Poorer households hit harder by indirect taxes such as VAT, report finds

Indirect taxes in the Republic such as VAT are “highly regressive” with low-income households facing disproportionately larger liabilities, a new report has found. The study by the Parliamentary Budget Office (PBO) examined the scale of indirect taxes paid by Irish households.

It indicated that households here pay an average of €151 per week in indirect taxes, equating to 13 per cent of household expenditure or 12.6 per cent of household income. The lion’s share – 75 per cent or €113 – was paid in VAT on various goods and services, most notably energy products.

Indirect taxes such as VAT were “particularly burdensome” on low-income households, the report noted, as they tended to spend a greater proportion of their income on energy products such as electricity, home-heating oil and natural gas.

It calculated that the poorest 10 per cent of households paid an average of €88 per week in indirect taxes, which equated to 29 per cent of their household income, while the richest 10 per cent paid an average of €216 per week, equating to just 7.9 per cent of their income.

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This regressive pattern was compounded by the higher relative expenditure by low-income households on highly-taxed products such as alcohol and tobacco, the report said.

Alcohol and tobacco products represented 9 per cent of all expenditure by the poorest 10 per cent of households, compared to 6 per cent for the richest 10 per cent.

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While the standard rate of VAT on most goods and services in the Republic is 23 per cent, the Government introduced a super-reduced rate of 9 per cent on electricity and gas during the recent energy price shock

The report noted that a “broad energy price shock” similar to the one experienced here in 2022 and 2023 would have “a regressive impact” with burden of the additional costs falling more steeply on lower-income groups.

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The findings tally with other research, which indicates that lower-income and rural households experienced higher-than-average cost-of-living increases during the inflationary crisis.

The PBO’s analysis also simulated the impact of raising the carbon tax to €100 per tonne, from €48.50 per tonne, the stated aim of the Government, noting it would add “to the regressivity of the indirect tax system”.

The proposed increase, at current estimated income and consumption patterns, would see an increase in indirect tax liabilities equivalent to 1.5 per cent of income for the poorest 10 per cent of households compared to 0.4 per cent for the richest 10 per cent.

“Broader revenue recycling of carbon tax receipts could be used to support a greater share of low-income households,” the report said.

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