Bleed the rich? Ireland boasts the most progressive income tax system in the EU for single earners and the fifth most progressive for married couples – Constantin Gurdgiev
In the Irish annual rituals calendar, October and November are the months reserved for the celebrations of the Left’s economic illiteracy. Year after year, Irish intellectutators (a cross-breed of obscure academics and kitchen-politics commentators) put down their well-fingered tomes of Socialism for Dummies and start work on Budget-focused glossy pamphlets. Produced by their ‘think tanks’, these are devoted solely to the task of arguing for more government spending for the poor and more taxes on the rich.
This year is no exception. The country is still in insolvency jail. Government, personal and corporate debts belong in the Guinness Book of Records. Budget 2013 is likely to dole out more pain for Ireland’s productive classes – those working for their living in the real economy. Productive teachers, doctors, and the private sector (both over- and under- paid) are going to see more of their earned income sucked out by the black hole of waste that is our State Economy. Alas, of course, this is simply not enough for the intellectutators. Hence, the calls for more taxation of the mythic ‘rich’.
Let’s take a look at the actual data coming from the OECD (suitable for international comparisons) and Revenue Commissioners (suitable for absolute analysis). To most readers of this magazine, the following will be uncomfortable, I must warn.
Leftist Hypothesis 1
Irish income tax is not progressive enough, so creating a higher band of income tax for those in higher pay brackets is ethically and economically justifiable
Based on the standard OECD measure of income-tax burdens, Ireland currently has the most progressive income tax system (including social insurance contributions) in the EU for single earners and the fifth most progressive for married couples.
OECD reports average income-tax and employee-social-security contributions as the percentage of earned income for the following groups of people: a) single earners on 67% and 167% of the average earnings, with no children; and b) married couples on 100% and 167% of the average earnings with two children. The gap between 67% and 167% earners for single individuals and 100% and 167% earners for married couples with children is the standard metric for assessing income-tax system progressiveness. So it allows for a comparison across all OECD countries. This gap measures by how much less lower-earning households of similar type pay income- and social-security- taxes relative to their earnings than do higher-earning households. In Ireland’s case, average annual earnings of €32,842 were assumed by the OECD for 2011, with 167% earnings amounting to just under €55,000 per individual.
In 2011 the gap was 19.3% for single persons, down on the 2007 gap of 20.0%. Thus, due to measures in 2008-2011 budgets, the progressiveness of the Irish tax system for single earners has increased slightly during the crisis. It still remains well above the OECD average of 9.6% and the EU average of 10.3%. In Sweden, in 2011 the same gap stood at 13.3%, while in Finland it was 13.9%.
The same gap for married couples with two kids was 5.1% in 2011 in Ireland, an increase from the 2007 level of 4.9%. In other words, the system of taxation became more progressive for families as well during the crisis. This gap compares with the less progressive OECD average of 2.6% and the EU average of 3.2%. In Sweden (gap of -1.1%) and Finland (-2.7%) the burden of taxation for families on 100% average earnings is higher than it is for families on 167% of average earnings and the regressiveness of their tax systems worsened in the 2007-2011 period. Ireland’s system is the fifth most progressive in the EU.
Which brings us to the second major point.
Leftist Hypothesis 2
The rich are low-taxed in Ireland
According to the latest data from the Revenue Commissioners, in 2011 the top 23% of income earners (defined as those on incomes in excess of €50,001 per annum) had a combined income of €46.1 billion, accounting for 55.8% of the total income in the nation. They paid 81% of all income tax. The middle-class – those on incomes of €30,001 up to €50,000 per annum – accounted for a total of 23.4% of income and 15.4% of total income tax paid. Which means that lower earners have managed to earn 20.8% of total income and pay only 3.6% of the total income-tax bill.
Let’s look at the data in more detail. For those in the income bracket of between €30,000 and €50,000, the total income-tax take (implied tax rate) amounted to under 9.5% of their income. For those earning over €50,000 the implied tax rate was 20.9%. Those who earned over €100,000 had combined income of 24.5% of the national total, while paying 43.9% of the total income-tax bill. Their implied tax rate was 25.7%. For those on incomes in excess of €200,000 –the ‘filthy rich’ in our Leftist parlance – income amounted to 10.4% of the total, while tax paid was 20.4% of the total, yielding an implied income tax rate of 28.1%.
One can only guess what ‘taxing the rich in a fair way’ might mean for our armchair Leninistas. But we do know what they consider to be ‘economically efficient’ taxation for the rich, so let us take a look at that in the last Hypothesis.
Leftist Hypothesis 3
Taxing the rich can significantly help closing the 2013 Budget gap, allowing us to avoid expenditure cuts
Given the levels of expenditure cuts required, there is simply not enough income earned by the so-called ‘rich’ to make a significant dent in the state budget in 2013.
The Irish Government has committed to delivering around €2.25 billion worth of cuts in public expenditure in 2013. Referencing the Revenue Commissioners data for 2011, this would equate to the entire income (net of taxes already paid) of all those with annual incomes in excess of €500,000 per annum.
Put differently, we would need to impose an additional surcharge of circa 5% on all net-of-tax disposable income of those earning more than €100,000 per annum in order to raise €2.25 billion in revenue. This assumes that such a surcharge – lifting upper marginal tax rate (exclusive of other income-related taxes, such as PRSI, income levies etc) to well over 80% – will not induce massive tax avoidance by the rich. Do note that in 2007 some 60% of all earners in excess of €100,000 per annum were non-PAYE earners, which implies high mobility of their incomes and substantial scope for legal ‘tax-optimisation’.
There is a further problem with the above numbers. The Revenue Commissioners’ data for 2010-2011 refer to tax cases, which include couples with joint and single income, as well as single earners. Which means that most likely even the above analysis is a huge stretch of wishful thinking. For example, the Revenue data for 2009 show that there were only 32,152 earners with income in excess of €100,000 per annum, including those living alone, in families and widows and widowers. The combined income tax paid by these people amounted to €2.75 billion with the implied rate of 28.1%. This means that to raise an additional €2.25 billion in taxes from those on incomes in excess of €100,000 single or €200,000 per couple would require almost doubling the rate of tax extraction from them. In fact, back in July 2011, Minister Noonan stated that raising the income tax rate to 60% for all incomes above €100,000 would raise a paltry €1.1 billion.
There is, put simply, no silver bullet for avoiding the cuts required. There are, however, meaningful ways to reduce the pain of the fiscal adjustments and to help restructure our tax system that is, by any metric, a major drag on our economic performance. These ways, alas, have nothing to do with taxing the ‘rich’. Instead we need to start from the top-line figure of what level of public expenditure we would like to see in this country relative to GDP. Then design a tax system that is flat; applies to all incomes; incorporates only two standard personal deductions for income earners and for her/his dependent adults and children; and shuts down all targeted tax breaks. This system should be accompanied by reduced VAT taxation, a revamped system of corporate taxation and a site-value tax on the ‘commons’. Alas, that is a much more ambitious and rather less ‘Socialist’ agenda for reforms than our Left’s intellectutators are willing to contemplate.