The lopsided nature of Ireland’s income tax base was laid bare in a Department of Finance report this week.
It noted that the top 10 per cent of income earners here now generate 40 per cent of income tax receipts and 60 per cent of USC (universal social charge) contributions.
The converse is that earners in the bottom 50 per cent of the income distribution generate just 10 per cent of income tax receipts and 5 per cent of USC contributions.
Even more striking, approximately one-third of all income earners – equating to 1.2 million tax units (which can be an individual or a couple) – are effectively outside of the income tax net courtesy of the State’s generous system of tax credits.
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“Considering income tax is the State’s largest source of tax receipts, the heavy reliance on so few payers leaves the public finances vulnerable to any shifts in the economic cycle,” the report says.
This concentration risk is in part the same as the risk that exists in the State’s corporation tax base where just 10 companies are responsible for 60 per cent of the total receipts. That’s because many of the top income earners work for the big US multinationals which pay the lion’s share of corporation tax.
“These same multinationals are, themselves, likely to be disproportionately impacted by any further deterioration in the global trading environment,” the report says.
“As such, in the event of a shock to one or more of these sectors, the contagion effect of these interlinkages risks the development of a ‘snowballing’ deterioration in both corporation tax and income tax,” it says.
The narrowness of Ireland’s tax base has been highlighted for several years including in a high-profile report by the Commission on Taxation.
The reports are piling up in the department but there has been little or no movement to address the problem. The inertia is undoubtedly a product of the ongoing tax bonanza which has allowed the Government avoid making hard decisions.
