Why Cash Matters (Budget 2015)

Nat O'Connor: As a follow-up to my pre-Budget post on proportions, we can now look at the results of the announced USC and income tax changes. There are seven changes in this mix:

• USC now kicks in at €12,012
• The lowest rate of USC is reduced from 2% to 1.5%
• The next rate of USC is reduced from 4% to 3.5%
• The 3.5% USC rate now kicks in at €17,576
• The higher rate income tax threshold or band has moved from €32,800 so it kicks in at €33,800
• The higher income tax rate has reduced from 41% to 40%
• A fourth rate of USC at 8% affects all income above €70,000

Taking the example of single PAYE workers, the changes affect people as follows (in ascending order of income):

• Those earning less than €10,036 never paid USC or income tax and are unaffected
• Those earning between €10,036 and €12,011 are no longer paying any USC, saving up to €280 in a measure targeted at this income cohort
• Someone on €12,0011 now pays no USC at all, €280 less than previously
• Someone on €12,0012 now pays €100 less USC, but does pay €180 as USC suddently kicks in for all his/her wages
• Someone earning between €16,016 and €17,576 is now only affected by the 1.5% and 3.5% USC rates (not 7%)
• Someone on €17,576 saves €174
• Everyone above €17,576 gets the full benefit of €174 from the USC changes
• Someone earning up €32,799 still only gains €174 from the USC changes, as he or she never paid the higher rate of income tax. The large majority of the 1.9 million people at work were already outside the higher income tax rate
• Someone earning €33,300 used to pay €205 at the higher rate, but is now only affected by the 20% band, saving €105
• Someone earning €33,800 used to pay a full €410 at the higher rate, but is likewise below the threshold for the higher rate, saving €210
• €210 is the maximum a single person saves from the wider income tax threshold/band change, and everyone earning over €33,800 gets the full benefit
• The gain of €210 from the threshold change is in addition to the €174 from the USC changes; together that makes €384
• Someone on €34,800 pays €400 at the new higher rate of 40%, saving €10 from the rate changes
• Someone on €43,800 pays €4,000 at 40%, saving €100
• Someone on €53,800 pays €8,000 at 40%, saving €200
• Someone on €63,800 pays €12,000 at 40%, saving €300
• Someone on €70,000 pays €15,252 at 40%, saving €362
• Someone on €70,001 now pays 8% USC on every euro above €70,000 cancelling out any further benefit from the drop to a 40% higher income tax rate, but retains the €362 benefit from the rate reduction
• €362 is the maximum gain from the rate change, and everyone over €70,000 gets the full benefit
• The gain of €362 from the rate change is in addition to the €384 from the threshold change and USC changes; all together the maximum benefit from all USC and income tax changes is €746

You can check the figures - and see the effects on couples - using the helpful Deloitte online tax calculator, which shows the pre- and post-Budget income figures.

The bottom line is that people from Minimum Wage levels (€17,576) to €33,800 gain €174, whereas people on incomes over €33,800 gain €384 or more, and people on incomes above €70,000 gain the maximum benefit of €746.

Whether or not you think this is equitable or 'fair' depends on whether you think the distribution of net incomes was fair in the first place. What Budget 2015 did, in terms of net income, is widen the gap between those on higher and lower incomes. Those in the Top 10% (€70,000+) got 4.3 times more cash than the many workers who earn between €17,576 and €33,800.

Importantly, bank CEOs and others on high incomes of say €500,000 will not benefit hugely from the lower 40% income tax rate, because of the new 8% USC, which is an important and valuable safeguard for equality. They only get the same €746 benefit, and also have their use of tax reliefs shaved as the extra point of USC is immune to most tax breaks.

Another way to look at what happened is to compare Person A on €17,576 (minimum wage), Person B on €35,000 (average wage), who benefits a little bit from the income tax changes as well as the USC changes, with Person C on €70,000 (Top 10%).

• Person A gains €174 from Budget 2015, leaving him or her with a post-tax income of €16,986 (was €16,812).
• Person B gains €396 from Budget 2015, leaving him or her with a post-tax income of €28,065 (was €27,669).
• Person C gains €746 from Budget 2015, leaving him or her with a post-tax income of €45,215 (was €44,469).

• The gap between A and B went from €10,857 to €11,079; wider by €222
• The gap between B and C went from €16,800 to €17,150; wider by €350
• The gap between A and C went from €27,657 to €28,229; wider by €572

As the result of a single budget - where available resources were still constrained - to widen the net income gap between some single people by €572 (and even more for some couples) is significant.

Did those on higher incomes really need the €746 they received in extra net income, compared to people on lower incomes or those reliant on public services? Will it really boost consumer spending in the economy and create jobs, or will it be used to pay down debt or spent on imports? TASC's analysis has always been that giving a little money to a lot of people will be more effective at getting money spent on essentials in the local economy to boost local jobs.

More importantly, what is the direction of Government tax policy? The signal from Government is that the gap in net incomes will be widened further, as they continue to target a reduction of income tax on the upper middle income group (those on €34,000 to €70,000).

The alternative is public services rather than tax cuts, as the effect would be diluted and it would not be affordable to give the many on low incomes the same amount of cash from tax cuts given to the few on upper middle incomes. This alternative is also based on the unpopular truth that people in low incomes pay relatively little tax and social insurance in Ireland compared to what is paid by workers across the EU. Tax cuts are illusory if out-of-pocket charges for public services will mount up due to overall under-funding of services.

Rather than giving low to middle income workers small tax cuts, the focus should be on targeted spending on public services - including perhaps some new services like properly subsidised childcare - as these would benefit everyone in society much more equally.

The Triple Benefit is Doubly Regressive

Cormac Staunton: In the immediate aftermath of the budget, there is much talk of whether the changes in income tax and USC were ‘progressive’ or not.

In order to be considered progressive, changes to the tax system should close the gap between those on higher and low incomes. As such, the cash benefit should be greater for people on lower incomes.

Changes to the tax system that give a greater percentage benefit to a person on lower incomes (even though the cash benefit is lower or the same) could be considered ‘less regressive’.

Using these definitions, changes to Income Tax and USC in Budget 2015 were not progressive, nor even "less regressive".

We modelled the changes in USC and income tax using our existing tax model, which is based on the rules for a single person paying PAYE. We looked at both cash and percentage change in net income: that is to say, how much did take-home pay change.

In cash terms it looks like this, when placed against gross income:

Those earning between €10,036 and €12,012 now pay no USC and see a benefit of approximately €240. This falls off immediately when USC kicks in, and between €12,012 and €17,500 (the minimum wage) the benefit of USC rate changes is around €110. From €17,500 upwards the gain from USC rate changes is €174.

After €32,800 the gains from income tax rate and band changes start to rise steadily, maxing out at €736 for those on €70,000, remaining at that level for all earners above €70,000.

Returning to our definition of progressivity, we should also look at what this means in percentage terms.

The curve shows that not everyone was affected proportionately. It can be explained as follows:

The first spike is caused by the removal of USC completely from people on €10,036-€12,012.

In the section from €13,000 - €32,000 the change in the USC rates and bands give a spike increase to people on the minimum wage as they are now out of the next level of USC.  As we saw above, the absolute benefit from USC changes stays the same for all people above minimum wage and below €32,800 (as there was no change in standard rate of tax). Hence the benefit, as a percentage of take home pay, declines.

After €32,800 people are hit with a triple benefit. They have a lower rate of marginal tax (40%), a later entry point to the higher rate (by €1000), and they benefit from the changes made to USC on the earlier parts of their income.

This group is doing better in percentage terms than those below them (aside from the brief spike for people between €10,036 and €12,012) and the percentage benefit increases as incomes increase.

This is doubly regressive, in that firstly those on €34,000 see a significantly higher benefit than those on lower incomes, and secondly those on €70,000 have a greater percentage benefit than those on €34,000.

After €70,000 the same cash benefit remains, but because of the introduction of USC at 8%, the benefit no longer grows. Hence, as incomes rise, the percentage benefit declines, but long after the progressivity horse has bolted.

Whichever way you look at it, it is incorrect to describe the tax cuts introduced as “progressive”, given that the greatest benefit in cash terms is for the top 10% (above €70,000), and that the benefit in percentage terms increases steadily from those on minimum wages to those on €70,000.

Cormac Staunton is TASC's Policy Analyst. You can follow him on Twitter @Cormac_Staunton

Budget 2015 and Proportionality

Nat O'Connor: Without a doubt, some of the analysis of Budget 2015's income tax measures is going to focus on proportional change rather than absolute or real income changes, which repeats a misleading bias from the Celtic Tiger years that permitted the gap between high and low incomes to grow.

It would NOT be fair if someone in the Top 10% ends up paying less tax than someone on the Minimum Wage, but it is highly likely that this will be the case. But it will be disguised as someone on low wages getting a bigger percentage tax cut than someone on a relatively high income. The focus here is on the misleading concept of 'proportional' or percentage income changes.

Currently, a single person on the Minimum Wage has a gross income of €17,500 and pays €744 in income tax and USC. Assuming he or she earns the same amount every week, no PRSI is payable. A single person in the Top 10% has a gross income of €50,000* and pays €15,131 in income tax, USC and PRSI.

* Note: you can confirm that single people are in the Top 10% of earners from €50,000 upwards (add males and females in Revenue Table IDS20 here). For everyone, including couples, the threshold is €75,000 to be in the Top 10%.

For example (calculation below), someone on the Minimum Wage might see their taxes cut by 5.2 per cent, but that means €39 in real terms. Conversely, someone in the Top 10% might see their taxes cut by 2.7 per cent, but that means €411 in real terms - in reality, nearly nine and a half times more money.

We know that 'the market' does not allocate pay fairly. For example, the UK New Economics Foundation have a report about the low pay but high social value of hospital cleaners and childcare workers, versus the high pay but lower social value of City bankers. Part of the role of taxation is to compensate for market inequalities.

As TASC show here (slide 3) Ireland has the highest pre-tax, pre-transfer income inequality in the OECD (i.e. we are the most unequal among all developed economies). But Ireland's tax and transfer system currently manages to get income inequality down to below EU average levels (slide 5).

'Proportional' tax cuts - such as those described below - will disproportionately benefit the better off in real terms, and that will weaken the ability of taxes and transfers to reduce income inequality in Ireland.

Calculation
Let's take three proposed policies: (1) move the USC threshold from €10,036 so that it does not kick in until €12,000; (2) move the higher rate income tax threshold from €32,800 so it kicks in at €33,800; and (3) reduce the higher income tax rate from 41% to 40%.

Our person on the Minimum Wage has a gross income of €17,500. He or she would now pay €39 less USC, which is a tax reduction of 5.2 per cent.

Our person in the Top 10% has a gross income of €50,000. He or she would get the same €39 reduction in USC, but also would pay €372 less income tax for total reduction of €411, which is a reduction of 2.7 per cent.

Of course, it is easier to give larger amounts of money to smaller numbers of people. But that is not a justification for doing so! It is probably not possible to give much more to all low earners in this budget, as there are so many of them. But there are economic and social reasons not to worsen the income inequality gap by giving more money to higher earners.

As TASC has argued in its pre-budget commentary, using any surplus for public services that benefit everyone equally would be the best use of the money. But the partisan push for tax cuts means that outcome isn't going to happen.

Budget Rumours: An Equality Analysis

Nat O'Connor: Budget 2015 will be announced tomorrow, but there are enough rumours and unofficial announcements in this morning's headlines that some analysis can be made about the overall thrust of policy.

The main question for TASC is whether there is any coherent strategy to address the growth of inequality over the last four decades - never mind the last six years of austerity budgets. Since 1975, average incomes have doubled in real terms. In other words, there has been real economic development. However, that average is skewed by the fact that incomes for the Top 10% of people have tripled and incomes for the Top 1% are five times larger, in real terms, than they were previously.



Cause for concern? Some would say that inequality is the price of Ireland's adoption of a laissez faire economic model. But the OECD predicts inequality will grow across the developed world to such an extent that by 2060 even the most equal countries today will be as unequal as the least unequal today. That is likely to lead to breakdown of social cohesion. And countries closer to the UK and USA economic models - like Ireland - are likely to see inequality grow sooner rather than later.

The reasons for growing inequality are complex. It is not a conspiracy but rather it is the working through of the structure of our economies. There is a growth in high-skill high-pay jobs, in IT for example, but a loss of mid-pay jobs in manufacturing (replaced by robots or moved overseas). Service jobs are growing, but new sectors of employment (like personal care or hospitality) are characterised by low pay and lack of job security. Given that inequality is a likely consequence of our economic model, what is the Government doing to counter-act this?

The budget provides a wide set of tools to reverse some of the growing inequality, as well as an opportunity to make statements about the future direction of economic policy. So what do the rumours suggest?

The main suggestions I've seen across the Irish Examiner, Irish Independent and Irish Times are:

• The higher rate of income tax to move from 41 to 40%
• Some changes to USC
• Changes to the tax bands, so the higher rate kicks in from €33,800
• Tax relief of €100 towards paying for water regardless of income
• Welfare bonus to pay towards water
• Consideration of part-restoring the Christmas pension/welfare bonus
• 20c to be put on cigarettes
• 1000 new teachers to be hired
• other spending, in health, justice, etc.
• retention of the 9% VAT for hospitality
• pension levy might be scrapped entirely
• A 'patent box' scheme to attract MNC investment

Good quote from Christine Keily in the Irish Independent summarises this: "While economic prudence would demand that Ireland stay the fiscal course, reduce spending and increase taxes, political prudence will dictate that the Government do no such thing and completely ignore the economists' advice."

Naturally, there may be no real substance to some of these rumours, but on the whole the end-result looks like a very political budget, with an ad hoc approach to what economic model would best suit Ireland and no great concern with economic inequality:

• Cutting the higher rate of income tax will benefit around 600,000 people - not the vast majority of Ireland's 1.9 million people at work (worsening inequality)
• USC changes would probably benefit most workers, but it is likely that high earners will get the same benefit as low and middle (maintains inequality)
• Changes to the upper tax band benefits surprisingly few workers (600,000 again) (worsening inequality)
• The tax relief of €100 towards paying for water combined with a welfare bonus of €100 to pay towards water are purely political measures, and are technically bad policy (worsening inequality - see below)
• Part-restoring the Christmas pension/welfare bonus (reduces inequality)
• 20c on cigarettes (regressive, so worsens inequality, but probably justified to help stamp out smoking)
• 1000 new teachers to be hired (reduces inequality)
• other spending, in health, justice, etc. (mixed effects, but health spending reduces inequality)
• 9% VAT for hospitality creates only low-paid jobs but reduces unemployment (reduces inequality slightly)
• pension levy might be scrapped entirely (increases inequality slightly, as only those with a better class of job have pension savings)

The Government are giving either a welfare payment of €100 or a tax credit to all people in jobs worth €100 to help pay for water. In other words, they are reducing people's likely water bills by €100 through tax money, rather than simply lowering water charges. It remains to be seen if anyone gets left out of this new scheme, which is wasteful as not all workers will need a €100 tax break to pay for water. Maybe it will only apply to low paid workers (more equitable) but if it is widely available, the likely outcome is that tax revenue - paid by VAT, income tax, etc. - will be used to subsidise water for people who don't need a subsidy, but paid for by everyone. That will worsen inequality.

Meanwhile, the 'patent box' tax avoidance scheme for multi-national companies signals that Ireland is committed to prioritising foreign direct investment rather than building up an indigenous industrial base in Ireland. This is turn is likely to continue the skewed nature of Ireland's economy, with higher paying jobs in Dublin and other centres, but no direct job gain across the country. Likewise, high-paying jobs in finance or IT will contrast with low-paying domestic jobs in retail, healthcare, etc. Overall, a pretty clear continuation of the economic model that the OECD predicts will increase economic inequality steadily to 2060 and beyond.

And the lack of a coherent push towards something different suggests that the Government does not envisage any other economic model for Ireland. So, the OECD's prediction of growing inequality does not seem to have challenged official economic thinking to date.

Deeply Misleading Irish Times Report of Budget Survey

Nat O'Connor: The Irish Times has given front-page headline coverage to the claim that "Voters want tax cuts over better public services" based on illogical and misleading interpretation of survey data.

The page giving the poll result is here. According to the video presentation by Political Editor, Stephen Collins (top right of the page), voters were asked to suggest what they wanted "unprompted" and the results were compiled. 44 per cent are reported as mentioning something along the lines of net income increase or more spending power, whereas 21 per cent said more spending on services.

It is wrong to interpret these categories as mutually exclusive. Many people would achieve "more spending power" if public services reduced their cost of living. The video explained that anyone seeking more spending power was put into the category of people seeking a net income increase. But this in turn was interpreted as support for tax cuts, as if that is the only way to achieve net income increase, which is facile.

TASC has been making the point for some time that Irish public services often require people to put their hands in their pockets and pay for GP fees, school books, hospital charges, childcare, etc. which would be subsidised or free-of-charge in most other countries.

Services have to be paid for, but economies of scale can make public services cheaper than private services for many people, and those on lower incomes can rightly expect subsidised services based on progressive taxation that requires those with greater income and wealth to pay more. This is part of the basic bargain of public services in a democratic society.

The contradiction in the report of the poll findings is shown in the responses to a list of suggestions:

• 15% Increase spending on healthcare (nurses, doctors)
• 15% Reduce/abolish water charges
• 14% Reduce income taxes
• 13% Reduce/abolish the Universal Social Charge
• 9% None of these
• 7% Increase social welfare payments
• 6% Widen tax bands
• 4% Provide a back to work incentive
• 4% Increase state pension
• 4% Increase spending on education (teachers, schools)
• 3% Reduce/abolish the Local Property Tax
• 2% Increase spending (general)
• 1% Reduce VAT/excise/direct taxes
• 1% Reduce abolish pensions levy
• 1% Reduce tax on businesses
• 1% Increase capital spending on roads, infrastructure
• 1% Increase spending on justice (more Gardai etc.)

Looking at the above figures, income tax was mentioned by 14%, USC by 13% and tax bands by 6%. That gives 33% or one third of respondents in favour of income tax cuts.

But 15% want spending on health, plus 7% on welfare spending, 4% on pensions, 4% on education, 2% on general spending, 1% on justice and 1% on infrastructure. That adds to 34%, or one percentage point higher than those calling for income tax cuts.

Stephen Collins's article begins with the claim that "More voters would prefer income tax cuts to improved public services in next week’s budget". But he is not counting social insurance/social welfare as a public service. Is it not obvious that increased spending on welfare or pensions would have to be funded, and therefore runs counter to the call for tax cuts?

One could add the 15% against water charges and 3% against LPT to give 51% seeking some taxes or charges to be reduced, but it is not obvious that someone who personally wants a tax cut or abolition of a charge wishes that to be funded through cuts to health or welfare. For example, a person might reasonably believe the abolition of water charges could be paid for through increased taxes in other areas, or a person might believe that recent economic growth will provide sufficient tax revenue. We cannot assume people's views if they are not asked appropriate questions. The headline that "Voters want tax cuts..." suggests a much more clear cut finding than the data shows.

On the basis of the survey findings, there is a public debate about these issues, not a clear cut view. One third favour income tax cuts, one third favour spending increases and the other third is more mixed or nuanced. Those against LPT and water charges do have to explain how they would meet the funding gap, but it is not clear that they want to reduce total tax take. There are further nuances, as people might seek a tax cut assuming they will benefit, even though a cut to the higher rate of income tax will only benefit a minority.

At best, the interpretation of these responses is debatable. It certainly does not provide a clear result to justify a headline supporting tax cuts within days of the national Budget.

In the Press Council of Ireland's Code of Practice, Principle 1 is Truth and Accuracy: "1.1 In reporting news and information, newspapers and magazines shall strive at all times for truth and accuracy." The Irish Times have failed to uphold this principle in this case and it is damaging for the reputation of both the Irish Times and Ipsos/MRBI to be associated with such biased and misleading reporting of poll results.

Hair of the Dog?

Nat O'Connor: If you read nothing else about the global forces that shape Ireland's economic future, you should read Michael O'Sullivan's essay in the Dublin Review of Books: Hair of the Dog?

Teasers: "the global economic and investment climate are now marked by the emergence of trends, policies and behaviours that would have been seen as radical before the financial crisis but which are now accepted as normal" ... "the Irish economy is beginning to recover, but there is also a sense that like the early 2000s it is the crucible for the spillovers of many of the forces acting on the world economy" ... "For a small open economy, the trend growth rate is bounded by the health of international trade, the attractiveness of the business climate and the extent to which there is structural growth in domestic business creation. In this respect Ireland is much better off than many of its euro zone neighbours like France, but this means that it should enjoy a long-term growth rate of close to 2 per cent rather than below 1 per cent. Expectations of sustained growth in a range of 4 per cent to 8 per cent are fallacious, and in recent economic history have only been achieved in a post-crisis environment by the likes of Hong Kong and Singapore, piggybacking on Chinese growth."

Public versus Private Sector Pay

Proinnsias Breathnach: On August 26 last, the Irish Times published an article with the headline “Public sector pay a third higher than private sector” in the front page of the Business section.  This was a highly irresponsible headline of the type one might expect to find in the Sunday Independent.

If the Irish Times presented a headline stating that, on average, workers in solicitors’ offices are much better paid than workers in supermarkets, readers would immediately regard this as being obvious, given the major differences in qualifications and hence pay rates between the two.

Essentially the same situation applies to comparisons between the public and private sectors.  There is a much higher proportion of professional people (e.g. teachers, doctors, nurses, administrators) and a much lower proportion of unskilled people (e.g. retail, catering, hospitality workers) in the public sector and therefore one would expect average pay rates in the sector to be higher.

To quote the 2010 Employment Survey (the most recent to be published by the Central Statistics Office), “on average, public sector employees had higher educational attainment, longer service, were older, and were more likely to be in professional jobs than their counterparts in the private sector.”

The 2010 Survey found that, while overall average weekly earnings in the public sector were 35 per cent higher than in the private sector, when allowance is made for these and other variables (including organisational size), the gap between the two for permanent full-time employees aged between 25-59 was only around 8 per cent and had fallen from around 13 per cent in 2007.  

Furthermore, the gap was greatest between workers at the lower end of the pay scale while at the higher end, private sector earnings were higher than in the public sector.

Misleading headlines such as the one used in the article referred to do nothing to promote balanced and reasoned debate on this topic and instead are conducive to the kind of emotive language (“inflated public sector pay”, “tiger wages” in the public sector) attributed to the Irish Small and Medium Enterprises Association in the same article.

I sent a letter to the Irish Times putting the above points, but it was not published.  I routinely send letters to that newspaper seeking to correct what I believe to be errors of fact or interpretation which have appeared in the paper but these are hardly ever published.  I am thinking of changing my name to Anthony Leavy!

Another way of looking at progressivity

Cormac Staunton: TASC has previously shown how the progressivity of Ireland’s income tax system declines after certain levels of income. It is progressive (in that the percentage of tax paid increases as incomes increase) up to about €75,000 but then the relative progressivity begins to slow and then almost flat-lines.


See this diagram, which is based on tax liability as a percentage of income for a single person:

The red line is tax, the blue line is tax plus USC and PRSI. These are calculations of liability based on the rules, not actual tax paid (which we have shown to be lower).

The progressivity happens because someone on €18,000 has a liability of about 10%, and someone on €33,000 has a liability (tax, USC and PRSI) of roughly 20% of gross income. This rises to almost 40% for someone on €90,000.

However, for someone making a jump to €150,000, the rate only rises by a few percentage points to less than 45%. No one, even on extremely high income, ever pays more than half.

Another way of looking at it is to look at the tax liability in cash terms, and compare that to gross income. This can be compared to a plotted line of income tax, USC and PRSI. The diagram looks like this:

 What this shows is that at all stages, the more you earn, the more you take home. There are no “diminishing returns” and no disincentives to work.

Cormac Staunton is Policy Analyst at TASC. You can follow him on Twitter: @Cormac_Staunton 

Response to Irish Times article on the 'Tax Debate'

Cormac Staunton: Chris Johns in the Irish Times has written an article attacking all sides in the debate on income tax in the Budget, which includes TASC’s recent commentary.

The reason this debate on income tax is happening is that the Government have repeatedly claimed that they are going to reduce the higher rate of tax in order to benefit for low and middle income earners. TASC’s analysis of the tax system shows that it is impossible to help people on low and middle incomes by cutting the higher rate of tax. By putting this analysis forward, TASC seeks to show who would benefit from a higher rate cut. In the context of Budget discussions, this distinction is fundamental.

To address Mr. Johns’ criticisms directly:

1) The number of people benefiting from a higher rate cut
In the article, Chris Johns claims TASC ‘distorts’ the numbers who would benefit from a higher rate tax cut. To be clear, the assertion that “18% of tax payers will benefit from a higher rate cut” is a Revenue figure, used by the Minister of Finance in the Dail. It is not a TASC calculation. The exact quote is:

Regarding a reduction in the marginal tax rate, it is assumed that the Deputy refers to a reduction in the 41% Income Tax rate. On this basis the Revenue Commissioners estimate that, a reduction of that rate would affect approximately 392,000 (18%) income earners.

The full written answer is available here, after Q.107

There are two issues raised with regard to the ‘18%’. The first is the total number who will benefit, and the second is the choice of population.

On the total who will benefit, Revenue identify 392,000 tax units as paying the higher rate of tax, out of a ‘population’ of roughly two million tax units. This gives the figure of 18% of all tax units, and was the basis for their response.

This number does not include a cohort of people who are liable for the higher rate, but whose tax credits exceed the tax at the higher rate. Revenue does not consider these people to be higher rate tax payers. This may be a fine distinction, but it is one made by Revenue, not TASC.

There is a valid argument to be made that people who are liable for the higher rate, but are not classified as paying the higher rate by Revenue, would still benefit from a higher rate cut, despite the phrasing of the response to the Parliamentary Question. The number of people in this group is hard to quantify (because of the way Revenue data is presented) but it is possible to estimate that it is somewhere in the region of 200,000 additional cases. In this case, IBEC’s figure of 607,000 who would benefit is valid.

In seeking to identify other people who would benefit, IBEC also add in a group who might benefit if they were to receive a salary increase or overtime to bring their estimated figure to 657,000 cases.

In identifying the ‘population’, IBEC narrow the definition of “taxpayer” by removing pensioners, low-paid and part-time workers and those on their first jobs (without reference to how these were identified).

In this way they shrink the population of “taxpayers” to 1.2 million cases, and can claim that more than half of “taxpayers” benefit from a cut to higher rate tax, despite the fact that Ireland has 1.9 million people in employment. Deliberately excluding the low-paid and pensioners from a discussion on income tax is poor analysis.

657,000 is 35% of the 1.9 million people at work in Ireland, but it is not “more than half”.

However, 657,000 is still only 18% of Irish adults, and in the context of the Budget, and the claims of ‘giving something back’, it is fair to point out (and factually correct) that a higher rate tax cut only benefits a minority of Irish adults.

2) The Marginal rate
While a single person on €32,900 may face a marginal rate of 52%, their effective rate is only 18%. That is a difference of 34 percentage points, or €11,186. In this context, focusing on the marginal rate of 52% is irrelevant to this discussion, rather than irrelevant entirely. In addition, because of the variances within tax systems, simple cross-border comparisons of marginal rates are not useful. In the Irish system, while it is true that the marginal rate comes in at below average earnings, this is off-set by tax credits and tax reliefs.

3) Focus on income tax
All of TASC’s analysis distinguishes where appropriate between “income tax” and “income tax, USC and PRSI”.  The focus on the actual level of income tax paid in this instance was based on the available Revenue data and in the context of a discussion on the 41% marginal rate of income tax (which is made very clear in the report).

A maximum 30% average effective rate of income tax, even on earners above €2 million, is factually correct. At no point does TASC claim that this is the only type of personal taxation. However, it is not accurate to simply bolt USC and PRSI onto the Revenue “tax paid” data, as this is a composite of couples and singles and they will have different USC and PRSI liabilities.


Cormac Staunton is Policy Analyst with TASC. You can follow him on Twitter @Cormac_Staunton