Kieran Coughlan: Shocking reality is Ireland has a progressive income tax system

The Tax Strategy Group has released its 2014 Budget recommendations.
Kieran Coughlan: Shocking reality is Ireland has a progressive income tax system

As outlined last week in this column this tax committee is made of senior officials and advisors from the Departments of Finance, Taoiseach, Public Expenditure and Reform, Jobs, Enterprise and Innovation, Social Protection and the Revenue Commissioners with the purpose of proposing and considering the various options for the Budget and for the medium and longer term.

On Social Protection, The TSG papers outlines that some 1.45 million people were in receipt of some manner of weekly welfare payment in respect of 2.22 million.

Breaking these figures down, statistics issued by the Department of Social Protection show that in 2013 the number of beneficiaries of State Pensions stood at over 550,000, meanwhile the number of people of working age in receipt of income and employment support stood at over 571,000.

What is truly shocking is both the rise the numbers of recipients of State supports and even greater rise in the overall cost to the exchequer over the past 10 years.

More than 150,000 extra persons were in receipt of State Pension in 2013 compared to 2004, a rise of nearly 40%, but the cost to the State has risen by more the 80% standing at €6.45bn in 2013.

For those of working age, the total number of beneficiaries has risen by over 198,000 persons or 66% in the period from 2004 to 2013, the cost of this social transfer having doubled over the decade to over €5.5bn in 2013.

The TSG report comments how these social transfers play a pivotal role in alleviating poverty, cushioning people from the worst effects of rising unemployment and falling incomes.

They are essential in supporting well-being and reducing inequalities through the redistribution of income, therefore helping to promote social solidarity.

Although the budget allocations for social assistance have risen at an even higher rate than the number of recipients of social benefits, key indicators measured as those suffering from consistent poverty, vulnerable to consistent poverty or those suffering from deprivation have all disapproved over the intervening period.

This suggests that the increase in State supports has hardly been sufficient to meet the increase in the costs of living.

The report suggests that any reduction in spending would have a knock on effect on consumer demand, thereby reducing household consumption and delaying the country’s overall economic recovery.

Moving onto income tax, the TSG notes that 19% of income earners pay tax at the high rate, with over 42% or 1,002,000 earners at the low rate of tax, and a further 880,600 exempt from tax.

According to the TSG notes, Ireland had the seventh lowest tax wedge (at 26.6% of income) of the 34 members in the OECD for a single worker on average earnings and the lowest of the 21 EU members of the OECD.

A progressive taxation system means that those on higher incomes pay proportionately higher rates of tax on their income than those on lower incomes.

Shockingly the TSG papers show that Ireland has in fact the most progressive tax system amongst all EU members and on a wider front, from an OECD perspective, Ireland is only outdone by Israel.

Describing our tax system as progressive seems like a bad pun especially for those earning more than €33,800 who stand to lose more than 50% of any extra income or profits they might be in a position to make.

Figures within the report show that those earning more than €50,000 per year pay 82% of the total income tax take of the country.

On the other hand, low earners actually contribute less in taxes than the average member country of the OECD.

Unsurprisingly, Taoiseach Enda Kenny has vowed to aim future tax cuts at those earning between €30,000 and €70,000 which will hopefully address this imbalance. On PRSI, the TSG papers note that the PRSI system ‘provided access to employee social insurance at very low levels’ compared with the UK.

In Ireland, it is possible to have full PRSI coverage as an employee at earnings of just over €38 per week (annualised €1,977), meanwhile self-employed persons only obtain PRSI coverage (and of a lesser form, such as not be entitled to jobseekers benefit) where earnings are over €5,000 per annum.

Meanwhile, our UK counterparts grant PRSI cover only where earnings are over approximately €7,850 per annum. Although an Irish employee is generally covered for PRSI purposes once they earn over €38 per week, the employee is not actually liable to pay any PRSI until they earn more than €352 per week (€18,302 per annum).

As such self-employed taxpayers are discriminated on two levels, requiring a higher earnings threshold before they are covered for PRSI, but yet self-employed persons are expected to start contributing PRSI at much lower levels of income than employees. Hopefully this year’s budget will go some way towards addressing these issues.

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