Real wages, allowing for the impact of inflation, fell in Ireland in 2021 but tax on that income increased, according to a new report from the OECD.
The Taxing Wages report examines the impact of tax on labour costs across the 38 member states of the OECD. The 2021 report, published on Tuesday, finds that Ireland was one of only eight countries where real wage levels fell last year.
It says the average wage in the State rose 1.5 per cent to €50,636. However, inflation of 2.1 per cent meant that, even before tax, income was down 0.5 per cent on average. With the tax on that reduced income rising by 1.2 per cent, Ireland was one of only four countries – the others were Austria, Korea and New Zealand – to pay more tax on lower real incomes.
The OECD data says that tax on labour in Ireland during the pandemic – as measured by the tax wedge on a single earner between 2019 and 2021 – rose faster than in all other OECD states bar Luxembourg and Israel.
The personal tax wedge, which is the amount in taxes a worker and their employer pay as a proportion of total labour costs – their pay plus what their employer pays in PRSI – rose for all family types, according to the report.
The tax wedge for the average single worker was 0.3 of a percentage point higher last year, at 34 per cent compared to 33.7 per cent in 2020. That includes their income tax, universal social charge and both their PRSI and the PRSI paid by the employer, minus any cash payments, such as child benefit.
The figure is fractionally below the OECD average and places Ireland 24th among the 38 OECD states. The report notes that income tax and employer PRSI account for 89 per cent of this tax wedge compared to an OECD average of 77 per cent on account of Ireland having among the lowest rates of employee social insurance payments in the group.
Preferential tax provisions and child benefit means that the average tax wedge for a family with one earner and two children was 19 per cent last year, below the OECD average of 24.6 per cent and among the lowest in the OECD – ranking the State 32nd out of 38 countries surveyed.
Despite the lower figure, the tax wedge for this group rose faster last year, by just over half a percentage point, than for single people.
For families in Ireland with two children where both parents are working – with one earning the average wage and the other two-thirds of that figure – the tax wedge comes back close to the single worker figure at 26.5 per cent, up 0.4 per cent on the previous year.
The position of single earners having the largest tax wedge and one-earner families the lowest mirrors the trend across the OECD. In all cases in Ireland, the increase in tax wedge was down largely to rises in income tax.
The tax rate for the average single Irish worker last year was 26.7 per cent, including PRSI, meaning their take home pay was 73.3 per cent of their wages. The OECD average was 75.4 per cent, due to the lower point at which the higher rate of income tax kicks in in Ireland.
Ireland was among only five countries with an average income tax rate of more than 20 per cent.
Married people fare better, especially those with children, according to the report. This is in line with the experience in Ireland over many years. An average married worker, with two children, had an average tax rate of 10.1 per cent in Ireland – over 15 points lower than their single counterpart with no children and below the OECD average of 13.1 per cent.
And families with two children where both parents are working were paying an average tax rate of 18.1 per cent, just above the OECD average of 17.9 per cent.
The tax wedge for the average Irish single worker has fallen by 1.3 percentage points since the turn of the Millennium. Back in 2000, the tax wedge for a worker in this position was 35.3 per cent of the cost of employing them. That figure fell as low as 28.1 per cent in 2007 before rising again after the financial crash though it has continued to remain below the OECD average.
The report looked at the impact of the Covid pandemic across EU states but said that, In Ireland’s case, it did not skew its published figures.