Tax dividend goes missing from jobs growth

Pundits left puzzled as income tax underperforms amid strong employment growth

At the press briefing that followed this week's exchequer returns, Department of Finance officials were asked to account for an anomaly in the State's finances.

Essentially, why was income tax underperforming when job creation was accelerating and unemployment falling?

The Central Statistics Office’s latest Quarterly National Household Survey suggests employment growth accelerated in the second quarter of 2016, while the State’s headline unemployment rate hit a post-crash low of 7.9 per cent on Tuesday.

In theory, the Government should be enjoying a healthy tax dividend as a result. And to some extent it is: income tax receipts have generated about €500 million more this year than last.

READ MORE

However, the State’s main tax head is underperforming departmental targets and was way off its August profile.

This raises questions about the quality of the new jobs being created and whether or not they are low-paid, with much of the new income thus falling out of the tax net.

The department's principal officer, John Palmer, attempted another explanation. He suggested the State's coffers benefited more from rising wages than from the creation of new jobs. So while job growth is strong, he said, wage inflation was soft.

“Basically in income tax terms we get a better elasticity, a better return if you like, from wage increases versus getting jobs. So while we’re seeing strong employment effects it’s not worth as much as wage increases,” he said.

He also noted that within income tax itself, PAYE was performing better than universal social charge, although this may be down to a profiling issue with USC, which was subject to changes in last year’s budget.

Either way, the latest returns indicate that the ongoing surge in corporation tax is offsetting the underperformance in income tax and VAT to the tune of €484 million. This buffer is narrowing, however, and may well be gone by the end of the year.