Who pays tax in Ireland? The little quiz revisited

Nearly three years ago, I posted a little quiz on Ireland’s income tax. There were four questions – on what percentage of income was taken in tax for the typical millionaire and for the typical worker, on what proportion of workers paid less than 10% in tax and what rate they *should* pay. The answers were then compared with the latest available information – for the year 2007.

The post has been very popular and is repeatedly linked on popular forums such as boards.ie, askaboutmoney.com and politics.ie. There were a couple of limitations to it, however:

1. Firstly, the figures were for 2007 and there have been such dramatic changes in employment and income since then, more up-to-date statistics would be ideal.
2. Secondly, while one of the “Big Two”, income tax is still just one form of taxation. VAT is the other biggie and there is research to show that VAT affects poorer households more: put another way, when you say “the average household in Ireland pays too little in tax”, people do not think you are talking only about income tax.
3. Thirdly, in addition to income tax and VAT, there are two further unavoidable distortionary taxes, PRSI (which is technically a form of compulsory insurance) and the Universal Social Charge. It would be nice to include all four of these taxes in any analysis.
• At this point, it’s worth noting the following: other taxes, including those on alcohol, cigarettes and petrol, and service charges (such as bin or water charges) are not unavoidable taxes – they are charges for a particular service or else designed to bring the market cost up to match the social cost. Those four taxes above are the only major indiscriminate taxes, which apply to all households but which don’t serve any particular purpose other than the very general funding of public services.
4. Fourthly, the different income brackets given by the Revenue Commissioners are relatively arbitrary. It would be nice to talk instead about households in specific parts of the distribution, for example, different deciles (e.g. richest 10% versus poorest 10% of households).
5. Lastly, looking at earned income is not exactly using a level playing field. Someone earning €20,000 a year through hard work is treated very differently to someone gifted €20,000 a year by the State – but income is still income. In my own opinion, all income – regardless of whether it is earned or benefits – should be taxable, and the rate of tax that is paid can then be chosen by policymakers.

With updated figures from the Revenue Commissioners, the publication of the CSO Household Budget Survey and ESRI research on the distributional effects of VAT, each one of these issues can now be addressed. What these combined datasets allow us to do is calculate the average all-in rate of tax paid by the typical household in each decile, i.e. the typical household from the poorest 10% up to the richest 10%, as measured by income.

But before finding out exactly who pays what in tax in Ireland these days, let’s see what we think is and should be the case.

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Now, on to the answers!