VAT paid by people on low incomes

Nat O'Connor12/08/2010

Nat O'Connor: This is a follow up to comments on the Corporation Tax post about VAT.

As was pointed out to me, although the main VAT rate is 21%, this means that for every €100 I spend, €17.35 is tax (i.e. 17.35 per cent). That is because €82.65 plus VAT at 21 per cent is €100. (That is, €100 minus €82.65 equals €17.35).

Similarly, if I buy things at the 13.5% reduced VAT rate, I pay €11.90 per €100. And I pay €4.58 per €100 at the 4.8% super reduced VAT rate.

Let's work out how much VAT I might pay if I was on a low income.

The Vincentians (http://www.budgeting.ie/) provide typical weekly baskets of goods in their analyses. Let’s imagine that I am living on an example weekly household budget they give, as follows:

  • €40 on Food;
  • €10.50 on Travel;
  • €63.00 on Housekeeping;
  • €19.24 on Clothing;
  • €11.00 on Rent;
  • €4.00 on Education.
This comes to €147.06 per week (although the point of the Vincentian study is that the family in question only had an income of €121.15).

But let’s just stick with the €147.06 total for the moment. I got more details on Ireland’s VAT from an EU publication. This gives the following information about VAT, based on the above spending:
  • Basic food has 0% VAT, but some processed food attracts 4.8% or 13.5%. Let’s split this three ways across my €40;
  • Travel is exempt from VAT;
  • Housekeeping includes ESB, fuel, telephone, TV licence (€3.50 a week), cleaning products, pocket money for kids, bus fares, chemist and €8 for social life. I’m going to assume 0% VAT for most of this, except for (a) the €8 social life, which I am going to allocate to two pints of beer at €4 each (VAT 21%), and (b) €10 telephone and €5 on cleaning materials at 21% VAT;
  • Clothing and shoes include 13.5% VAT;
  • Rent in social housing includes 13.5% VAT;
  • I’m going to count Education as 0% VAT as well (e.g. books are 0% as I’m not sure about education services; although newspapers include 13.5% VAT).

In this scenario, my VAT tax bill will come to €8.49 out of the €147.06 I spent; that is 5.75 per cent of my spending.

That’s surprises me, as I thought it would be higher given that I usually think about VAT at the standard rate of 21%. (Please let me know if I have missed something important in this calculation!)

I think I can reasonably include the TV licence as another €3.50 tax, for €11.99 total (8.1 per cent of my spending). Carbon tax, Excise, etc. are also relevant, but I haven’t time to make a full study out of this.

Nearly €12 paid in tax is highly relevant in the real-life context that the Vincentians are describing, where the family in question had a shortfall of €26.59 in making ends meet every week.

It also cannot be said, as one Government minister did recently, than many half of households in Ireland are “not paying a bob of tax”.


For contrast, in a 2010 report (on 2008 data) Revenue reports 56 cases of people earning more than €250,000 and paying less than 5% effective income tax. If we imagine €50,000 of this income is spent on goods at 21% VAT, this comes to another 3.5% of their income; that is, less than 8.5% tax in total. So on a very low income (€7,682 per year), I could be paying close to the same proportion of my income on tax as someone earning a quarter of a million euro!
And unlike people on high incomes, who can avail of many tax breaks, there is no relief from VAT for people with insufficient incomes to buy the essentials. Instead, many people on low incomes go to moneylenders who can legally charge 150% interest or more (see for example Life and Debt, TASC's latest report).

Posted in: InequalityTaxation

Tagged with: povertyVAT

Dr Nat O'Connor     @natpolicy

Nat O'Connor

Nat O’Connor is a member of the Institute for Research in Social Sciences (IRiSS) and a Lecturer of Public Policy and Public Management in the School of Criminology, Politics and Social Policy at Ulster University.

Previously Director of TASC, Nat also led the research team in Dublin’s Homeless Agency.

Nat holds a PhD in Political Science from Trinity College Dublin (2008) and an MA in Political Science and Social Policy form the University of Dundee (1998). Nat’s primary research interest is in how research-informed public policy can achieve social justice and human wellbeing. Nat’s work has focused on economic inequality, housing and homelessness, democratic accountability and public policy analysis. His PhD focused on public access to information as part of democratic policy making.


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