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Ireland's political and cultural magazine
50 February 2016
by Sinéad Pentony
I
n recent months there have been many references
by politicians and economic commentators to Ire-
land having one of the most progressive tax
systems in the OECD. These statements reference
data from the OECD Taxing Wages database which
provides “…an insight into the levels of progressivity in
the income tax systems of OECD countries”.
However, progressivity in the income tax system is
often presented as the tax system as a whole
being progressive, but this a different
matter entirely. The overall progres-
sivity of the tax system cannot be
measured by the levels of income
tax alone and a comprehensive
overview of progressivity
should include the effect of all
taxes, charges and tax reliefs
that make up the whole tax
system.
The Irish income tax system
is progressive using the OECD
method, which means those on
higher incomes pay proportion-
ately more tax on their income
than lower earners. The OECD
method compares the tax liabil-
ity of a single person earning
two-thirds of average earnings
(67%) with that of someone with
a gross income of one-and-two-thirds (167%) of aver-
age earnings.
Where the difference between these two
tax liabilities is high, the tax system is con-
sidered progressive, as those with higher
earnings pay more as a percentage of their
income than those on lower incomes. In Ire-
land, the person on higher earnings pays
19.3% more of his/her income on tax than
the person on lower earnings, whereas this
difference across the OECD is an average of
9.6%.
It is important to note that Ireland’s high
progressivity score (as measured by the
OECD) is a result of having low taxes on low
incomes rather than particularly high taxes
on high incomes. It is also important to
remember that measuring the progressivity
of the income tax system in this way, is
based on the theoretical level of tax payable and not on
Revenue data of the actual amount of tax paid.
In practice this means that the OECD data only
includes personal allowances and universal cash ben-
efits, which in this case, is child benefit. It doesn't
include tax deductions such as mortgage interest,
health insurance, pension deductions or tax relief on
investments, which are used to reduce the amount of
tax that is actually paid (the effective tax rate). These
reliefs disproportionately benefit high earners.
These tax reliefs are particularly important in an Irish
context because the OECD’s Economic Survey of Ireland
2009 found that the average EU level of tax breaks in
the income tax system was equivalent to 5.6% of the
total tax take, whereas the equivalent number for Ire-
land was 18.3%. While many tax reliefs, such as those
relating to property development, have been
closed off, tax reliefs continue to feature
strongly in the Irish tax system.
The Tax Strategy Group, for
example, in its 2014 report on
‘High Income Individuals’
Restrictions’ found that those
with gross incomes of
€140,000 to €160,000 had
an average effective income
tax rate of 25%, despite
paying most of their income
tax at the marginal tax rate of
40%. The Revenue data shows
that while there is progressivity
in the Irish income tax system,
in that the proportion of gross
income that is paid as income
tax increases as income rises,
the extent of progressivity is
significantly reduced by the
effects of tax reliefs beyond the basic system of tax
credits.
Micheál Collins’ analysis of the ‘Total Direct and Indi-
rect Tax Contributions of Households’ in Ireland uses
the Household Budget Survey data to estimate total
household income tax and social insurance contribu-
tions. The lowest 10% of households pay 0.3% of their
gross income in income tax, while the top 10% of house-
holds pay 23% of their gross income in income tax and
social insurance (Chart 1). The average income tax and
social insurance is 14%. This analysis shows progres-
sivity in the income tax system, with contributions
increasing as incomes increase.
The effects of other taxes also needs to be factored
into assessing the level of ‘progressivity’ in the tax
system. The OECD data relates to income tax, and this
accounts for less than half (43%) of the overall tax
system. Taxes on consumption account for 35% of the
tax system, while taxes on capital account for 22% of
the overall tax system.
Consumption taxes are also known as indirect taxes
and they include VAT, excise duties, levies, local taxes
and charges. This type of taxation is regressive, which
means that low income families pay proportionately
more of their income to these taxes compared to high
income families. The lowest income households con-
tributed over 4 times more of their income (27%) to
It is important to
note that Ireland’s high
progressivity score (as
measured by the OECD)
is a result of having low
taxes on low incomes
rather than particularly
high taxes on high
incomes.
Going backwards
How progressive is the Irish tax system?
Somehing wrong here
GENERAL DELIVERY
February 2016 51
indirect taxes than the highest income households (6%)
(Chart 2). Ireland is more reliant on consumption/indi-
rect taxes than other European countries, with an EU
average of 28.5% of revenue coming from this source
compared to 35% in Ireland.
Micheál Collins combines the effects of direct
(income tax and social insurance) and indirect taxation
(VAT, excise, levies etc.) (Chart 3). On average, house-
holds contribute 24% of their gross income in direct and
indirect taxes. The lowest income households contrib-
ute 28% of gross income in taxes, most of which is
made up of indirect taxes. The highest income house-
holds contribute over 29% of their gross income in
direct and indirect taxes. Using this analysis, the Irish
tax system can be described as regressive, as the
lowest income households pay only slightly less tax (as
a proportion of their income) than the highest income
households. Micheál Collins concludes his analysis by
stating “judging tax contributions by income taxes
alone offers a limited and misleading picture of the dis-
tribution of tax contributions across society.”
With the general election campaign in full swing, all
of the political parties have set out in broad terms, what
they will do in relation to taxation and expenditure, if
they are elected to form part of the next government.
All political parties, with the exception of the Social
Democrats, have stated that they will cut/abolish the
Universal Social Charge (USC) and make changes to
other existing taxes, while at the same time committing
to increase spending across a wide range of areas. The
USC is a very progressive tax that applies to different
types of income with little scope to reduce the tax liabil-
ity through the use of reliefs and exemptions.
Some political parties have stated that they will intro-
duce new taxes on capital and wealth or make
adjustments to Capital Gains Tax and Capital Acquisi-
tions Tax. While there is certainly scope to increase the
tax take from these sources, it is very unlikely that they
will fill the revenue gap created by abolishing the USC
or reducing the number of people who are liable for the
USC. These promises are being made in the context of
Ireland having the third lowest tax take in the EU as a
% of the GDP, which was 34.4% compared to an EU aver-
age of 45.2% in 2014.
The taxation system is one half of the 'progressive'
coin. The other side is social and economic expenditure.
Government expenditure in 2014 was 38.2% of GDP in
Ireland compared to an EU average of 48.2%. Lower
taxes and higher disposable incomes do not necessar-
ily make people better off, as a greater number of goods
and services have to be paid for as out-of-pocket costs
rather than provided as public services.
Unlike public services, the prices of private goods
and services are rarely subsidised, which can make
them more expensive. The cost of childcare in Ireland
is an example of this as it is the most expensive in the
EU. The overall system of taxation in Ireland and how
we pay for public services is too heavily weighted in
favour of fees and charges, which makes it regressive
for families on low incomes, who often struggle to
afford them, or go without.
So, how progressive is the Irish tax system?
Not very.
30%
25%
20%
15%
10%
5%
0%
0.30%
0.77%
1.20%
2.70%
4.67%
8.54%
11.15%
13.50%
16.56%
22.91%
13.74%
2 3 4 5 6 7 8 9 TopBottom State
30%
25%
20%
15%
10%
5%
0%
27.37%
18.02%
16.45%
14.49%
13.46%
12.75%
11.06%
9.96%
8.53%
6.33%
10.34%
2 3 4 5 6 7 8 9 TopBottom State
30%
25%
20%
15%
10%
5%
0%
27.67%
18.79%
17.65%
17.19%
18.13%
21.19%
22.25%
23.46%
25.09%
29.24%
24.08%
2 3 4 5 6 7 8 9 TopBottom State
CHART Property Tax in Ireland and the EU (2012)
CHART Total Indirect Taxes as a % of Gross Income
CHART Total Household Tax Contributions as a % of Gross Income
Source: Total Direct and Indirect Tax Contributions of Households in Ireland: Estimates and Policy
Simulations, Micheál Collins, NERI Working Paper Series, August 2014.
