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Single? You’re bearing the brunt under Ireland’s tax system

OECD’s Taxing Wages report finds the tax system favours married couples

If you're single in Ireland, you may already bemoan the penalty you pay on so many things for not being married. It's not just a single supplement on holidays/hotel accommodation we're talking about. Car insurance and mortgages are just two of many other things that can be less advantageous to single people.

Not only that, but the tax system also continues to favour those who are married. While this isn’t as significant as it was in the days of pre-tax individualisation, a married couple with one income can still expect to pay less in tax than a single worker on the same income, while married couples with two incomes also fare better in the tax system than single people.

This year's survey highlights the largest decrease in taxes on wages since the global financial crisis of 2008-09

And, as a new study from the OECD finds, single workers are bearing the ever-increasing burden of Ireland’s tax take.

Published at the end of April, the OECD's Taxing Wages report is a wide-ranging review of income tax paid by workers and social security contributions levied on employees and their employers in OECD countries.

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This year’s survey highlights the largest decrease in taxes on wages since the global financial crisis of 2008-09, due to declining household incomes coupled with tax reforms linked to the pandemic.

Across the 37 OECD countries, the total tax take – or tax “wedge” – was 34.6 per cent in 2020, a decrease of 0.39 percentage points on 2019. It’s a significant decline but less than that experienced in 2008 (0.48 percentage points) and 2009 (0.52 percentage points).

The tax wedge reflects the total taxes on labour paid by both employees and employers. In an Irish context, that includes income tax, PRSI and employer's PRSI. It also takes into consideration cash payments to workers, such as child benefit.

OECD average

Ireland is in line with the OECD average, with the 12th-lowest tax wedge for the average single worker, at 32.3 per cent. Of this, income tax makes up 18.8 per cent, followed by PRSI (3.6 per cent) and employer’s PRSI (9.9 per cent).

This is down on 2019, as Ireland’s tax wedge fell by almost one percentage point during 2020 on the 33.2 per cent wedge that existed the previous year. The fall is higher than the OECD average, driven by a slightly greater decline in income tax, and slight increase in employer’s PRSI, the OECD said.

Employer’s PRSI increased in 2020, up from 10.75 per cent to 11.05 per cent. However, there is a threshold on this, of €398 a week.

It is also due, however, to declining wages, on the back of the pandemic. Overall, the survey finds that wages fell in Ireland last year, with the average annual wage down by 4.2 per cent from €48,722 to €46,685. A word of caution on this: the Irish wage figures include part-time workers, and the impact of higher than usual part-time work during the pandemic may be behind the reduction in average wage in Ireland, the OECD notes.

But, having said that, this is one of the sharpest declines in wages. In the US, for example, wages rose by 6.4 per cent, by 1.7 per cent in the UK, and by 0.2 per cent in Germany. Declines were reported in Switzerland (-4.7 per cent), France (-2.6 per cent) and Italy (-3.9 per cent).

The report also offers an insight into how Irish families were taxed last year. Typically, one could expect the tax wedge to be lower for a married couple, given the benefits the tax system conveys on marriage, and the ability to share credits, and the lower rate of tax.

In addition, the payment of child benefit can lower the burden further.

As the OECD notes, Ireland is one of the countries that provide a "fiscal benefit" to households with children through advantageous tax treatment and/or cash benefits, and it was one of 27 countries where these benefits increased last year. In the UK, the preference for families declined in 2020, but only marginally.

In Ireland, however, it is the scale of this difference that might alarm single people.

The average tax wedge faced by a single worker (32.3 per cent) is more than twice that faced by a one-income married couple with two children (16.1 per cent).

Less than half

This puts it in a group, alongside 12 other OECD countries – including Austria, Belgium, Switzerland and the United States – where the income tax burden for a one-income family is less than half that faced by a single individual. In Switzerland, for example, the tax wedge faced by the single person is 130 per cent greater than that facing the one-income family.

Great for a family, perhaps, but not so much for the single worker.

The Irish differential between the two examples is significantly greater than the OECD average, where the tax wedge is 34.6 per cent for the average single worker, against 24.4 per cent for the one-income family.

It means, for example, that on a gross salary of €46,685 a single person could expect to give up €16,150 in taxes (including employer’s PRSI) in Ireland. A one-income married couple, on the other hand, would lose just €8,050.

In part, this gap is due to child benefit (€3,360 a year for two children), as well as the ability of the one-income married couple to pay tax at the lower rate of 20 per cent on earnings of up to €44,300, compared with just €35,300 for a single person.

The tax burden is less, at 24.1 per cent, for a single person earning 67 per cent of average wage (€31,278), but higher for someone earning €77,963 (167 per cent of the average) at 41.2 per cent.

And the differential is widening.

According to the study, across the OECD the gap between the OECD average tax wedge for the single average worker (34.6 per cent) and the one-income couple with children (24.4 per cent) widened by 0.7 percentage points since 2019. This reflects policy changes that have provided additional support to families with children during the Covid-19 crisis, the OECD says.

In Ireland, that gap widened by almost one percentage point. In 2019, the tax wedge faced by a single worker (33.2 per cent), was 85 per cent greater than that incurred by the one-income married couple (17.9 per cent). Now, as outlined above, it is more than double.

How do other countries treat single workers?

Not all countries treat single workers the same way. Across Australia, Finland, Israel, Lithuania, Mexico, New Zealand, Norway and Sweden, there is almost no difference in how single workers and one-income married couples with two children pay tax. In others, the difference is minute. In Chile, for example, the one-income couple at the average wage level with children did not pay personal income tax, while the average single worker paid 0.03 per cent of gross wage earnings.

Single parents

But what about single workers with children in Ireland? Is their tax outcome any more favourable? Well, according to the survey, the tax wedge for a single parent, with two children, earning 67 per cent of the average wage was 13.7 per cent across the OECD. This compares with 24.4 per cent for a one-income married couple with two children on the average wage.

According to the survey, tax rates for married couples fell to new lows during 2020, with the drop in the tax wedge being even more significant

The tax burden on this single worker with children was actually negative in a number of countries, including New Zealand (-18.1 per cent), Canada (-17.9 per cent) and Poland (-3.5 per cent), due to payments such as child benefit. In Ireland, the single worker with children earning about €31,278 (67 per cent of average wage) had a tax wedge of just 1.3 per cent, or €406, in 2020.

This is significantly lower than the OECD average, as well as the UK, where the figure is 9.2 per cent, and the US, where it is 7 per cent), and it does show that single parents are treated more advantageously in the Irish tax system.

For example, single parents in Ireland pay the standard rate of tax – 20 per cent – on earnings of up to €39,300, compared with €35,300 for those with no children.

When comparing with other countries, however, it’s worth noting that the figures refer to the “tax wedge”, and not all of this cost is borne directly by workers. In France, for instance, where such a worker would have a tax wedge of 17.3 per cent, employer taxes are considerably higher than in Ireland.

Married couples with children

If single workers fare the worst, and single parents the best thus far, where do married couples fit in?

Well, according to the survey, tax rates for married couples fell to new lows during 2020, with the drop in the tax wedge being even more significant. The average tax wedge across the OECD for a one-earner couple at the average wage with children in 2020 was 24.4 per cent, for example, a decrease of 1.1 percentage points on the previous year.

This is the largest fall and lowest level seen for this household type since the OECD started producing Taxing Wages in 2000.

Ireland had one of the lowest tax wedges for one-income couples, at just 16.1 per cent, down by 1.7 percentage points on 2019. This compares with 37.9 per cent in France, 37.5 per cent in Sweden and 37.1 per cent in Greece. Lower than Ireland are the US (14 per cent); Canada (10.1 per cent) and New Zealand (5 per cent).

For two-income couples – one earning the average wage and the other 67 per cent of the average wage – Ireland had a total tax wedge of 24.2 per cent, down by 1.2 percentage points on 2019. This puts Ireland as 10th lowest across the OECD in this category, behind the US (21.3 per cent); New Zealand (17.6 per cent) and Chile (6.7 per cent), and at a much lower burden than Belgium (43.4 per cent); Germany (41.5 per cent) or Italy (40 per cent).