Ireland the only OECD state where some get back more than they pay in income tax

Thanks to child benefit, lower income families lose nothing to income tax

It’s an accepted view that Ireland is a high-tax country when it comes to income taxes; but the OECD, it would seem, begs to differ.

In a new survey, the group of richer countries which promotes economic and social development, puts paid to this and finds that income tax in Ireland is in fact comparatively low when compared with 35 countries across the world. And when it comes to families, Ireland exerts a clear “fiscal preference” for levying lower rates of tax, with Irish families among the lower-taxed in the world.

Taxing Wages 2017, the flagship publication from the body, measures the so-called tax wedge – a measure of the tax take on income including income tax and levies and employee and employer social insurance contribution– across 35 OECD countries.

So what does it find?


Tax burden is falling

Well, the survey shows the personal tax wedge or burden fell substantially in Ireland between 2000 and 2016, down by more than five percentage points for families, while single people, on 67 per cent of the average wage or an annual income of €22,523, saw their tax wedge drop by 11.7 percentage points. Single parents on a similar income level saw their tax wedge drop by 18.1 percentage points.

Individuals bear bigger brunt

Single people with no children will pay considerably more tax than those who are married or who have children – but will also pay considerably less than their peers across the OECD. According to the OECD’s latest report, single people in Ireland incurred a “tax wedge” of 27.1 per cent on their income in 2016 – the seventh lowest across the OECD, and less than the OECD average of 36 per cent.

In Belgium on the other hand, the tax wedge was as high as 54 per cent of their income to tax taxes, while Germany (54 per cent), Hungary (48.2 per cent) and France (48.1 per cent) are also close to the 50 per cent mark.

When employer’s PRSI is excluded, Ireland also fares well. With an effective tax rate of about 19 per cent on income of €42,254, this again puts Ireland in the realm of the lightly taxed countries, well below the OECD average of 25.5 per cent.

Disposable income for families is 20% higher than singles

The tax wedge for families is considerably less than that for single individuals without children, both in Ireland and across all OECD countries. Indeed the tax savings realised by such a couple means their disposable income is higher than the single individual’s by 20 per cent or more of earnings in six countries – including Ireland – showing the “fiscal preference” for families is alive and well here. In the last budget for example, the homecarer’s allowance, a tax credit paid to stay-at-home parents, was increased.

Other countries apply a different approach; there is no difference in the tax burden on single people and one-earner couples in six countries – Australia, Chile, Israel, Mexico, New Zealand and Sweden, for example.

Families with one earner pay a comparatively low amount of tax, at just 8.3 per cent of their income – the third-lowest across all OECD countries, and far lower than the 27.1 per cent incurred by singles. This compares with France (40 per cent); Belgium (38.6 per cent) and Greece (38.3 per cent). New Zealand is at the other end of the scale with a tax wedge of just 6.2 per cent, followed by Chile (7 per cent). The average for OECD countries was 26.6 per cent. Moreover, Irish families with one earner saw the third-biggest decline in the amount they pay in tax between 2015 and 2016, down by 1.03 percentage points. This compares with a 1.24 percentage point jump in Belgium, and a 2.68 percentage point decline in Austria.

Child benefit means some families pay a negative rate of tax

Ireland’s child benefit regime, offered at a rate of €135 a month per child, combined with its favourable method of taxing families, means that some families actually pay a negative rate of tax on their income – or in other words they receive more from the State than they pay back in taxes.

According to the OECD, the net personal average tax rate for the average one-earner married couple with two children in Ireland is actually minus 1.6 per cent on the back of child benefit – and it’s the only country across 35 OECD countries where this is the case.

Moreover, such a couple earning €22,523 in Ireland will pay tax at a rate of minus 18.8 per cent, on the back of child benefit and tax credits.

For example, an Irish couple with one earner and two children, earning the average industrial wage, will earn €33,617 a year – but thanks to child benefit and the homecarer tax credit negating any income tax they pay, they will actually bring home €34,143 a year. Once the couple pass a certain income threshold, this advantage evaporates.

Fiona Reddan

Fiona Reddan

Fiona Reddan is a writer specialising in personal finance and is the Home & Design Editor of The Irish Times