With unemployment soaring, why is the income tax take still high?

In the midst of a pandemic economic crisis, with unemployment shooting higher, how come the amount of income tax being collected is way ahead of expectations and running just slightly below 2019 levels?

It has a lot to do with the extraordinary nature of the recession – and also with the unusual structure of the Irish income tax system. Together with soaring corporation tax, this may give Ireland some leeway.But the longer term costs of the crisis also point to higher taxes in future, even if Minister for Finance Paschal Donohoe said there would be no income tax hike in the next budget.

1. The facts: The Government had expected a sharp fall in income tax this year as jobs and incomes were hit by the pandemic. In the event, income tax receipts of just under €13.9 billion in the first eight months were just 1.4 per cent below the same period in 2019. A strong performance in January and February is boosting the figures – and monthly receipts in August were 5.7 per cent down on August 2019. But the overall total for the first eight months is 17.6 per cent, or €2 billion, ahead of expectations when the Department published their updated forecasts in April.

This €13.9 billion figure includes income tax and the USC. Looking at PRSI, the total collected is also ahead of schedule, by around 4.7 per cent at €7.058 billion. This is now 9 per cent below the same period last year, a bigger fall than income tax.

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Combined with a 41 per cent overshoot in corporation tax receipts, or around €1.9 billion in cash terms, the fact that income taxes are above target is giving vital support to the exchequer.

Spending is shooting higher and is also well ahead of profile – by around €7.6 billion. Tax overall is running €6.4 billion ahead of the revised targets. Borrowing may thus rise above the €23 billion estimate in April, but there are reasonable hopes it could be less than the upper possible figure of €30 billion that was indicated.

2. Why is income tax not falling by more? The performance of income tax reflects the peculiar nature of the pandemic recession. The main job losses have been among lower paid employees in sectors like accommodation and food, non-food retail and entertainment. There has also been a huge drop in part-time employment, by its nature lower paid, while full-time employment has fallen by much less. Of course some higher paid jobs have also been lost – and incomes have been cut. But the fall-out has been much greater in the consumer-facing sectors which tend to be lower paid.

Lower-paid employees pay relatively small amounts of income tax and, following changes in recent years, also not too much USC. So job losses in these areas have not had a big hit on income tax. Average earnings in the accommodation and food sector, for example, are less than €20,000 – this counts full-time and part-time employment. The PAYE tax bill for someone on this level of earnings would be small – for someone on €20,000 it would be €700 euro a year if they just had the basic credits for single people. The USC bill would be just over €220 for someone at this earnings level. PRSI would take around €460. So the total take for the exchequer is around €1,380. This is around 6.9 per cent of gross pay.

Then let’s look at someone in the highest paid sector - ICT. The take from average earnings of close to €65,000 in this year would be over €10,500, or more than 16 per cent of gross pay for a single employee. So the higher paid jobs are, in the jargon used by the Revenue Commissioners, much more “tax rich”.

While some people on higher salaries have lost their jobs or seen their incomes cut, they are much fewer in number than those in lower paid sector. Hence the income tax take has been protected.

The reason PRSI has fallen by a bit more than income tax and the USC is that while it also hits the better-paid more, it takes a slightly bigger proportional slice from lower paid employees. Also, companies availing of the Government wage subsidy re paying a reduced 0.5 per cent rate of employers’ PRSI – and that will affect revenues too.

3. The protected sectors: Understandably, much of the focus has been on sectors in trouble, but many sectors have just carried on – and in some cases kept hiring. An analysis by the Revenue Commissioners pointed out that public administration, education and health account for 26 per cent of PAYE liabilities and 29 per cent of employment. Multinational-dominated sectors like manufacturing – 12 per cent of PAYE liabilities and 8 per cent of employees – and ICT – 12 per cent of liabilities and 4 per cent of employees – have also largely continued to function. The same applies to sectors like finance.

Interestingly, the Revenue point out that in April and May, redundancies accounted for €238 million in lost tax revenue, but this was partly offset by€105 million tax gain from new jobs elsewhere. Despite the pandemic, many companies are still hiring.

4. Policy question – the impact of the pandemic: The figures are encouraging in that the hit has not been anything like what was expected. However, income tax receipts month on month are now running well below last year. The reduction in the cash amount of wage subsidy supports and the building pressure on many businesses – including big ones – could also lead to a pick-up in job losses in the autumn, including in some better-paid areas of the economy. Crucially, we also don't know what the self-employed tax returns will look like in the autumn – as the self-employed have the option of basing their payment on 2020 trading, they could take a significant hit.

The data also provides further evidence of the uneven impact of the pandemic. Those in lower-paid areas of employment are suffering most from job losses and poorer prospects, while many better paid employees continue, supported in many cases by their ability to work from home. Younger, lower-paid employees are in the firing line.

5. Policy question - the tax structure: Ireland's income tax structure puts a relatively low burden on lower earners compared to international norms and higher earners pay proportionately more. This has been a policy choice over the years – for example during the last recession the USC was introduced to take a charge on almost all but the lowest of incomes, but since then the burden on lower earners has been cut significantly.

This means that higher income taxpayers pay a large share of the tax. Revenue Statistics show that in 2018 – the last year for which full data is available – around 168,000 taxpayers ( single people and married couples jointly assessed) – earned around 29 per cent of all income and paid just under half of all income tax that year. That means around 7 per cent of all income taxpayers pay half the tax.

This is a progressive tax structure – though together with the reliance for not far off half of corporation tax on 10 big multinationals is does mean that the base of the Irish system remains relatively narrow.This is likely to become an issue in future as the Government pays for the pandemic bills – likely to lead to a long-term rise in health spending – and plans to introduce wider entitlements through Sláintecare. The fall-out from the pandemic will also increase spending pressures elsewhere.

In many other EU countries, lower and middle income families pay more income tax and social insurance, but get a wider range of services in return. Typically, employers also pay higher social insurance, again in return for wider benefits for staff in areas like sick pay. Whether this kind of trade-off is politically possible here remans to be seen.