— A 2012 version of this blog post, one including VAT and other unavoidable taxes, is available here —
Income taxes are, with VAT receipts, the biggest generators of tax receipts in Ireland. It is likely that in 2009, income taxes will contribute between 35% and 40% of total tax receipts, a figure of perhaps €12.5bn. Given the importance of income tax, then, it’s vitally important that the taxpayer understand what the system is and what it isn’t. In that spirit, I examined Revenue Commissioner figures on who pays what in income tax in Ireland. It was an eye-opening experience!
In that spirit, here is a quick quiz, three questions, about Ireland’s income tax system. I would have only got one of these right beforehand…
And, just to see where we think we should be, one more quick question:
And now, to reveal the answers, with some interesting facts about Ireland’s income tax system along the way:
- Ireland’s top 0.5% of earners, the 11,714 people who earned more than €275,000 in a year, paid almost 18% of all income tax, over €2bn in total. Their average tax rate was 27.5%.
- Almost 770,000 people earned less than €17,000. Understandably, given tax credits, these workers paid a tiny amount of tax, €20m in total. Their average tax rate was about 0.5%.
- It’s in the middle, though, where things seem to go all screwy. The median earner, earning about €25,000, paid just 4% in income tax! As I argued before, we seem to have got ourselves into a situation where the typical Irish worker pays hardly any income tax and yet seems to think they are heavily taxed.
So, to go back to the quiz above, the answers are:
- Option 4 – the average millionaire pays six times the income tax rate of the average worker. There’s one thing the system ain’t and that’s regressive!
- Option 5 – amazingly, two thirds of the 2.2m people paying income tax in Ireland paid an average rate of less than 10%.
- Option 1 – as per above, the median earner pays about 4% in income tax in Ireland, compared to 20% in the OECD.
I look forward to seeing what the answers to the final question are. My own belief is that we should be aiming for about 15%. This would make us fiscally sustainable, while keeping us an attractive place for labour in the OECD. Somewhat bizarrely, though, I feel the prospect of people paying as little as 15% of their income in tax could also spark riots in the streets!
The income levy has at least brought everyone up a notch or two, something which seems necessary, when looking at the average tax rates paid compared to other countries. This should be formalized in the December budget, by lowering the tax-free allowances and increasing the standard and marginal rates by 1%.
To close, here are the average tax rates paid by different income groups, according to the Revenue Commissioners 2008 report.