Don't expect any major changes to the structure of tax system in Budget 2019
Ireland is a low-tax economy for the low paid, and a high-tax economy for higher earners. Don't expect change, writes Dan O'Brien
How great is Ireland's tax burden? Last week this column compared this country with the rest of Europe. Across the EU, governments raised revenues worth 45pc of the bloc's economy in 2016, according to Eurostat. In Ireland, the figure was 42pc, as calculated by the new official measure of the economy which strips out the distortionary effects of multinational activity.
In other words, the oft-made claim that Ireland is a low-tax economy is wide of the mark. The Irish State takes in slightly less than the EU average, but 12 of the 28 countries in the bloc raise less revenue relative to the size of their economies. Importantly, among those dozen countries is the UK, one of Ireland's biggest competitors when it comes to attracting and keeping both talent and foreign direct investment.
Beyond Europe, Ireland is a higher-tax jurisdiction when compared to the countries with which economic links are strong, according to OECD figures. In the US, home to most of the foreign companies which employ so many people here, the tax burden is considerably lower than in Ireland once the inflated multinational effect is accounted for. Australia and New Zealand, which have long lured Irish workers, are similar to the US.
If the big picture shows that Ireland is not a low-tax economy, what about how Ireland compares in terms of who pays which taxes (including PRSI contributions, one of the major taxes but one that is usually excluded in discussion because of the way the Department of Finance presents its figures)?
Before comparing personal taxes, permit me to recap very briefly on last week's look at non-personal taxes.
Ireland raises a quarter of its tax revenue from indirect taxes, such as VAT and excise. That is the same as the EU average.
Ireland is different when it comes to corporation tax and employers' PRSI contributions. The former accounts for a considerably larger share of revenue than the EU average, and the latter considerably less. But, together, they make up one-fifth of revenues, much the same as the EU average.
Now let's turn to tax on personal incomes, including income tax, USC and PRSI paid by workers. In 2016, the most recent year for which EU-wide figures are available, these taxes accounted for 38pc of the total tax raised in Ireland.
That was marginally higher than the EU average, which stood at just under 37pc. It was well above the level in Britain, at 33.6pc.
So just as the overall taxation level in Ireland is broadly similar to the European average, so it is with personal tax too.
But Ireland's personal tax structure is different from most others in the rich world in terms of how much it taxes the better-off and how little it taxes the less well-off.
As international bodies, such as the Organisation for Economic Cooperation and Development, have shown time and again, Ireland has one of the most redistributive tax and welfare systems among its mostly rich 35 members (and as rich countries have the most redistributive systems in the world, that puts Ireland at the very top globally).
The nature of the Irish tax system can also be seen from Revenue Commissioner's figures. Just last week the Department of Finance included these figures in one of its pre-Budget documents looking at personal taxation. For income tax and USC they show that the top quarter of earners will pay 85pc of all of these taxes in 2018.
As one might expect with a system that taxes the rich heavily and the poor lightly, things become more concentrated as one moves up the income distribution - the richest 7pc of taxpayers will account for more than half of all income tax and USC revenues this year.
Bringing this home in the most accessible way may be to compare how much people at different income levels pay in tax.
The latest figures from the Tax Institute look at how much comes out of pay packets (including PRSI) over a range of incomes in Ireland and seven other countries. The accompanying graphic compares Ireland with neighbouring Britain and Sweden, one of the highest-tax countries in the world by almost every measure.
Someone on the minimum wage working full-time earns around €18,000 a year in Ireland. Less than 3pc of this is taken in all forms of personal tax. That is far lower than any of the comparator countries, including our nearest neighbour, where five times more tax is taken at this income level.
The average earner in Ireland makes twice the minimum wage, or around €37,000. The tax bill shoots up even at this modest level, with one-fifth being taken by the taxman. But that is still low compared to peer countries.
Things change quickly as incomes rise further. At an income level of €55,000, Ireland overtakes Britain. At this income, the taxpayer keeps 70pc of their income and the State takes 30pc, the same as in Sweden.
The gap with Britain widens the further one moves up the income scale. At €75,000, the Irish State takes just under 35pc, one percentage point less than in Sweden but four points higher than in the UK.
By the time one reaches a six-figure income, the Irish State is taking close to 40pc of the total. Again, this is closer to Swedish levels than British ones.
From this starting point, where will the Government go on tax in Budget 2019?
If it wanted to raise significant amounts of additional tax, the most obvious places to start would be the areas where tax is comparatively low: the low-paid and, as discussed last week, employers' social insurance.
But both of these have significant downsides.
Both are taxes on labour, widely viewed by economists as more damaging to economic growth than indirect taxes, such as VAT.
Bringing Ireland's unusually low taxes on the low- paid closer to the levels in peer countries might generate more revenues, and some might consider it fairer that everyone who can work contributes more than low single digit shares of their incomes to the running of schools and hospitals, but it also has its problems.
Getting by on the minimum wage, even when it is hardly taxed at all, does not allow for a good quality of life, so from a fairness perspective, it seems hard to justify tax increases. Another consideration is the effect higher taxes on low incomes would have on work incentives.
With a comparatively generous welfare system, the gap between net pay on the one hand and benefits on the other would be narrowed if taxes rose for the least well off. It could then make good financial sense for people in that position to drop out of formal work and instead rely on benefits and some part-time work in the black economy.
So, even where Ireland is a low-tax economy, moving to more normal levels would have economically damaging effects. For this reason, not to mention the multi-faceted politics of it all, don't expect any major changes to the structure of the tax system in Budget 2019.