High earners pay more than their fair share in tax, while others get a free ride
Don't believe the poverty lobby groups, low earners and those on the dole are doing relatively well
Published 02/10/2016 | 02:30
If you listened to politicians, the commentariat and the poverty lobby groups, you would be convinced that austerity had left the lower paid and those on social welfare in dire circumstances and that higher earners are paying very little tax.
Here are a few facts.
A couple in Ireland earning €40,000 pays €6,143 in income tax, PRSI and USC, or 15pc of their income. A couple earning £35,000 in the UK pays 23pc of their income in equivalent taxes.
If the couple in Ireland has two children, they will pay €5,143 in taxes and receive €3,300 in child benefit. If you view child benefit as a negative income tax, the net tax falls to €1,843, or 4.6pc of their gross income.
So the tax take on low and middle earners in Ireland is extremely low when compared to the UK. According to the OECD, the tax take on low earners is the lowest in the OECD.
A significant part of the difference between the tax rates in Ireland and the UK is due to social insurance. An employee earning €40,000 in Ireland pays €1,600 a year in PRSI. A UK employee on £35,000 pays £3,283 a year in social insurance. That is right - they pay twice the social insurance in the UK.
But an Irish married man with a dependent wife gets weekly dole of €312.80, while his equivalent in the UK gets only £114.85.
So the Irish man pays half the social insurance but gets twice the dole. That is unfair to the general Irish taxpayer who has to fund the difference.
What about high earners? An Irish couple with two children earning €80,000, which just puts them into the top 10pc of earners, pays €22,272, or 27.8pc of their income, in net taxes after deducting child benefit. So a moderately well paid couple pays €22,272 whereas our friend on €40,000 pays €1,843. Where is the fairness in that?
According to the latest figures from the Revenue Commissioners, the top 20pc of earners pay 75pc of all income tax and USC paid in the country. The bottom 50pc of earners pay less than 4pc of the total tax and USC take. Some 750,000 low earners pay no income tax or USC at all.
So, people on social welfare get very high payments. Low earners pay little or no tax. And the top 20pc of earners pay most of the income taxes. Not quite what you are hearing from politicians and lobbyists. This is not fair. It's not fair that low earners get a free ride on the backs of the top 20pc. It's not fair that those on social welfare get among the highest welfare benefits and payments in Europe at the expense of a minority of taxpayers.
This small group of taxpayers is called upon, time and time again, to pay for everything. Salary increases for public servants? No problem, we will push up the top tax rate to pay for it. More social housing? Fine, push up the top tax rate. State-subsidised childcare? Fine. Push up the top tax rate, but don't let high earners benefit from the subsidy. More spending on public hospitals? Fine, push up the top tax rate and, while we are at it, cut the tax relief we give them on private health insurance.
Every citizen should pay their fair share. It's not enough just for the top 20pc to pay their fair share. Everyone should have a stake in society and everyone should contribute something.
But quite apart from the unfairness of the system, it's not good for the dole recipients themselves. If you have very high social welfare, people will become dependent on the State. They won't look for a job and try to get on in life. According to Eurostat, in 2014, 22pc of Irish people were living in jobless households - that was far higher than any other EU country and twice the EU average of around 11pc. The ESRI uses a different measure, but it still estimates our jobless household rates to be around 35pc higher than the EU average.
If we send a message out to our kids that they need not bother with school or work because they will get high social welfare payments and benefits and free housing, then they won't bother with school or work. The message will be further reinforced when they see their parents not bothering to work for years because the generous welfare system, free housing and free healthcare make it not worth their while to work. But it won't only be at family level - they will see their whole community living on Benefits Street.
We need to break this self-perpetuating cycle. We have to get the message out to people that it pays to finish school and it pays to work. We have to tell people that living on the dole will no longer be a picnic.
Means-tested social welfare rates and benefits should be cut to average EU levels. Of course, it will cause hardship in the short term. But it will spur many of these people to re-enter the workforce and they will benefit hugely from it in time.
Here is another gross unfairness in the system: a person who has worked all their life and contributed hundreds of thousands of euro in PRSI will get virtually the same Old Age Pension as someone who has drawn the dole all their life. That is not fair. The systems in most other EU countries are pay related - the more social insurance you pay while you work, the better the pension you get in retirement.
The PRSI system here should be changed so that a person's contributions should go into an account in their own name. This account would be used to pay their pension and their healthcare. They could also draw on the account during any periods of unemployment. The more they put into the account, the more they would get out. If someone earning €80,000 a year loses their job, they would get a dole payment based on their salary, but it would be drawn from their own account. They would not be getting some State handout, they would be getting their own money back. And it would always be in their interest to work. While they are working, they are building up their retirement account. While they are unemployed, they are depleting it.
When they retire, they would get a pension based on the amount in the account.
Such a system would go a long way to solving the pensions crisis we have. If people paid for their pension through a PRSI account in their own name, they would not need a separate, privately funded pension. They would be prepared to pay higher PRSI if they could see a direct link between what they pay in and what they eventually draw out. There would be no more arguments about the age at which a person should be able to draw the Old Age Pension. The amount of the pension they would get and the age from which it could be drawn would be decided by the amount they have in their PRSI account.
It's time for the top earners to shout stop. They have studied hard and worked hard to be where they are today. There should be no shame in earning a good salary and they should not be penalised for it.
Brendan Burgess is the founder of the consumer forum Askabout money.com