Short-sighted annual changes to the taxation system over the past nine budgets has left Ireland with a patchwork quilt type of system with workers paying higher rates of tax while still on below average incomes.
Tax paid rises very progressively as salary increases, with the progressivity accelerating from €75,000 onwards in particular, the Institute noted in its report, ‘Perspectives on Ireland’s Tax System — A Medium- to Long-Term Approach’.
This situation, created by the more than 50 personal tax changes introduced in the past seven years, suggests Irish employers “could face difficulties in seeking to attract mobile international talent from certain competitor jurisdictions” the report states.
“The budget-by-budget approach to personal taxes over nine consecutive budgets has led to some unintended consequences in the personal tax system and has created peculiar traits across all salary levels; including lower, middle and higher income levels,” Institute president Mark Barrett said.
Progressivity, whereby higher earners pay proportionally more, is generally a desirable attribute of income tax systems.
The institute has asked , however, whether Ireland’s system — the second most progressive in the OECD behind Israel — is removing too many low-income earners from the tax net, with an inordinate burden on remaining taxpayers.
The increases in the proportion of taxes paid by high income earners has become notable in recent years, according to the Institute, with the top 1% of earners paying 19% of all personal taxes in 2015. It estimates that this figure has since risen to 22%.
Middle-income earners face a high marginal rate of tax — the amount paid on an additional euro of income — with those earning more than €33,800 paying a 49.5% tax rate.
While much debate ahead of the upcoming budget has focused on the likely reduction in USC, the fact that earners move from the 20% tax rate to the 40% tax rate at low income levels is a greater factor contributing to the “squeezed middle”.
The institute highlighted how a worker on €25,000 earns almost 1.4 times the salary of a person on €18,000 but pays 5.6 times the tax.
Similarly, a worker on €35,000 earns more than 1.9 times but pays 10.9 times the tax, while someone earning €75,000 earns 4.2 times but pays 44.1 times the tax.