The average tax rate paid on Irish incomes is rising and this may underpin the surge in income tax revenue seen during the coronavirus pandemic, according to a new study from the Irish Fiscal Advisory Council (Ifac).
Income tax receipts shot up by 17 per cent last year and recent figures show the trend continuing in 2022. While the Ifac says caution is needed, it finds that the growth of high-paid employment may be set to support revenues in the years ahead.
The average — or effective — tax rate on Irish incomes rose from 22.4 per cent in 2019 and 2020 to 24.4 per cent in 2021, according to the Ifac, the highest in its measured series going back to 1995. It says that this rise is “puzzling” in the absence of significant income tax policy changes in recent years and since the tax take on incomes has been broadly steady for some time. The analysis by Ifac economist Kevin Timoney shows that the higher average tax take was broadly the same across different sectors, though the reasons varied, “reflecting the uneven nature of the recovery from the pandemic”.
The analysis shows that sectors with the highest pre-pandemic wages — including sectors such as information and technology, finance and professional services — had strong growth in wages, employment and hours worked “and tax receipts from these sectors increased rapidly in 2021, having increased marginally in 2020″. In contrast, the rise in the effective tax rate among lower-wage sectors such as retail, accommodation and hospitality appears to reflect the fact that many lower-wage employees were not working during the period when consumer-facing sectors were closed. More higher-wage managers and owners continued to earn and this pushed up the average income tax take in these sectors. This may reverse somewhat in 2022 as the economy fully reopens, although there are also wage pressures in these sectors.
However with the income tax burden low on the lower-earning employees, the biggest impact on the economy-wide effective tax rate comes from the higher-earning sectors. The Ifac research finds it is plausible that official forecasts that assume growth here will continue to boost income tax revenues, will be met even if there are downside risks if any of the key sectors or companies face difficulties. The impact on tax revenue of the longer-term shift towards higher-paid work needs to be monitored carefully, said the Ifac, but may provide important support for the exchequer in the years ahead.