Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Are Irish workers undertaxed?

Recently, an ad for Liveline included an angry woman, decrying Ireland as a ‘high tax’ economy. Her argument was: “What’s the point in working if the government is just going to take all our money anyway?” That baffled me. As far as I knew, Ireland was certainly not a high-tax economy, certainly compared to some of the Scandinavian economies. I decided this was worth a closer look. Just how much of a low-tax economy is Ireland? And – given the €25bn gaping hole in the budget is going to have to be solved through a mixture of both expenditure cuts and tax increases – are Irish workers undertaxed?

The graph below shows the average “all-in” personal income tax rate levied on people who earn the average industrial wage, for a range of economies including Ireland, from 2000 on. The figure given is an average tax rate for four stylised households (a single worker with no children, a single worker with two children, a married couple with one earner and no children and a one-earner couple with two children). The figure for each economy includes family cash transfers, paid in respect of dependent children between five and twelve years of age. All figures come from the OECD.

Average 'all-in' personal tax rates, selected economies, 2000-2007
Average 'all-in' personal tax rates, selected economies, 2000-2007

Amazingly, in 2007, Ireland would have negatively taxed the four households, supplementing their income by 0.2% on average. Needless to say, negative tax is not the norm, certainly not for the average worker. Ireland is out of line with every other developed OECD economy. Our closest competitors, in terms of not taxing the average worker, are the Czech Republic and Korea – but both of those have an average tax rate for the four cases above of just over 10%.

Excluding child benefit, Ireland is still the lowest taxer, but the gap between us and the rest of the developed world narrows substantially. But including child benefit or excluding it, Ireland taxes its average worker the least of the 28 developed economies in the OECD in six of the seven different measures of average ‘all-in’ tax that the OECD produces. Only for single workers without children did one country, Korea, tax less than Ireland in 2007.

It could be argued that the use of manufacturing wages for Ireland – compared to a broader definition of ‘industrial average’ in most other OECD economies – could be affecting the result as it lowers Ireland’s average wage. That may be the case, and would affect the level of Ireland’s line in the graph above – but it wouldn’t substantially alter the trend. Ireland was already one of the lowest taxers in the OECD in 2000 and yet it cut its taxes by twice as much as any other economy.

This pattern since 2000 is important for where we are now, because a common explanation of how Ireland got into its fiscal mess is over-reliance on receipts from property taxes. That’s certainly true, but this wasn’t a passive over-reliance. This wasn’t a case of leaving the rest of the economy as-is and just not realising the once-off nature of the property tax windfall. This was very much an active over-reliance on property. The economy and the tax system was actively re-ordered based on a presumption that receipts from a property transaction tax and related sources would be the centre of the new economy. This was done with what seems like a reckless determination to tax workers less and less, without a due consideration of the sustainability of that policy.

I’m not saying that we should have high taxes for the sake of it. For one thing, direct taxation is only one part of the story – Ireland’s indirect tax rate (i.e. VAT) is one of the higher rates in the OECD (although it’s certainly not out of line). In fact, I’m not necessarily arguing that income tax rates need to go up. I can find only country in the OECD – the Netherlands – where the top rate of tax is above 50%. The Czech Republic, for example, which manages to get 10% in tax on the measure above, only taxes 32% at the top rate.

What I’m arguing is that we need to look again at our thresholds, i.e. at what point on the income scale do we start taxing people. We’ve got ourselves into this mess since 2000 and we certainly need to get ourselves back out.

  • Aidan ,

    Very interesting post Ronan. Just one point on The Netherlands, it is also the only country in the EU where mortgage interest is fully deductible so there are very few people paying the full whack at 52%. The system here encourages richer people to move to more expensive houses so that they have plenty of interest to write off. That in turn means that mortgage debt is The Netherlands looks dangerously high but it’s not because savings are also enormous and housing supply cannot meet demand.

    • Caelen ,

      I think this topic needs further work and analysis. You bring up indirect taxation towards the end of the article but it seems that you mix ‘tax’ with ‘income tax’ at the start of the article. If your argument is that we are a low tax country (and I have little doubt it is), then you need to look at the total tax burden, not the income tax burden. This would tally all the indirect taxations (including property, VAT, excise, etc.)

      This is probably a gigantic undertaking. Taxation now seems to be so complicated that I often compare it to Ryan Air pricing – you may think you know how much a seat cost, but that will bear little resemblance to what you actually end up paying. I often wonder how even an economically competent government can effectively manage a country with so many levers to pull.

      • ronanlyons ,

        Hi Aidan,

        Thanks for the comment and the further detail for the Netherlands. Yours is one example of the difficulty in calculating actual overall tax burdens – something Caelen takes up below.


        • Con ,

          Ronan, whether or not Ireland is a low tax economy depends on who you are. You are right to highlight the fact that direct taxes on people earning the average wage and below are low by international standards. But (based on 2007 OECD data) Ireland is mid-table on tax for those earning 167% of the average wage, at 20.6% of pay (all pay, not marginal). And presumably we have moved into a substantially higher taxing position in the rankings arising from the budgets since then. Viewed in terms of her own experience of the tax system, the angry woman may well have been perfectly correct.

          Including social security contributions in the calculation makes Ireland look lower taxed relative to others, but my guess is that the recent budgets have shifted us up at least to mid-table on weight of combined taxation/social security for people on 167% of the average wage.

          I guess this reinforces your point about the need to look at thresholds. If we already tax people on above average pay fairly heavily, and people on low to average pay very lightly by international standards, this raises an obvious question as to whether the low-tax-on-low-pay model is sustainable.

          • ronanlyons ,

            Hi Caelen,

            You’re absolutely right, and I should point out that this is not meant to be a definitive analysis, rather just a start-point for discussion.
            I hope over the coming couple of months to take another couple of perspectives on tax, but certainly from a first glance, it doesn’t look like we are overtaxed through indirect means to such an extreme that this might “balance things out”. There is also the issue of progressiveness versus regressiveness – indirect tends to be more regressive.

            Thanks for the comment,


            • ronanlyons ,

              Hi Con,

              Thanks for stopping by and commenting. Good point about the higher earners, I decided not to mention it in the post (one message at a time, otherwise I confuse myself!) but there are a whole plethora of stats about the top x% of earners paying almost all our income tax that add another dimension to our income tax problem.


              • Stephen Kinsella ,

                Hi Ronan, great post, and very timely, given what’s going to happen to people’s pay packets at the end of May. There is another post to be written here about the timing of successive personal income tax decreases in the Tiger era, relative to the political business cycle (buying elections, and so forth) and relative to the composition of the government’s receipts as a function of its expenditure. The point is made and made well that Ireland’s overall income tax levels have fallen since the mid-1990’s, so expecting this to increase in the next 1 or 2 years isn’t rocket science. But, relative to the political business cycle (4-5 years of an FF government, economy more than likely in early recovery) these tax increases may be more or less damaging on domestic consumption, depending on the form they take, and the types of people they hit, as Con perceptively observes.

                • Caelen ,

                  Perhaps it would be worthwhile simply looking at tax as a proportion of GNP. This seems to suggest that Ireland is roughly at the mid point for tax as a proportion of GDP Given that GDP is deceptative large compared to GNP, this would push us further up the ranks.
                  Further recent tax increases would likely have us well into the middle of this category but nowhere near the top.

                  This would seem to suggest that we have mid to high taxation

                  • Sue ,

                    Hi Ronan,

                    Do you mind explaining what ‘all-in personal income tax rate’ and ‘family cash transfers, paid in respect of dependent children’ are?


                    • ronanlyons ,

                      Hi Sue,
                      “All-in personal income tax rate” is the OECD’s way of making international comparisons on tax, as the precise tax structure varies from country to country. Some countries have more than one level of taxation (e.g. state and federal), while some have tax credits, or surtaxes, etc. The rate essentially tells the reader what % of the income of someone on an average wage was taken as tax. In Ireland, it was negative!
                      The family cash transfers are payments made by governments to families, so in Ireland that would be child benefit. This is how the “tax” can be negative, as a government may take €1,000 in tax over the course of the year but pay the family €1,200.
                      Hope that makes sense, thanks for the comment,

                      • ronanlyons ,

                        Hi Caelen,

                        You have a point and it’s something – as I said earlier – I want to come back to, as it’s such a complicated issue. Today, though, I wanted to focus just on workers (rather than consumers or investors or just plain citizens), and I felt that was best done by looking at income tax rates, rather than tax-GDP ratios.


                        • ronanlyons ,

                          Hi Stephen,

                          Great comment – really interesting idea too about the timing issue. I agree also that there’s certainly a post to be written on which taxes hit consumption least, given the times we are in.


                          • Anthony Bermingham ,

                            Of course, in the eighties we had high income taxes with very low entry thresholds. Not just to the lower rates. The bands weren’t index linked so gradually more and more workers into the higher rates. The govenment just kept squeezing until the well ran dry and there was massive public reaction, culminating in the PAYE March in Dublin.

                            There was a commission on taxation, or some such, that concluded that the high income tax rates were a tax on jobs – there was no incentive to move from the dole to highly taxed jobs. So the recommendation was to move from income taxes to indirect taxes, VAT, excise, VRT, etc. So, in fairness to past governments, in this regard they were following policies upon which there was a consensus and which, for a long while, seemed to work.

                            But, that was before the property bubble tempted the government with easy pickings and the policy was probably pushed too far!

                            • Sue ,

                              Makes perfect sense. Thanks Ronan.

                              • ronanlyons ,

                                Hi Anthony,

                                You’re right – the government did actively choose indirect taxation as a strategy at some point (in the mid-1990s I think). There are probably two somewhat separate issues within that – sustainability of tax receipts, and the regressiveness or progressiveness of a tax system. Both were somewhat hidden by the consensus and the seemingly endless boom that had us all fooled!


                                • Ciaran Daly ,

                                  I think you hit the nail on the head, “from first glance” it looks like we’re undertaxed. I think you’ve confused ‘tax’ with ‘income tax’. The woman on liveline might pay low (or no) income tax but she’s subject to 21.5% VAT, that is huge by any standard and deeply unfair.

                                  If you want to raise taxes, the best way would surely be to abolish all the reliefs and benefits.


                                  • ronanlyons ,

                                    Hi Ciaran,
                                    Thanks for the comment – title does try and get the worker bit, rather than consumer bit, but point taken.
                                    Plus, am hoping to come back in time and examine other aspects of the taxation system, such as indirect tax. Will check out that post re reliefs now,


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                                      • Dara ,

                                        On VAT – we pay 21.5% VAT vs an EU average of 18%. If you spend every cent you earned on top-rate VAT items (ie no food, rent, or mortgage) it adds just 3.5% to your tax rate vs the EU average. So tax rates including VAT are still well below average surely.

                                        • kosogun ,

                                          I saw your comment on the Economist report on Ireland’s budget Dec 12 2009 – Ireland shows the rest of Europe what austerity really means.
                                          Since you are an economist and you support the government budget, please tell me why the budget does not seriously tackle and reform welfare.
                                          Why will they not tackle utility companies both private and semi-state bodies?
                                          Why are they holding on to Anglo Irish bank? is it not clear that that bank is a black hole.
                                          Do your reaserch you will find out that the rest of the banks that are being supported are telling thier staff to be patient about bonus. It will all be paid (including arreas) when it is politically expedient to do so.
                                          Why will you trust this government? I think what they have done is a con job, window dressing we will call it in Accounting.
                                          I am sure more pains are coming and it is not this goververnment that will tackle it. They are hypocrates. They will only do what will make them popular at the expense of the general public.

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