How much tax does the ‘squeezed middle’ really pay?

Budget 2019 is fast approaching and, at times, it seems you can't see the sky for all the kites being flown. One proposal that now seems a near certainty is to take more middle-income earners either out of the top rate of tax altogether, or reduce the amount of their income that's liable to tax at 40 per cent.

While it has been suggested that such a move will only save taxpayers in the order of €300-€500 over the year, it’ll be welcome nonetheless.

Reducing the amount of tax they pay too dramatically could, of course, have severe consequences on the country’s coffers.

Yes, we’ve known for some time now that as many as one million income earners don’t pay tax on their income; but the question then must be, who is bearing the burden of taxation in this State?

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Is it our higher earners, or top 1 per cent? Is it lower-income earners in the standard rate tax band? Or is it the “squeezed middle”, who are paying the top rate of tax on relatively low amounts of income?

Revenue estimates for 2018 suggest that more than half a million (531,700) tax “units” will pay tax at the higher rate of 40 per cent. As married couples opting for joint assessment are only counted as one unit, the number of people may be significantly higher.

And it's likely to be a big topic on budget day, as wage growth indicates that almost 65,000 more taxpayers will fall into this 40 per cent tax rate come January, unless Minister for Finance Paschal Donohoe does something to widen income tax bands on October 9th.

Doing something would be politically favourable; doing nothing would be more lucrative for the exchequer.

As can be clearly seen from the most recent Revenue Commission figures available – for 2015 – just 17.6 per cent of taxpayers were paying income tax at the higher rate ... but they accounted for 47 per cent of earnings.

And when it comes to income tax, they are clearly the engine behind income taxes, accounting for 75 per cent of all income taxes in that year.

The squeezed marrieds

Looked at another way, about one in five of the population pays tax at the higher rate, but they contribute three-quarters ( or almost four-fifths in fact) of all income tax revenues. Those paying tax at the standard rate, on the other hand, account for 43 per cent of all taxpayers but just 25 per cent of tax revenues.

And if we look a little closer at the figures, we can see that one cohort – married couples with two incomes – bear the biggest burden when it comes to the tax system. Back in 2015, for example, this cohort accounted for 28 per cent of the higher-rate taxpayer population. But given that they earned 53 per cent of all income that year, they contributed 43 per cent of the income taxes paid by higher-rate taxpayers.

Or to look at it another way, our dual income married couple “squeezed middle” – which will also incorporate the top 1 per cent of earners – contributed almost a third of all income tax revenues in 2015. No wonder then that Government policy has been to shift the rate at which you enter the 40 per cent rate up – but only ever in small increments, so its overall tax take isn’t hit.

Even if the Government were to adjust the tax bands by about €750-€1,000 in this year’s budget, it would really only be a case of inflation-linking the bands, or dealing with “bracket creep”. This is when rising wages drive incomes into higher tax brackets. The taxpayers only end up paying more tax: their real purchasing power doesn’t improve.

So there is no real benefit, or tax savings, to taxpayers, as the shift in the bands is only offsetting this.

Single men who pay tax at the top rate are also major contributors to tax coffers. In 2015, for example, they accounted for only 14 per cent of all higher-rate taxpayers. But they contributed 18 per cent of all higher rate tax yields, thanks to their strong earning capability. Single women lagged behind – though only slightly – accounting for 13.5 per cent of all higher-rate taxpayers. However, lower earnings mean they contributed less to tax yields, at just 14 per cent.

Lower rate taxpayers

In contrast, while there are possibly twice as many taxpayers paying tax at a rate of 20 per cent – some 1.2 million will be in 2019, according to Revenue forecasts, accounting for 44 per cent of all taxpayers – the amount they contribute is significantly lower.

With total earnings of some €35 billion in 2015, standard rate taxpayers contributed some €4 billion in income taxes. That’s way less than than the €10 billion paid by higher rate taxpayers, even though their total income was only slightly higher, at €40 billion.

But what of the State's rich, or top 1 per cent? We can get more recent insight from figures published by the Tax Strategy Group during the summer. This reveals that, in 2018, this cohort – those earning €200,000 or more – will pay 28 per cent of the total yield from income tax and USC.

And if you scroll back in the earnings data, you’ll find that the top 26 per cent of income earners – those earning €50,000 or more – will pay a staggering 85 per cent of total income taxes. The remaining 74 per cent of income earners will pay just 15 per cent of total IT and USC.

Big driver

The importance of the “squeezed middle” to the exchequer’s coffers is evident when we consider where the Government is generating tax revenues. Last year, the Irish economy generated tax receipts of some €50.7 billion. Of this, a staggering €20 billion, or almost 40 per cent, came from income tax.

Corporation tax contributed just 16 per cent, while VAT was the other big contributor, at 26 per cent.

So forget about your Apples and your Googles, it’s income taxes that are driving the Irish economy. And it’s higher-rate taxpayers, or the “squeezed middle”, who are driving income taxes.

Contrast this with 2006, when income taxes accounted for about 28 per cent of total tax revenues, thanks to the greater revenues coming from the buoyant construction sector at that time. Depending more on income taxes may make for a more stable tax policy, but it means the Government can’t really shift this burden until they find another – potentially more volatile – source of revenue.

Rich single women

It’s not (yet?) a huge figure, but figures from Revenue show that single women are slowly and steadily creating wealth.

In 2016 some 435 single women (that is, unmarried/not in a civil partnership) reported earnings of €275,000 or more, while a further 558 single women would also have made the top 1 per cent, with earnings of €200,000-€275,000.

Unremarkable enough perhaps, particularly when you consider that twice as many single men make the top 1 per cent. But it’s a sign of a growing trend.

Back in 2004, for example (the earliest record we have from the Revenue), there were just 244 women in the €275,000+ category, or 464 in the top 1 per cent. While the figure earning €275,000+ rose to a high of 441 in 2006, it fell off significantly after that.

The latest uptick is likely to be down to a new generation of highly paid female professionals in the legal and accountancy sectors, as well as more female business owners, increasingly earning on a par with their male counterparts.

The number of single women in the top 1 per cent reached a new high of 993 in 2016, according to Revenue figures.