Nat O'Connor: Why reduce the 52% marginal tax rate? Taoiseach Enda Kenny joined the chorus of Government spokespeople to call for its demise (Irish Times)
“The Government has agreed that the next priority [as regards taxation] is to reduce the 52 per cent income tax rate on low- and middle-income earners,” ... “The 52 per cent marginal tax rate, comprising income tax, PRSI and the universal social charge, is – I believe – anti-enterprise, anti-investment and anti-jobs. It is damaging not alone our businesses, our workers and their families, it is equally damaging to Ireland’s attractiveness as a location for foreign investors. I believe it will make it harder to get our emigrants to come back home as the recovery continues.”
The debate about taxation is being made on the basis of misleading statements, false logic and little analysis. But here are some facts...
(1) Minister for Finance, Michael Noonan: "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." (Dáil Questions)
So, if only one in six income earners pay the higher rate of tax, how can changing it benefit low or middle earners as the Government claims? While the one in six earners (less than one in ten adults) benefits from tax cuts, everyone else is likely to experience public services with less funding or weaker social transfers.
(2) The OECD compares taxation in different countries in an annual publication, Taxing Wages, which is a reference for investors and employers. In this chart the total of income tax, employee social insurance and employer social insurance is shown. The OECD average was 35.9%, but Ireland has the lowest tax wedge on labour in the EU on average single workers at just 25.9%. For a one earner couple with two children, Ireland is the second lowest in the entire OECD at 6.4%, against an average of 26.4%.
Any returning emigrant on average pay will see that he or she will pay less tax in Ireland, regardless of the 52% marginal rate. Any employer will see that, even for high salary employees, employers' social contributions in Ireland are just a fraction of what they are in other countries.
(3) Marginal tax rates are NOT the same thing as effective tax rates - that is, how much tax you actually pay. First of all, if you move into the higher tax band, you don't pay all of your income at that level - just the top wedge. And also Ireland gives far more tax credits, tax reliefs and tax breaks than most other EU countries, so we pay less effective tax than others with lower headline tax rates.
And Ireland is far from being the highest tax country. The OECD lists 'all-in' personal income tax rates by family type.
- Single Person, No Child, Average Wage: Ireland 18.7%; Lowest tax in EU
- Single Person, Two Children, Average Wage: Ireland 13.6%; Lowest tax in EU
- One Earner Married Couple, No Child, Average Wage: Ireland 13.6%; Lowest tax in EU
- One Earner Married Couple, Two Children, Average Wage: Ireland 11.1%; Lowest tax in EU
More OECD data on different family types is given here. And if you want you can also try the Deloitte tax calculator and work out your own tax and social insurance payments as a percentage of gross income.
So what's really going on with the 52% rate? Well, for the relatively small number of people on twice or three times average pay, Irish taxation gets close to EU norms. And at the highest levels, it can be higher than UK or USA tax rates on personal income (although still lower than other EU rates). Those who would benefit most from cutting the 52% marginal rate are the top 10 per cent of earners.
Business lobbyists in Ireland and some multinationals are using their influence to seek tax cuts for high earners, claiming this is pro-enterprise or will lead to investment. But where's the evidence for this? Maybe some investment decisions will change, but public investment decisions will also change if there is less tax revenue available. (And anyway, high-tax Nordic countries score consistently high on entrepreneurial surveys, so low tax does not equal entrepreneurial, see e.g. The Economist).
No one pays tax for the sake of it. But Ireland needs public services, social transfers and public investment for sustainable job growth spread around the country, as well as social justice and a decent quality of life for all. Tax is the price of that, and giving tax cuts to high earners will not boost the economy sufficiently to provide for everyone. (See here for more detail on an IMF finding that public investment boosts the economy more than income tax cuts).
TASC has put these and other facts in a series of Policy Briefs here.
The current one-sided chorus has created a mythology around a cutting a totemic 52% marginal rate, but it fails to engage with real evidence about effective tax rates or meaningful comparison between the tax system in Ireland and other countries. (Even those earning €150,000 pay less than 45%, not 52%; and probably much less due to pension tax breaks). Ireland's total tax take is three-quarters of the EU average, and the effect of this is seen in service charges for health and education, weak job growth in rural areas and small towns, years of weak investment in infrastructure (as Irish Water keeps telling us) and growing deprivation and inequality.
Anyone with a progressive vision for public services must defend the tax base - and that includes the marginal rate. In fact, taxes could and should be higher for the very top earners, certainly not cut at their behest before recovery is even felt around the country.
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.