Optimal taxation of top incomes

Tom McDonnell: You can find an interesting paper on optimal top marginal tax rates here.… The authors find that the optimal top marginal tax rate converges to about 2/3. You can read a synopsis of the findings here.

The effect of marginal tax rates

It has sometimes been suggested that marginal tax rates in Ireland are too high, and that raising them would harm growth. They may affect the incentive to work. It is true that they are 10th highest, of the 34 countries in the OECD. Also the marginal rate hits in relatively low (affecting average earners). Helpfully, the OECD provide the data here.


However, what is the link between marginal tax rates and the economy?

 

As can be seen in the above graph there is no negative relationship between GDP per capita and marginal tax rates. In fact it is slightly positive. Of course this is not conclusive evidence of a positive link, but the evidence certainly does not support the hypothesis that high marginal rates harms GDP.

But does it affect the incentive to work?

No relationship is found between unemployment rates and marginal tax rates in the OECD.

High tax rates are not the problem. In other countries, such as the Nordic countries, high tax rates are used to fund social services such as child care, which make it easier for people to work in the market economy.

Effective tax rates in Ireland

Proinnsias Breathnach: I sent the following letter to the Irish Times in early December, but like my article on competitiveness, it failed to make it onto the page:

In an article in The Irish Times on December 3, Danny McCoy, Director General of IBEC, wrote: “OECD data show that effective tax rates for high-income earners in Ireland are higher than those in many European countries, including Germany, France and the UK.” Mr McCoy suggests that this is undermining Ireland’s ability to attract or retain highly skilled workers.

A table from the OECD website (Table I.5, OECD Tax Database) shows that, for workers earning two thirds more than the national average wage, the proportion of income paid in income tax and employee’s social security in 2008 was as follows: France 33.3%, Germany 45.6% and the UK 30.3%. The comparable figure for Ireland was 26.9% - lower than any of the other 14 countries which made up (with Ireland) the European Union before its recent enlargement.

Of course, Mr McCoy may have had in mind people earning a lot more than two thirds above the average wage. According to the income tax calculator on the parmentier.de website, a single German worker earning €200,000 per year (perhaps typical for a high-flying executive or top scientist) would have expected to take home €105,660 last year after payment of income tax, social security and solidarity surcharge. An Irish worker in the same category would have taken home €5,000 more than this, according to the hookhead.com tax calculator. Again, the effective rate of tax is lower in Ireland.

It may be that the OECD data referred to by Mr McCoy give a different picture, but even if so, the data quoted here indicate that the picture is rather less clearcut than Mr McCoy would have us believe.