What about the PAYE Worker?

Paul Sweeney: For decades there used to be a refrain heard endlessly on taxation. It was “What about the PAYE worker?” Will we hear it more often soon if some get their way.

There has been a strong lobby by the self-employed and their lobbyist/advisors to get special income tax reductions for them in the forthcoming Budget on 13th October. They argue, correctly that the very high-earning self-employed pay a higher USC than PAYE workers and they don’t get the PAYE allowance - unless they are also employees (which they can be).

There is a surcharge of 3% on individuals who have non-PAYE income that exceeds €100,000 in a year. This surcharge applies to the non-PAYE income only. The PAYE credit is €1,650 a year for employees only. So do the Schedule D taxpayers or self-employed have a case for “similar treatment” with PAYE workers through special income tax reductions?

No, because their tax treatment is designed to give the PAYE worker approximately the same taxation. 

Under the tax rules, the self-employed have additional tax privileges over the PAYE workers and the current differences in rates and the additional allowances were added to reflect these differences. Schedule D taxpayers can claim expenses which are “wholly and necessarily incurred in the performance of their duties”, but employees can only claim expense which are “wholly and necessarily and exclusively incurred in the performance of their duties.”

The word “exclusively” means that employees have no opportunity to reduce their taxes in the way the self-employed can. In addition some self-employed may have greater opportunities (than others) to even under-state income or exaggerate expenses. By doing so, they are engaging in tax evasion. Anyone who has paid a self employed person cash has an idea of what is going on. Those in cash businesses including even some professionals are sorely tempted to understate income and some substantially. The evidence is in the results of the Revenue audits, some of which are published in the Tax Defaulter list. Few if any are PAYE workers. The list does not seem to get shorter each year, indicating that temptation for the self-employed is still at large.

In addition, self-employed have opportunities to engage in tax avoidance which is legal and indeed legitimate. It quite legitimate for a self employed to pay hotel and other expenses when they are seeking business which they may not get. Employees can to do this but fruitless travel will be reimbursed by the employer.

The PAYE allowance was brought in after the great tax marches in 1979 and 1980 because of the two additional opportunities which self employed had over PAYE workers to reduce their tax. First was the legitimate right to incur additional expenses and the second was the clear understanding between the social partners that a considerable number self-employed did engage in tax evasion to varying degrees. The evidence is in the annual audits by Revenue.

So in conclusion, there is no case for the additional tax privileges to be granted to self-employed in the forthcoming Budget through reduced USC or other reductions in rates or increases in their tax credits. There is however, a case for similar treatment of PRSI for low paid self employed. Tax is an emotive issue as the great 1980s tax marches showed (that was about inequity between the PAYE worker and the self-employed/farmers) and the water charges marches (which is not about tax, but a charge).

Finally, much of the lobbying on tax in the run up to the Budget is about income tax. Yet the last Budget projected that income tax and consumption taxes would both be around 17500m. Thus for every €100 paid in income tax the average person will pay an additional €100 in spending taxes this year. Why is this not seen in the discourse on taxation?

It seems that taxes on consumption like VAT and excise do not feature, yet for the low paid, those may be the only taxes they pay. Many high paid people may pay a lot in such spending taxes in absolute terms but it is an insignificant and diminishing proportion of their total taxes as incomes rise. What does this tell us about media focus on income tax?

“What about the PAYE worker?”

Paul Sweeney is Chair of TASC's Economists Network