Poorer people in Ireland ‘pay out more of their income in tax’

Poorer people in Ireland pay out a greater share of their income in tax than their richer counterparts, according to new research.

The finding, contained in a report by the Nevin Economic Research Institute, runs counters to the notion that Ireland’s tax code is progressive, in other words, one in which the tax rate rises as income increases.

The institute’s research, which is based on data from Central Statistics Office’s most recent household budget survey, found Irish households pay 24 per cent of their income in taxes, both direct and indirect.

On average, 13.6 per cent of gross income goes in direct taxes (income and social insurance) and 10.36 per cent in indirect taxes (VAT, excise and levies).

VAT was found to be the largest source of indirect taxation, collecting on average €3,360 per annum from households, equivalent to 6.27 per cent of average gross income.

The report found that in nominal terms the tax was progressive but when judged against gross income it becomes regressive, accounting for a higher percentage of income in poorer households.

Specifically, the research showed the poorest 10 per cent of the population shelled out 16 per cent of their income on VAT while the top 10 per cent of earners paid out just 4 per cent.

A similar pattern emerged when it came to the other big indirect tax, excise duty, with the poorer cohort paying 8 per cent of their income on this tariff compared to top earners who pay 1.4 per cent.

The report noted that in contrast to the indirect tax regime, the State’s income tax code is strongly progressive with the top 10 per cent paying an average rate of 23 per cent of their income compared to the bottom tenth who paid out just 0.3 per cent.

However, the report found the combined effect of both direct and indirect taxes accounted for a greater portion of overall income in poorest households than in richest ones.

Specifically, the bottom 10 per cent of the population forked out 30.5 per cent of their income in total tax, while the top 10 per cent paid 29.6 per cent.

The report’s author Dr Micheál Collins said the Irish income tax system is progressive, but the indirect taxation system is regressive - as income increases less tax is paid as a percentage of gross income.

This gives a U-shape to the overall household tax contribution curve - households at the bottom and top of the income distribution contribute the most, he said.

“What this report is really getting at is that the tax code is not simply about income tax…it’s a more complex picture than that,” he said.

Budget 2012 included an increase in the standard rate of VAT from 21 per cent to 23 per cent yielding an additional €670 million to the exchequer.

Projections for the Republic of Ireland’s taxation revenue suggest that just over €50 billion will be collected across all taxation categories during 2014. While corporations and other businesses contribute a sizeable proportion of this sum (principally through profit taxes, local authority charges and employer PRSI) the largest proportion flows from households.