy lifting that was being asked of nine consecutive budgets. Not only was personal tax required to put a floor under the exchequer returns, it was also charged with juggling the social and economic needs of the country during sensitive and difficult times. It was never going to be easy.
The public focus on their cash position and the importance of securing support on Budget Day meant a budget-by-budget approach to personal tax policy for nine consecutive budgets. This approach has left us with a personal tax system that is skewed and one that has taken on unusual traits at a range of salary levels from lower to higher income levels.
The Irish Tax Institute's report, 'Perspectives on Ireland's Personal Tax System - A Medium to Long Term Approach', offers some interesting analysis on those traits. For example, at the lower end, a worker on €25,000 earns 1.4 times the salary of a person on €18,000 but pays 5.6 times the tax.
Those in the 'squeezed middle' (eg on €55,000) pay more tax than in Sweden, Spain, Switzerland and the US and over €800 more than in the UK. Meanwhile, a worker on €75,000 earns three times the amount of a person on €25,000 but pays almost eight times the amount of tax.
The impact of high taxes can already be seen in the squeezed middle but differences really accelerate at higher income levels, with the capping of recent tax reductions at salaries of €70,044 having an impact.
A worker on €100,000 earns 5.6 times the amount of a person on €18,000 and pays almost 66 times the amount of tax. If you compare them with the person on €25,000, they earn four times the salary but pay over 11.7 times the amount of tax. And at €100,000, Ireland remains at the upper end of the global rankings, ahead of taxpayers in France, Spain and the UK, amongst others.
A worker on €120,000 earns 6.7 times the amount of a person on €18,000 and pays over 83 times the amount of tax.
There was a universal appreciation that 'needs must' and that in the early years of the crash a blunt approach to increasing tax yields was essential.
However, the combined impact of those changes and the way they have been 'to some extent' unwound has left some interesting marks on the Irish personal tax system - marks that we should reflect on as we look towards the formulation of future personal-tax policy.
It's certainly time for a coherent and planned approach to Ireland's personal tax system in order to balance both the economic and social needs of the country into the future and the Institute has produced its report today as part of a broader discussion on the personal tax system.
The publication of the Income Tax Reform Plan last July, as originally outlined in the Programme for Government, was a welcome first step on the journey of personal tax reform.
As the Oireachtas sets about reflecting on the Income Tax Reform Plan, the Institute's report asks a number of questions including 'Have we a personal tax system in Ireland that meets our social needs but is also suitable for a small open economy?'
Experts and policymakers have spoken about the importance of balance in a personal tax system. The commencement of an open and informed discussion on all of the issues should help ensure that we find it.
Mark Barrett is president of the Irish Tax Institute