Limp income tax baffles pundits

Exchequer returns for April reflect ongoing below-par performance in main tax head

The latest returns for April show income tax was 3.1 per cent or €198 million below the Department of Finance’s target for the four-month period. Photograph: Ralph Orlowski/Reuters

The latest returns for April show income tax was 3.1 per cent or €198 million below the Department of Finance’s target for the four-month period. Photograph: Ralph Orlowski/Reuters

 

A feature of the exchequer returns this year has been the underperformance of income tax, the star performer of recent years, and ultimately the main barometer of economic health.

The latest returns for April show income tax was 3.1 per cent or €198 million below the department’s target for the four-month period, although this is not much in the context of a €19 billion annual haul.

However, the fact that the tax does not seem to be reflecting the strong level of employment growth in the wider economy is baffling pundits, just as, on the opposite side, the UK economy is refusing to bow to its shrinking Brexit outlook.

April’s exchequer numbers coincided with the Central Statistics Office’s unemployment statistics, which put the State’s jobless rate at a nine-year low of 6.2 per cent.

The figures show that the number of workers classified as unemployed fell by 4,800 in April alone, one of the biggest monthly falls.

However, the Government’s tax take doesn’t appear to be reflecting this employment dividend.

One explanation for the limp numbers is that the tax take from the top 20 per cent of earners, which divvy up the lion’s share, is more lumpy that the rest, meaning it flows in uneven amounts.

Divergence

This may relate to the current divergence between universal social charge (USC), which is more progressive, and PAYE. The latter is ahead of target while the former is running behind.

To date, the Department of Finance has had no explanation for this divergence, other than to say the USC is a newish tax, has been tinkered with a lot and is therefore less predictable.

What’s also surprising about the latest numbers, and in the context of the weak-than-expected income tax receipts, is the performance of VAT.

For most of the recovery, the sales tax lagged the other tax streams, reflecting the glacial pace of recovery in retail.

The stronger VAT figures in 2017 would suggest a trend of increased spending. However, this also appears to running counter to a sluggishness in certain sectors, including new car sales.

Perhaps trying to divine patterns in a few months of tax returns is foolish, but 2017 already looks like breaking the pattern of preceding years.

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