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How much tax we pay is down to what we spend

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VAT and duty rates on petrol is 55%.

VAT and duty rates on petrol is 55%.

VAT and duty rates on petrol is 55%.

THE Nevin Economic Research Institute (NERI) published some astonishing research during the week which has been reported uncritically in the media.

The poorest 10pc of households have an average income of €9,800 a year.

• They pay 30pc of their income in taxes - mainly VAT and excise duties.

• The famous "squeezed middle" is paying much less tax than this - only around 17pc to 21pc of their income.

• The top 10pc of earners are paying 24pc of their income in income taxes, PRSI and USC.

This report is nonsense.

The bottom 10pc of households report having an average income of €9,800 each. Who are these people? A family of two unemployed parents and one child has an income of €19,500 between social welfare and child benefit.

So it's a bit of a mystery how so many people are reporting earnings with an average of €9,800.

But even more astonishing is that while their reported income is only €9,800, they also report their average expenditure as €18,500! How can someone with an income of €9,800 afford to spend €18,500?

They spend 30pc of their income in indirect taxes? Yes, but that is 15pc of their expenditure - the exact same as the squeezed middle.

The level of indirect taxes anyone pays depends directly on how they spend their money. If you spend most of your money on necessities like rent, food and public transport, you will spend very little in indirect taxes.

If you spend most of your money on take-away food, chocolates and crisps, you will pay plenty of VAT.

If you spend a lot of time in the pub, you will give 32pc of what you spend to the Exchequer.

But if you spend a lot of time outside the pub smoking, you will give 80pc of your expenditure on cigarettes to the Government. Cigarettes are the real killer.

Contrary to what is suggested in the NERI report, the poorest 10pc are making no contribution to the Exchequer, as 85pc of their income comes from the Exchequer in welfare and other payments. So the suggestion that they are contributing 30pc of their income to the Exchequer is nonsense.

The poorest 10pc of households are huge net recipients of Exchequer funds.

So what about the top 10pc of earners? Anyone who is earning over €109,000 will have been astonished to hear that they are paying only 24pc of their income in income taxes, PRSI and USC.

A single person earning €109,000 pays €34,500 in income tax, €4,360 PRSI and €6,946 in USC, to give an effective tax rate of 42pc - almost double the 24pc claimed by NERI. A married person earning €109,000 will pay 39pc of their income in direct taxes - still well above the figure reported by NERI.

So how do they come up with the figure of 24pc? Although in Ireland, individuals are taxed, NERI chooses to work out the effective tax rate based on household income, and not the individual's income. A household is all the people living together. A single person, or two or more people sharing a home form a household.

Two people earning €55,000 each could find themselves included in NERI's top 10pc of households as their combined income is in excess of €109,000. A single person on €55,000 pays total deductions of €15,662, or an effective tax rate of 28pc. In practice, this can be brought down further if the person makes pension contributions or has health expenses. So these people bring down the reported effective tax rate of the top 10pc.

The average pay for a single individual in the top 10pc of earners is €155,000 and they pay €69,731 tax, or 45pc of their gross income. A married person pays 43pc of their income in direct taxes. Adding the 6pc of indirect taxes to this brings their effective rate to around 50pc, not the 30pc per household reported by NERI.

NERI claims that when you consider income taxes and indirect taxes together, the low earners contribute more to the Exchequer than middle earners and about the same as the very high earners. The truth is actually the polar opposite.

The middle earners are squeezed and high earners are mangled to pay a much higher proportion of their salaries in taxes than NERI is reporting, and this is used to transfer money to the 10pc on the lowest incomes who make no net contribution to the Exchequer.

The Government needs to investigate why those with average earnings of €9,800 manage to spend €18,500 a year. I strongly suspect that a significant part of this is due to undeclared income. The only way to tax undeclared income is through expenditure taxes. It's easy to evade income tax - it's harder to evade VAT and Excise Duty. VAT and Excise Duty should not be reduced in the Budget.

Anyone who wishes to, can cut down their indirect taxes without government intervention - cut down on the booze and cigarettes, stop eating take-aways and take the bus instead of driving.

I am not opposed to increasing income taxes on the higher paid to help reduce the budget deficit. But it should be recognised that many of those who will be asked to pay more are already paying an effective tax of 50pc and not the 30pc claimed by NERI.

Brendan Burgess is the founder of the consumer forum askaboutmoney.com

Sunday Independent