Economy

Few options for Donohoe on three in 10 earners outside tax net

More of income tax total now coming from smaller number of higher earners

The income tax burden on lower earners here is well below the average.

Thu Jun 28 2018 - 05:00

How do so many people in Ireland escape the income tax net entirely? Because recent budgets have made sure that this was the case, that's how.

The latest Revenue data shows that 956,200 tax units – single people and jointly assessed couples – will not be liable to pay any income tax this year, about 37 per cent of the total. Some of these will be caught in the universal social charge (USC) net. But even when this is taken into account, some 769,800 will pay no income tax or USC – about 29 per cent of total earners.

During the economic boom, successive budgets took more and more people out of the tax net entirely. This was dramatically reversed as crisis hit the public finances. The introduction of the USC in 2011, then kicking in at income levels of just over €4,000, was the key change. However, subsequently the earnings level at which people become liable to the USC has been increased to €13,000.

The income tax burden on lower earners here is well below the average. The flip side is that the Irish tax system is, according to the OECD, the most progressive among its European Union members. In other words middle to higher earners in Ireland pay more than the international average.

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There are a few key policy issues here. One is the need to have a progressive system to fund welfare and social services. A second is the goal of having a solid and wide tax base. The reliance on income tax as a source of revenue has risen significantly in recent years, and within the income tax total more is now coming from a smaller number of higher earners.

And the final issue is competitiveness, with warnings from business that high taxation on those earning above the average – and particularly above about €70,000 – can make it harder to attract investment.

The political reality for the Minister for Finance, Paschal Donohoe, is that once you take people out of the net, it is very hard to put them back in, except in an emergency. Those households outside the tax net are likely to stay there. And with few new sources of revenue, income tax and USC relief will remain incremental. Talk of phasing out the USC has been long forgotten.

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