Cliff Taylor: Squeezed middle is paying too much tax

So who exactly are the much-talked about squeezed middle? They are the people who are working and earning but still struggling to pay their bills. They are hard-working and feel hard done by. Certainly in the case of those who bought houses at the top of the market and have suffered tax hikes to help pay for the collapse, they have good reasons to feel squeezed and sore.

This group provides a huge political conundrum for the Government as it frames the budget. There are so many of them there simply isn’t enough cash to spare to put any noticeable amount of money into their pocket.

The most striking thing about this group is its size. Close to one million taxpayer “units” have earnings between €30,000 and €100,000, according to figures from the Revenue Commissioners. Each unit is either a single person or a two-income couple on joint assessment. You could argue what is squeezed and what isn’t – a single person on €100,000 is well-off, but a two-income couple on €50,000 each, with kids and a boom-time mortgage, are not

This middle group pays not far off half of all the income tax and universal social charge (USC) now being collected. They are the workhorses of the tax system. Above them – and below them – are the the two other distinct groups in our tax system.

Lower earners

Below, in income terms, are the lower earners who pay very little or no tax on their incomes. In the wake of the crash, tens of thousands were brought into the net via the introduction of the USC. In the last few years, they have been reversed back out again – with some 500,000 removed from the net, according to a report this week by the Irish Tax Institute. One-third of earners now pay no tax or USC.

Then there is the €100,000-plus category. This group of almost 150,000 taxpayers earns over one-quarter of the income declared for tax and pays more than 45 per cent of the income tax and USC.

The problem for Minister for Finance Michael Noonan is he is now in a financial cul de sac in terms of helping this big group in the middle ground. He can trim USC a bit. But to help pay for this, tax credits and bands will not be indexed for wage inflation, meaning more of any wage increases will go to tax. The net gains for most will be tiny.

What of the other two groups? Since the USC cuts started a couple of years ago, the previous government moved to restrict gains to those earning over €70,000, by capping their benefits from USC cuts. All the signs are that this will continue. So this group will not benefit either.

This leaves the lower earners, some of whom may gain from a further rise in the USC ceiling, though a portion of the extra cash could be clawed back by moves to raise more PRSI from this group.

USC cuts

The politics of this is that the big group in the middle ground who will feel they voted for USC cuts are going to be disappointed. And there are a lot of them. Many would probably settle for better services – in health, childcare and so on, or more affordable housing – in return for their tax euro. But recent experience will give them little confidence that this can be delivered. So the clamour for lower taxes will continue.

The report this week by the Irish Tax Institute counted 50 different changes to Ireland's personal tax regime between 2009 and the last budget. The result is a hodge-podge of a tax system with a whole host of weird consequences. And those in the middle are among the affected. Employees enter the higher 40 per cent income tax rate at the ludicrously low income of €33,800 – add USC and PRSI and they are paying close to 50 cent in every additional euro in tax.

Those in the middle have gained from USC cuts, but the upper middle ground, in particularly, is still being hit hard. As the tax institute points out, the fact that low incomes are subject to high income tax rates is central to this.

There are two separate issues here. The first is that the Irish system relies too much on taxes on income. With the row on water charges and the decision to freeze local property tax until 2019, this isn’t going to change any time soon. The new sugar tax – not likely to appear until 2018 – and higher excises on diesel and cigarettes will raise a bit, but this is tinkering rather than reform.

International comparison

The second question is whether other groups should pay more income tax or USC to give the middle ground a break. By international comparison, higher earners pay a bit more than the average share, and lower earners a bit less. In this way the tax system tackles our unequal pretax income distribution. But the decision to have lower earners pay nothing – and the reluctance to raise more taxes from other sources such as property – means the squeezed middle is going to remain squeezed.

The short-term problem for the Government is clear. It hasn’t got much cash to spend on budget day – about €1 billion in total, of which €300 million will go on a tax package. The many taxpayers in the middle ground are not going to feel much better-off. The election promises of abolishing the USC will have to be sold on the basis of “ jam tomorrow”.