Time to revisit the notion of ‘Tax Freedom Day’, writes Tom Healy.
The minister for finance rightly dismissed a recent suggestion by the Irish Tax Institute that Irish workers ought to be taxed at the 2008 rates. The Tax Institute talk about a ‘Tax Freedom Day’ when workers have paid their entire income tax obligations were they to pay all of their tax upfront and after which they start earning for themselves.
According to this thinking, the lowest paid are the freest of all meeting their income tax obligation on January 1 each year. Are people paying too much tax? And who should pay more, or less?
2008 was the high point of Celtic Tiger as well as being the low point in terms of personal tax rates. There was a systematic erosion in the tax base as well as in rates of personal taxation over a long period dating back to the 1980s.
Picking the year 2008 as some sort of meaningful benchmark or point of desirable return can only be described as fitting into a scene from Alice in Wonderland. Data published by the OECD show that average personal tax rates in 2017 were back to where they were in 2000.
All the cross-country evidence indicates that on average we pay less in total taxes whether on labour or on capital. A key factor is the relatively low rate of social insurance paid in Ireland by employees and employers.
It is true that lower paid workers pay less in tax than their counterparts elsewhere. However, this is due to the very unequal distribution of income and wages before taxes kick in. The Irish tax code has a lot of heavy lifting to do to even out income more.
What the data shows is for the average-wage single person, Ireland is well down the list of countries. The same is true for workers on two thirds of the average. In the case of above average-wage workers, the average tax rate is below that of most other OECD countries at a level of 31.3% and 18th out of 28 countries shown.
Much play is made about the high marginal tax rates in Ireland especially in regards to the relatively low-income threshold at which people pay the highest marginal rate.
This corresponds to the extra tax paid for each additional euro earned. It is typically much higher than the estimated average tax rate because of the existence of different bands as well as exemption thresholds for tax and, in the case of Ireland, PRSI and USC.
The marginal rate is indeed relatively high for average or just above average wage earners in Ireland. At the same time, six other OECD countries have higher marginal rates for this group.
We should be competing on quality of life, fairness and access to health and education. Some of the most successful and competitive economies in the world combine high levels of taxation with high levels of productivity and more equitable distributions of income before tax.
We pay for what we get. A double-income household with a combined income of say €60,000 might incur well over €1,000 a year in out-of-pocket medical expenses not to mention private health insurance and still pay dearly for outpatient appointments and visits to the doctor. Would it not make better sense for most people to pay a bit more and pool the benefits in better services?
People do not become free on a given date based on when they start earning for themselves. Rather, by avoiding hard and necessary changes in the tax code, most people end up being very unfree for the rest of the year by virtue of a sometimes poor, absent or under-supported public transport system, prohibitive childcare costs, high out-of-pocket healthcare costs, high rents and house prices and rising education costs.
I suggest that we revisit the concept of ‘freedom’.
Tom Healy is director of Nevin Economic Research Institute