POLICY BRIEF: Economic Equality Series www.tasc.ie
A Third Rate of Income Tax Introducing a third rate of income tax would make the tax system more equitable, while allowing government to improve public services, or fund tax cuts for middle and low incomes earners. 60% 50% 40% 30% Maximum effective income tax (three rates)
20%
Maximum effective income tax (current system)
10%
€1,000 €10,035 €16,499 €23,000 €32,800 €41,000 €51,000 €61,000 €71,000 €81,000 €91,000 €101,000 €111,000 €121,000 €131,000 €141,000 €151,000 €161,000 €171,000 €181,000 €191,000 €201,000 €211,000 €221,000 €231,000 €241,000
0%
Gross Income Chart 1: Theoretical ‘effective’ Income Tax Rates – current two-rate system v. adding a third rate (including USC and PRSI)
Income Tax in Ireland Income tax makes up 42 per cent of the Government’s tax revenue and is paid by 38 per cent of the adult population or 1.4 million adults. This rises to 44 per cent or 1.6 million adults if USC is included. Income tax interacts with a number of key elements of the economy: employment, wages and consumption. Income tax paid in Ireland is lower than the ‘headline’ rates suggest. The average rate of income tax paid in Ireland is just below 14% of gross income for households. The amount paid ranges from zero for the lowest earners up to an average of 23% for the top 10 per cent of income earners.
It is sometimes argued that Ireland is unusual in having a system where workers begin to pay the highest income tax rate at less than average wage levels. That is, the 41% higher rate is paid on income above €32,800. A person who earns €40,000 is often portrayed as ‘paying tax’ at the higher rate of 41%. However for a person on €40,000, the maximum income tax payable according to the rules is only 15.5%.
Similarly, they are only liable for a maximum of 24.8% if USC and PRSI are also included, far less than the ‘52%’ marginal rate (see Chart 1). There are also a number of other unusual features of the Irish income tax system. Firstly, Ireland has very high level of tax credits, tax reliefs and tax breaks available. The use of tax breaks by many people can lower the actual amount of tax paid to below the theoretical maximum. The theoretical rates, as illustrated in the chart, are sometimes called the ‘effective’ tax rate but do not take these tax reliefs into account. Secondly, Ireland is highly unusual for its very low level of PRSI, especially employers’ social security contributions; which are effectively the lowest level of social insurance in the EU.