Middle-income earners will still bear brunt of tax burden

It’s been billed as the budget for middle-income earners; the budget where the squeezed middle – the people who get up early in the morning – get some much-needed relief.

However, as figures from the Irish Tax Institute show, any gains for this cohort are likely to be limited. Why? Firstly, because they pay too much tax, and secondly, because the exchequer increasingly depends on middle-income earners to prop up the State's tax revenues.

To the first point. It’s worth repeating: about 37 per cent of income earners in Ireland don’t pay any income tax. About 29 per cent pay neither income tax nor the universal social charge (USC) – and these numbers have increased in recent years.

Thanks to efforts to take more people out of the tax net in recent budgets, you now only start to pay USC on earnings over €13,000, and income tax on earnings over €16,500 for PAYE employees, or €13,000 for self-employed.

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This means that someone earning €18,000, for example, will have a tax burden of just €510 of their income, compared with €4,770 in Germany. It also means that the burden of filling the exchequer’s coffers falls on those on middle and higher incomes.

Imbalance

The Irish Tax Institute says that 50 per cent of taxpayers now contribute 97 per cent of tax revenues, with the remaining 50 per cent contributing just 3 per cent. If you want to shrink the amount a certain cohort – or those on middle incomes are paying – you need to increase either taxes on higher earners, or bring more people into the tax net. Neither approach, however, has found much political favour, apart perhaps from the intention to taper the PAYE credit on earnings of €100,000-€120,000.

And it becomes even trickier when you consider just how important income tax has become as a contributor to the State’s tax revenues.

Back at the height of the Celtic Tiger in 2007, income tax accounted for just 28 per cent of the exchequer’s total tax take; today that figure has rocketed to 40 per cent, or as high as 50 per cent once PRSI is factored into the equation.

So while Fine Gael and Fianna Fáil may squabble over which soundbite-friendly reduction to grant middle-income earners, the reality is that until the State finds a new bountiful source of tax revenues, the brunt will still be borne by the middle.