Like so many aspects of Irish life, personal taxation has become an unwieldy lump of interconnecting parts, aggressively defended by various sectoral interests, which makes reform difficult if not impossible.

The code has 53 separate parts, comprising three different tax charges, each with a different entry point, and a total of 10 rates, 15 bands and 22 personal tax credits.

Governments tinker on an annual basis, making changes that are parsed on how they affect certain earners on a euro-gained/euro-lost basis without much recourse to overall impact or whether it best serves the needs of the country.

As a result, the system has become uneven, skewed and out of kilter with competitor countries.

Universal social charge

This is essentially the kernel of the Irish Tax Institute's argument set out in its latest report, entitled Perspectives on Ireland's personal tax system – a medium- to long-term approach. It highlights that some 50 changes have been made to the code in the last nine budgets and that since 2012 the entry point to the universal social charge (USC) system has changed four times, while the USC bands have changed three times.

The report notes that the austerity budgets passed between 2009 and 2011 were primarily aimed at raising the exchequer take from personal tax and broadening the tax base, while minimising the impact on lower and middle-income earners.

It acknowledges that a “needs must” ethos prevailed at the time because of the calamitous financial situation the State found itself in, and “that in the early years of the crash a blunt approach to increasing tax yields was essential”.

In more recent budgets, those from 2012 onwards, it suggests the Government endeavoured to take the lowest income earners back out of the tax net while limiting the gains for higher earners through capped rate reductions.

‘Too progressive’

The combined impact of these changes and the way they have been unwound has warped the code, it says, or more precisely made it “too progressive” with workers hitting steep rates of tax at relatively low or moderate rates of pay.

It highlights that workers here move from the standard 20 per cent income tax rate to the 40 per cent rate at €33,800, effectively before they even reach the average industrial wage.

To illustrate the point further, the report analyses how salary levels compare to tax levels paid across a range of salary bases.

It shows how a worker on €25,000 earns almost 1.4 times the salary of a person on €18,000 but pays 5.6 times the tax. The gaps gets bigger as you climb the income scale, with workers on €35,000 earning 1.9 times the salary of a person on €18,000 but paying 10.9 times the tax.

At salaries of €75,000, the earning multiple is 4.2 but the amount paid in tax is 44 times greater; and at €100,000 the earning multiple is 5.6 but the amount paid in tax is 65.8 times greater.

The institute acknowledges that raising the entry point to the higher rate is “extremely costly”, noting the cost of increasing the marginal rate threshold by just €1,000 in 2017 would cost the exchequer €188 million.

However, it questions whether the relatively high tax rates above the average wage impact Ireland’s competitiveness and create issues around incentive to work, labour costs and ability to attract talent and skills.

The OECD measures progressivity in terms of the tax code by comparing the tax paid by workers on 167 per cent of the average wage, which is €61,000 in Ireland’s case, with lower-paid workers.

The average rate of progressivity across OECD countries is 125. Ireland, in contrast, has a progressivity rate of 179, which is second only to Israel in the OECD but the highest among European Union states.

The institute’s report notes that in 2015 the top 1 per cent of income earners paid 19 per cent of all personal taxes while 12 months later this is estimated to be 22 per cent.

It also estimates that the bottom 50 per cent of income earners will in 2017 pay 3.6 per cent of the personal tax take.

The institute says the Department of Finance’s recent publication of a reform plan is “a welcome step in the journey to shape Ireland’s personal tax system”.