THE TAX QUESTION No3: MIDDLE EARNERS: Only Korea and Mexico took less money from an average pay packet than Ireland in 2007, writes COLM KEENA
AN IRISH worker on an average wage pays less in tax and social security payments than almost any of his or her counterparts in any country in the developed world.
The driving down of the so-called “tax wedge” – the total amount of income tax, employee, and employer social security payments associated with an individual’s wage – has been an element of government policy for the past decade or more, and is considered to be one of the drivers behind economic growth here since the mid-1990s.
This is why raising income tax rates now, when unemployment is growing so rapidly, is the exact opposite of what is required in terms of supporting businesses and jobs. However, the state of the public finances is such that it trumps such concerns.
From the point of view of the worker, the employer’s PRSI contribution is not as important as the tax and PRSI taken out of his or her weekly or monthly wage packet.
According to an OECD survey of its 30 member states, only Korea and Mexico took less money from an average worker’s pay packet than Ireland in 2007.
An Irish worker on an average wage without children paid just 13.9 per cent of his gross wage in tax and PRSI, according to the report. This compared with Belgium, which came top of the table, and where the equivalent figure was 55.5 per cent. The OECD average was 37.5 per cent.
The situation is even more dramatic when child benefit and other State support payments are taken into account.
The driving down of income tax for lower and middle income workers, along with the large increases in child benefit payment rates over recent years, has created a position where, according to the OECD, Irish families on average incomes are net beneficiaries from the State. In other words, when child benefits are taken into account, such families get more from the State that they give to the State in taxes.
According to the OECD’s 2007 Taxing Wages report, Ireland was almost unique in its generosity in this regard. Married couples with two children, where the sole earner was on the average wage, ended up 12 per cent better off in income from the State when child benefits were taken into account.
The only other country where this was true was the Czech Republic, where a family in a similar situation ended up a net beneficiary equivalent to 6 per cent of the average wage.
Obviously, one-earner families on an average wage with more than two children were greater net beneficiaries.
The figures produced by the OECD showed that for a two-earner, two-child family, where the first earner was on the average wage and the second earned one third of the average wage, the benefits still outweighed the taxes. The net position was 2 per cent of the family’s income.
If the second earner’s income was 67 per cent of the average wage, the net figure came out at 3.5 per cent, this time in favour of the exchequer.
Such a scenario in a State where expenditure for this year looks set to be €20-something billion euro more than the €30-something billion it is expected will be raised in revenue, may no longer be sustainable.
However, a notable point about the OECD report is the size of the average income in 2007 – €31,336, or €600 a week. It is a modest income by any standards given the cost of living here and indicative of the large percentage of the workforce that are on what many would consider to be low wages.
All the coverage over recent years about the Irish economic boom has perhaps hidden the fact that for a large proportion of the population, life remained a struggle.
More than 32 per cent of income earners in 2008 earned less than €20,000, according to the Revenue’s best estimates. A further 9.7 per cent earned between €20,000 and €30,000. The latter category earned €9.7 billion in total, of which 2 per cent, or €327 million, went in tax. Some extra income is likely to be raised from this low-income group, and possibly from those who earned between €10,000 and €20,000.
Ireland’s 2.36 million earners in 2008 earned a total of €101.63 billion. Earners with incomes between €30,000 and €100,000 earned €55.663 billion of this, or slightly more than half of the total. They paid €7.4 billion in income tax, or 47.7 per cent of the total raised.
If the group was targeted for an extra one percentage point, this would raise an extra €155 million. Double that would bring in an extra €310 million. Those fortunate people who earn more than €100,000 a year paid approximately 50 per cent of all income tax last year. A key consideration, once the Government’s budget is announced, will be whether this privileged group ends up paying a greater overall percentage of the income tax take. Such a development would make it easier for those earning between €30,000 and €100,000, and those earning less than €30,000, to accept their tax increases.
Series concluded
Child benefit rates
Child benefit rates have almost doubled in the past nine years. The net cost to the exchequer has risen from €964.8 million in 2001, to an estimated €2.53 billion for this year. (The number of children qualifying has risen also, from just over one million to 1.14 million.)
The child-related payments made to social welfare recipients have not been increased, while the untaxed child benefit payments paid to all families irrespective of wealth or income, have increased sharply.
At the outset of this period there was a debate about making the benefit payments taxable as income, but this was not done. Doing it now is more complicated, and some observers believe that for this reason it is unlikely that the Government will announce such a change in the upcoming emergency budget. However some change to the system is surely inevitable now given the state of the public finances.
While it is commonly said that Ireland has a particularly generous child benefit regime, its direct payments model is considered by experts in the area to be wasteful and inefficient in terms of equity or efforts to reduce child poverty. (Ireland comes second worst in the EU 15 states for child poverty while coming third from the top in terms of cash payments as a percentage of the average wage.)
Taxing child benefit would seem preferable to the current situation but a broader, more considered strategy for supporting children and combating child poverty is what many experts in the area say is required.
Likewise the untaxed and universal early child supplement payment, which will cost the exchequer an estimated €340 million this year, is considered by many to be an inefficient and wasteful way of trying to achieve improved early childcare targets.
It was another Celtic Tiger era soft option. In 2006, in the face of a growing childcare crisis, the Government sought to create the appearance of dealing with the issue by announcing the increased expenditure of public funds. The cheaper and more difficult option of putting a national, more targeted structure in place, was avoided.