Sunday 18 March 2018

Taxing wealthy is a popular idea – but has flaws

Sarah McCabe

Sarah McCabe

TAXING the wealthy has long been a difficult subject for governments, and Ireland is no different.

Global debate was reignited in 2011 by Barack Obama's references to the "Buffett rule", his promised reforms of the US tax system designed to ensure that the very rich would not end up paying a lower tax rate than middle-class families.

The rule was named after billionaire Warren Buffett, who publicly and controversially criticised his country's government for affording him an effective tax rate lower than his secretary's.

Many argue that this strategy is misguided and that economies are damaged when business owners and investors are saddled with high taxes.

'The Economist' has estimated that a 1pc increase in the overall tax charge levied in a country decreases gross domestic output by 3pc, mostly because tax rises have an effect on investment.

Some governments have prioritised cuts to top tax rates above all else in an effort to boost growth; both Ronald Reagan and Margaret Thatcher used the tactic as a central part of their economic policy.


The fairness and effectiveness of Ireland's income tax regime fares well in studies. According to the OECD, Ireland has one of the most progressive income tax systems in the world, second only to Israel.

OECD research says the country's top 25pc of high earners pay 75pc of all taxes.

Breaking this down, the top 1pc of Irish earners – those making €200,000 and above – pay a fifth of all taxes, while the top 5pc of earners – those making €100,000 or more – pay two-thirds.

Yet this research also notes that Ireland's top marginal tax rate, at 42pc for employees and 55pc for the self-employed, kicks in very early – at €41,800 for a one-income family and €32,800 for a single person, which is below the average income.

This is arguably bad for competition, since workers in competitor countries can earn more before they enter the higher-income tax brackets.

Last year the Economist Intelligence Unit said in a report entitled 'Investing in Ireland – A Survey of Foreign Direct Investors' that Irish income taxes could be discouraging senior talent.

Finance Minister Michael Noonan has, meanwhile, stated that high marginal tax rates on income can deter inward investment, entrepreneurship and employment.

Thus the Department of Finance has flagged that changes to consumption taxes, such as VAT, are more likely in future budgets.

Its research suggests that as a percentage of gross domestic product, consumption taxes are lower in Ireland than the EU average and offer the potential for a "tax shift".

Irish Independent

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