If Ireland is to substantially increase investment in public services and to provide the level of public services available in other European countries, “it may need to reconsider” how it approaches income tax.
This is according to the Parliamentary Budget Office, which has published data comparing Ireland’s income tax rates, tax bands, and burden for low, average, and high earnings across the eurozone.
It said that a rethink may be needed to fund major public services in future, such as State-sponsored childcare, and pointed out that Ireland is a “relatively low-tax country” compared to many of our European counterparts.
Ahead of Budget 2023, ministers have said a big focus will be put on the likes of childcare, housing, and health.
Just this week, childcare providers held a protest outside Dáil Éireann as they criticised the Government’s “unsustainable” new funding model for the sector.
However, there appears to have been pushback over the new 30% tax band touted by Tánaiste Leo Varadkar as an option within the Budget. He has said it will, nevertheless, contain a “substantial tax package that will reduce income tax”, with a “particular emphasis” on middle-income earners.
The analysis from the Parliamentary Budget Office (PBO) pointed out that Ireland is a relatively high-income country, with the fifth-highest average gross earnings across 17 eurozone countries in 2021 at €50,636.
It said that Ireland is “unusual” with only two income tax rates — the 20% and the top 40% rate — as most other Eurozone countries have many more, with the point at which earners go onto the top rate in the likes of Austria, France, Germany, and Spain being determined by dedicated rates for very high earners.
The point at which Irish earners go onto the highest rate of income tax is much lower than most other Eurozone countries. Taxpayers here go onto the 40% top rate when they are earning less than 70% of the average gross earnings. This is lower only in Luxembourg.
For example, in Germany there are multiple tax bands compared to Ireland’s two. The top rate of tax applies to earners on €274,612 or above, which is 522.5% of average gross earnings in the country.
Based on the percentage of gross income paid in direct taxes by households, Ireland ranked 18th-highest of 19 countries, as households paid 11.4% of gross income in direct taxes. This compared to 38.5% in Denmark, 32.4% in Greece, and 28.4% in Germany, which led the PBO to conclude Ireland is “shown to be a relatively low-tax country”.
In Ireland, low earners pay an effective rate of 16.72% tax, average earners pay 26.66%, and high earners pay 36.02%. Of these, only the high earners scraped into the top 10 of the highest effective tax rate across the EU.
Workers earning €50,000 in Ireland accounted for 18% of taxpayers, but account for over 75% of income tax paid. Those earning above €100,000 account for 2.2% of taxpayers but account for over 31% of income tax paid.
The PBO said that the data available demonstrates that Ireland has a progressive income tax system but that our effective tax rates show Ireland is also a relatively low income-tax country.
“Income tax is a central pillar of tax revenue in Ireland, particularly considering the precarious nature of corporation tax receipts," it said.