Who is paying the most tax and is it enough?
When you include consumer taxes, the poorest pay relatively more tax than the rich.
Published 31/08/2014 | 02:30
According to the latest report from the Nevin Economic Research Institute (NERI) the poorest and the richest households are paying the most tax. It claims the income tax system is progressive, but indirect tax, such as VAT and excise, are not and they hit the poorest and most vulnerable harder than the rest. Maybe we should look at the wider tax system and not just focus on income tax alone when sharing out the spoils in the next Budget.
NERI suggests that while the rich and middle-income groups pay the most income tax, those on low incomes pay proportionately more indirect tax than the rest, and Euro for Euro, based on data taken from the CSO's last household survey, the lowest 10pc are paying over 30pc of their income in tax. It might be a spending tax but it is harsh. It seems unreasonable if NERI is right. You might ask what does it all mean and where are they going with this, and that's what we are going to look at.
The report divides households into seven parts based on income. The bottom third, fourth and fifth deciles contribute the least percentage of income in tax when indirect tax is included. Those in the seventh decile based on income, pay roughly the same fraction in direct tax (income tax) as they do in indirect tax such as VAT, excise and levies. If tax cuts are coming, and they are, NERI says the poorer households would benefit more, if indirect taxes are cut instead of income tax, particularly for the bottom 10pc.
The Nevin Institute is a trade union-backed think tank, so it is not surprising that they are focused on what will benefit low paid workers and those depending on welfare the most. They would keep public spending high, funded by higher income and capital taxes. And if cuts are on the way, they would use them to cut indirect tax that affect the poorest disproportionately to the rest. They appear to ignore the fact that those on welfare have indirect tax built into their benefits and low earners are taxed with this in mind too.
Everyone has suffered financially in the last six years, mainly from higher taxes on income. The NERI proposals run the risk of dumping whatever austerity is left on middle income families who suffered the most from austerity.
The proposed €2bn in austerity for the next Budget could be eased back to less than a billion based on higher tax revenues in 2014. Even the EU has changed tack and is moving away from austerity in favour of rebuilding consumer confidence by creating more disposable income. It may be politically expedient to cut income tax for middle earners, but there's nothing in it for those on welfare, or subsistence income as many of the Labour Party's supporters are.
There are few high earners in the trade union movement with the exception of the union heads themselves. They favour taxing those earning over €100,000 who will carry the can so that public spending can keep going up. It would be a mistake to push ahead with spending while it's still out of control and that's what got us into trouble in the first place. It's even more worrying that the Minister for Public Expenditure and Reform is contemplating lifting the embargoes on public sector pay, before the problems have been fixed.
The top rate of income tax (41pc) hits income over €32,800 and when combined with PRSI and the USC it takes away over half what a person earns above that figure. The Nevin Institute and the trade union movement have set the bar too low for incomes that can afford to pay the highest rate of tax and contrary to what it says, when everyone pays tax at the same rate on earnings above €32,800, the system is not really progressive as they claim it is.
At a basic level ,the average worker can expect to lose up to 25pc of their income in tax, 25pc to pay for a place to live, they should be putting away 25pc in savings and to pay for their retirement. This leaves only 25pc to live on. Is it any wonder middle income families have so little to spend? The only way back for the country is to get more people off welfare and earning enough to pay their way. There's nothing wrong with Welfare once too many don't depend on it.
Middle-income earners and most of those earning over €100,000 are caught in the trap of giving up what they earn, to pay for the rest. Maybe it's time that the rest caught up and took care of themselves, spreading the tax burden more evenly. For this to happen more people must join the income tax system and the numbers on welfare should be dramatically reduced. Then we can afford free healthcare and education.
When the top rate of tax only applies to income over €100,000, or even €200,000, maybe then we will have a progressive tax system that doesn't target the squeezed middle who've worked for what they have. It's not that we shouldn't have a good welfare system, we just need less people dependent on it. You can't expect those who work the hardest to pick up the tab for the rest, especially when those who pay the most direct tax, middle income groups, don't have enough left to pay the bills or accumulate some wealth of their own to avoid being a burden.
The Minister for Social Protection, Joan Burton, knocked on the head Labour proposals to bring back tax credits for families with children. Tax relief for children was replaced with children's allowances under the social welfare system. It was better than the tax benefit, but the rich benefit as much as the poor which can't be justified. The minister is right to avoid complicating it further with tax credits, but this area still needs radical reform if we are to cut out the waste.
Ms Burton wants to focus on the lowest paid and those on welfare for any benefits that the Budget brings in. She wants to make it more attractive for those on welfare to re-enter the workforce and contribute more to the economy as it improves. To this end, she is in favour of those who find a job, keeping some of their welfare benefits, such as rent supplement and some child benefits, so that they have enough disposable income to make taking up a job worthwhile.
Meanwhile Paschal Donohoe, Richard Bruton and the small business group ISME are strongly opposed to higher wages in any form. Mr Donohoe wants to keep wages down and focus on getting people back to work and businesses want to keep pay under control. Most would favour raising the threshold that taxes income at the highest rate and there will be some tinkering around with the USC too. They don't have much to play with, but they should cut dependence on the welfare state. Not too long ago, we were facing higher taxes and a reduction in services. Now tax cuts are on the cards and we may even hold onto the services we have too.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning