Think again about the 'squeezed middle'

Nat O'Connor: Ireland's 'squeezed middle' has been defined by the Minister for Finance, Michael Noonan, as those earning between €32,800 and €70,000 (e.g. the figures were repeated again in the Irish Times).

That basically means any single person once he or she begins to pay income tax at the higher rate of 40%.

What isn't clear from Minister Noonan's definition of 'the middle' is whether he is focusing on individual incomes or household incomes. Obviously, there is a big difference between one person earning €40,000 and two people each earning €20,000.

But unless we are talking about individual incomes, married couples on up to €140,000 would still fit in Minister Noonan's definition of the squeezed middle (and be potentially in line for further tax cuts) despite being in the Top 2% of the income spectrum.

The following chart shows Revenue data for tax cases (either singles or couples) by their gross income before tax. There are 2.05 million cases, representing 2.85 million adults; i.e. there are c. 800,000 married couples in the data, slight over half of which are dual-earner couples.

(Click to enlarge)

Three things to note when reading the chart:

1. Revenue has no data for over 750,000 adults (15+), who have no taxable income - presumably for many of the approximately 350,000 secondary and third level students aged 15+, as well as for some people entirely reliant on social protection incomes.
2. We don't know how many single tax payers are cohabiting with another earner, therefore benefiting from a higher household income.
3. Where social protection incomes are a taxable part of a larger individual or household income, they should be included in the Revenue data - e.g. someone with both a State Contributory Pension and an occupational pension might have a tax liability.

If we begin counting the so-called 'squeezed middle' from those on incomes of €30,000+, they are actually the top 25% of all adults in Ireland by income share. If we exclude the adults not in Revenue's data, they are in the top 32%. In neither case are they the real middle.

It is also possible to estimate the distribution of taxable income by dividing married incomes 50:50 between couples, as shown in the next chart. This is not the best method of indicating market income distribution, which is often skewed towards one earner in a couple (the other of whom does more unpaid work), but it is one way to illustrate the average income per adult.

(Click to enlarge)

In this data, which removes the distortion of single versus dual income tax cases, those on incomes over €30,000 are in the top 15% of all adults in Ireland, or the top 20% of all adults in Revenue's data.

The middle adult taxpayer in Revenue's data is an adult in the €20,000 to €30,000 income group, below the 'squeezed middle's' LOWEST point of €32,800.

All of this is yet another way to show that the 'squeezed middle' is just a rhetorical device to make it sound OK to cut the higher rate of income tax for the minority of people who already enjoy a greater share of market incomes. Those earning from €32,800 to €70,000 are neither the 'middle' nor the most 'squeezed'.

This is not to say that some people on those incomes may not be under serious pressure due to mortgage debt or other issues. But that would call for targeted measures like mortgage relief for the over-indebted, not blanket tax cuts for an income category that includes many people without major mortgage debt or other such pressures.