Only One in Six Pay The 41% Higher Income Tax Rate

Nat O'Connor: Minister for Finance, Michael Noonan, has confirmed TASC's analysis that few people would benefit from changes to the higher income tax rate of 41%. In responding to parliamentary question on TASC's analysis, he confirmed: "I am informed by the Revenue Commissioners that they estimate that just over 17% of income earners were liable to Income Tax at the 41% rate in 2013." (Link: KildareStreet.com)

TASC's concern is that changes to the higher income tax rate would only benefit the one in six of the highest income earners who pay tax at the higher rate. (Link: TASC Policy Briefs)

It may surprise people that only one in six income earners pay any tax at the higher rate. Unfortunately, this is a stark reminder that many people in employment earn relatively low wages - and only some couples have two good incomes. Many people do not even earn a Living Wage of €23,000/year.

In Q1 2014, average earnings per week in Ireland were €689.88/week (€35,874/year) (Link: CSO).

With average earnings €3,074 higher than the threshold to pay the higher rate of income tax, how can it be that only one in six income earners pays at the 41%?

Here are two major reasons:
1. Marriage - over 1.7 million people in Ireland are married, compared to 2.5 million who are single, which includes those who are co-habiting, but considered 'single' for tax purposes (Link: CSO). Although the threshold for paying the 41% income tax rate is lower than average individual wages (a single person begins to pay tax at 41% on that part of their income above €32,800) it is almost certainly not lower than average household income levels. Through sharing tax credits, a married couple with one income begin to pay the higher rate from €45,400 and a married couple with two incomes pays the higher rate from a variable threshold up to €65,600 (depending on the balance between the two incomes).

2. The Maths of Averages - Average earnings of nearly €36,000 does not imply an even distribution of people on either side of the average. In fact, many more than half earn less because it take a lot of low income salaries to average out one highly paid employee. For example, one person on €110,000 (in the top 10%) combined with four minimum wage workers on €17,542 gives an average of €36,034 each. In order to bring the four workers up to a living wage of €23,000, the high pay would have to be brought down to €88,000 (average €36,000 each). In other words, high pay matters in terms of the shrinking incomes of the 'bottom 90%' in society.

Revenue provides statistics on the distribution of income, based on the gross income of tax cases (single or couples). While bearing in mind that some couples might choose to make separate tax returns, the Revenue statistics can be used offer a conservative estimate of income distribution in the economy. Table IDS1 on page 6 shows a large number of tax cases (presumably including many pensioners with small declarations and part-time workers) on less than €15,000 annual income. But conversely, out of over 2 million tax cases, only around 200,000 cases declared incomes over €75,000; of whom less than 100,000 had incomes over €100,000 (most of these high income cases are married couples).

Based on 1.9 million people in employment, it should be clear that couples where both spouses are on 'above average' pay of €40,000-€50,000 each are actually doing very well compared to everyone else. This is not to deny that many of them have high mortgage debt and high childcare costs. But squeezing the 'bottom 90%' through tax cuts for the top 10% is not the way to solve these problems.

Postscript: And it doesn't matter whether the rate is cut from 41% or whether the band is shifted upwards, so one begins paying the higher rate from 34,800 instead of 32,800. Only one in six income earners (at the top end of earnings) would benefit.

Dr Nat O'Connor     @natpolicy

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.