Should you be paying more tax?

The amount we pay in taxes on our income and spending is relatively low by EU standards, according to new figures from the EU statistics agency. How can this be the case when many households have little left over at the end of each month?

In particular, the figures show that people on lower incomes pay significantly less than the international average, while higher income earners pay closer to international norms. This has implications for future policy here, though of course there is no cast-iron rules which says that taxes here should be levied on the same basis as they are elsewhere. A key power of any government is to choose where to tax – and where to spend. But pressure on the next government to spend more is likely to mean that the level of tax at least stays where it is or even drifts upwards.

1. The EU data: The latest figures from Eurostat, the EU statistical agency, are interesting because they combine a couple of major Central Statistics Office surveys to provide a picture of the level of both taxes on income – income tax, PRSI and the USC – as well as indirect taxes like VAT and excise duties. What's more, they look at how they affect people at different income levels and allow us to compare this with other EU countries.

If you use in the country selector on the graphic you can see the tax take at different incomes levels in a range of countries. Households are divided into quintiles – so the first quintile includes the 20 per cent with the lowest disposable, or after-tax income, the second quintile has the next 20 per cent up to the fifth quintile, which has the fifth of the population with the highest income. While we have seen studies before looking at income tax, this is one of the first adding in indirect taxes as well, to give a fuller picture of the tax take from households at different income levels. Because of the demands of trying to get comparable data from a range of countries this is an experimental series and relates to 2015. However there have not been significant changes to taxes here in the meantime, so it seems fair to say that the comparisons are still broadly valid.

How do you know if you are wealthy? It’s not straightforward

---

How well paid do you think you are? Here’s how to work it out

---

Will you end up paying more tax after Budget 2020?

---

Tax and Ireland - what you pay and how it compares to the rest of the EU

---

2. What it shows: The data shows that the overall tax take here at 20.2 per cent is towards the bottom of the EU league, with only 2 of the 26 countries measured having a lower rate and 24 being higher higher. ( There are no averages calculated but if you just take a mean average of the 26 countries as a rough guide is comes out just over 27 per cent.)

The data shows that Ireland has a progressive tax structure – in other words the richer you are, the more you pay. We had known this was the case with the income tax system, but the figures confirm it also holds when you add in indirect taxes, despite the fact that on their own at least some of these taxes often hit the least well off most.

The figures show that the bottom quintile pays 12.1 per cent of income in income and indirect taxes, rising to 13 per cent for the second quintile, 18.9 per cent for the third, 25 per cent for the fourth and 33.4 per cent for the highest income section of the population.

Compared to other countries, lower paid sections of the Irish population pay relatively less than most other countries, while for the better off it is closer to or above comparable countries. For example, the 12.1 per cent paid by the lowest quintile is half the UK level and well below France’s 22 per cent. When you go to the top quintile, the tax bill here is the same as the UK– and a bit above France.

Looked at another way, only tiny Cyprus has a fractionally lower tax take from the bottom quintile of lowest earners. Meanwhile 14 of the 26 countries have a lower rate for the highest quintile of earners ( though taking the main developed countries we are roughly in line here, with lower rates in many eastern European countries.) Even at the middle income third quintile, only a couple of countries have a lower take than Ireland does.

Income tax on lower earners rose during the crisis and has been cut since then, in particular as entry levels for the USC rose. The tax burden on middle and higher earners also rose during the crisis and have generally stayed above pre-crisis levels.

3. What other data shows : OECD figures on taxing wages show a similar pattern in terms of direct taxes on income – they do not offer the same breakdown including indirect tax. The OECD calculations are calculated in relation to gross income – so they don't compare directly to the Eurostat ones above which use disposable income as the benchmark.

For tax on earnings, a single employee at two-thirds the average wage ( about €34,000 on the figures used by the OECD)paid 15.9 per cent of income in tax, USC and PRSI in 2018, versus 21 per cent for the OECD average and 23.5 per cent for the EU. At average earnings ( around €50,000)for a single employee the gap is smaller, with the Irish tax bill at 25.5 per cent, in line with the OECD average but below the EU’s 28.4 per cent A higher wage single employee (around €85,000) pays more that the international averages.

In the case of families, the tax burden here is consistently low by international standards. Out of 36 OECD countries including in the tax figures, Ireland is one of 11 in which families with two children pay one half or less in cash terms what single people pay.A couple with one average earner pays around 15 per cent here versus 20-21 per cent internationally – double earning couples on average wages also pay a bit less here.

When payments like child benefit are counted in, the gap grows – subtracting these payments from tax paid leaves a net contribution of just over 8 per cent for a one earner couple, versus 14 to 15 per cent internationally.

There is one other key insight from the OECD figures– which is also relevant when assessing what Eurostat found.A key reason why the total take from incomes is low in Ireland is largely due to social insurance - PRSI. Employee social insurance takes around 4 per cent from incomes here, versus 10 -11 per cent internationally. Looking at income tax alone, payments here are more in line with the average or above for higher earners. This does not matter for the employee in cash terms – but it does have policy implications as discussed below.

4. The policy issue : So what does this mean? And if the tax burden is low here, why do so many struggle to make ends meet, or have to juggle ahead of pay day? There are a few likely reasons. One is that Ireland is an expensive place to live, with a basket of consumer goods and services here costing the second highest in the EU and 29 per cent above the average. Second is the high cost of housing, which are key factors in many – though by no means all – household budgets.

But there is another key factor, too. It is the services and supports which people receive from the State, sometimes directly in return for social insurance payments, or sometimes as part of normal public services.These include supports like unemployment benefit, parental leave and sick pay but in many more developed countries – France, Germany and the Nordics – social insurance is also part of wider State supports in areas like healthcare. Employees may more but also get more in return.

For example in Germany a compulsory health insurance payment is part of the social insurance structure – which those with higher incomes can choose to top up. Childcare in Germany is also heavily subsidised. France also has an extensive social insurance system, and efforts to make this more financially sustainable are proving highly controversial. Families in Ireland, meanwhile, typically pay for costly private health insurance and childcare costs here are also among the highest in Europe.

A full comparison of tax payments here and benefits received from the State would be very instructive in terms of policy – there have been calls from IBEC and others for a new commission on taxation, and this would be a key job for it. It would also need to count in property taxes – generally lower here – and other charges.

Pressure on spending in areas like housing and healthcare suggest that there is little scope to reduce the overall level of taxes. And reform – raising more money in one area to cut taxes elsewhere – is difficult, given the public objection to paying more in any area. Just look at the water charges and the local property tax. The outgoing government, in its early days, had plans to reform the social insurance system – merging it with USC and extending benefits. However while some benefits were extended, wider reform was put on the back burner.

If we want more benefits and higher spending, then we will have to pay for them via higher taxes. The question then is who pays, what are the consequences of this and what do taxpayers get in return. We don’t have to do the same as other countries – but studying what happens elsewhere does casts some interesting light on our options.