Income tax: Do Irish workers pay too much? Here are the facts

Smart money: Is now the right time for politicians to be promising tax cuts?

Fine Gael would plan to cut income tax if it got back into office after the next general election, Paschal Donohoe, the Minister for Finance said on Wednesday. Or at least it would increase the income level at which people become liable for the top 47 per cent rate. But do we pay too much income tax in this country? And is planning to reduce it a practical goal, at a time when there are so many pressures to increase spending?

What we pay – the facts:

The income tax burden here compared with other countries has always been a point of debate. Recent OECD data provide some clarity. The OECD data have typically shown that the income tax burden here is lower than the international average. However, as UCC economist Séamus Coffey pointed out in a recent blog, the OECD has now decided to take a higher figure for the Irish “ average” wage. And this changes the outcome.

TOO many people have been taken out of the income tax net, putting a huge burden on middle and higher earners.

And there was a warning that a steep rise in the carbon tax on petrol, diesel and solid fuels will mean the Government tax take of €3.5bn a year from the taxes and levies on fuels may actually fall.

President of the institute Frank Mitchell said it was not sustainable that so many people are exempt from income tax and the universal social charge (USC).

Recent changes have meant that almost three quarters of a million workers no longer pay the USC.

And close to one million workers do not pay any income tax as their earnings fall below the threshold for paying it.

This is out of a total of 2.8 million taxpayers

Mr Mitchell said: “A system that exempts more than three quarters of a million out of a total of 2.7 million income earners, from paying any tax is not sustainable.

“We need a broader base where the load is spread according to the means of taxpayers.”

The institute is a representative group for tax professionals.

Figures produced by the institute show that corporate tax is expected to yield €10bn this year.

But income tax, USC and pay related social insurance (PRSI) combined are expected to yield three times more, at €34.1bn.

The institute said that the tax system was too dependant on income taxes, and questioned why so few workers pay income tax or USC.

Mr Mitchell said: “We believe that everybody who works should contribute to the exchequer according to their means and that those who earn most, should contribute most.”

Recent changes to USC have meant the burden of that charge was increasingly falling on middle and higher earners.

Calculations show that those earning more than €100,000 pay half of all income tax and USC.

Income tax payers in this country pay a marginal tax rate of 48.5pc on salaries over €35,500, the income level where the higher 40pc income tax rate kicks in.

Workers hit the 40pc tax rate on a much lower level of income than competitor countries.

Those earning more than €70,000 have a marginal tax rate of 52pc.

Asked why it was advocating that lower earners should pay more tax, while corporations should not pay more, chief executive of the Irish Tax Institute Martin Lambe said both income tax and corporate taxes were heavily dependent a small number of payers.

He said corporates are employers, and said our income tax system was very progressive.

When asked if corporates should pay more tax, Mr Lambe said: “It is a political decision.”

But he added: “Everyone who benefits from state services should pay something but based on an ability to pay.”

He said there was a need for a broad mix of corporate, income, property and environmental taxes.

Any move in the Budget to impose higher carbon taxes could see the yield from taxes and duties on petrol, diesel and solid fuel falling back.

The State takes in €3.5bn in taxes, duties and carbon tax on fuels.

Mr Mitchell said: “There is always going to be a cost with a measure like carbon tax. If you introduce a measure it changes behaviour, but you have to look at what cost there will be.”

He said carbon taxes are regressive as they hit the poor and rural dwellers harder.

Imposing a €20 per tonne increase in the carbon tax would add €3.39 to the cost of petrol for a 60 litre fill for a vehicle. It would see diesel go up by €3.93, and a bag of coal by 52c.