THE TAX QUESTION No 1: Who pays what:It is hard to see how any equitable increase in income taxes would not seek a significant contribution from the better-off, writes COLM KEENA
IT IS difficult to review the figures on who pays income tax without being diverted to the question of the distribution of income within Irish society. It is commonly said that Ireland has a progressive income tax system in that the higher earners in society pay the vast bulk of the income tax collected each year, and the State’s lowest income earners pay little or no income tax. An examination of the figures shows that this is indeed the case.
Likewise it is correct, as Government Ministers often state, that a relatively small percentage of high income earners pay a huge proportion of all income tax paid.
The figures for 2008 show, for instance, that 32.8 per cent of all income tax is paid by the top 2.8 per cent of earners. Or, to take a different set of figures, the 6.36 per cent of all earners who earn more than €100,000 a year pay 42.5 per cent of all income tax. It is also correct to state that the bottom 32.3 per cent of earners pay no income tax at all.
Such statements can be taken to support the view that the higher paid are already making a large contribution to the public finances, and so should not be targeted unduly when the Government comes to deciding how the increased tax burden that is on its way should be spread across society.
However, it is equally valid to flip the import of the available figures for who pays income tax, and see them as a reflection of a far from progressive phenomenon, namely, the unequal distribution of income across society.
The Revenue figures show that 28.2 per cent of all the income earned in 2008 was earned by just 6.36 per cent of the population.
Higher up the pyramid, the situation is even more pronounced. The figures show that 6 per cent of all income earned in 2008 was earned by just 0.22 per cent of the population.
At the very top, the 1,447 people (0.06 per cent of all income earners) who earned more than €1 million each last year, collectively earned 3.4 per cent of all income. In real figure terms, this small cohort of people earned €3.459 billion in 2008, an average of €2.39 million each. On this basis, it is hard to see how any equitable increase in income tax rates would not seek a disproportionate contribution from the better-off.
The income figures in the table above are gross income figures, meaning they include (almost all) income earned, with adjustments for allowances arising from property tax schemes, mortgage interest, etc coming afterwards. However, the gross income figures do not include pension payments by employees that are eligible for tax relief.
These payments include payments by proprietary directors, or company directors employed by companies they own. As provision for a pension tends to increase with income, it can be assumed that the income distribution picture captured in the table would be more unequal if it included this income diverted to pensions. The total cost of pension provision relief to the exchequer in 2006, the latest year for which figures are available, was €2.9 billion. Of this, €540 million arose from employee contributions. At the then top rate of tax, this would indicate income of €1.28 million that does not appear in the table.
The income distribution figures show that approximately 40 per cent of all income is earned by those with incomes between €30,000 and €70,000. As these are income bands within which large amounts of income is located, they are another obvious target for an exchequer in need of additional revenue.
The exemption of the lower paid from the tax net has been achieved as a result of a push begun in 1998 by the then minister for finance, Charlie McCreevy, and maintained since by way of tax credit increases. A reduction in tax credits would bring more of these people into the tax net, as well as increasing total tax payments for all income tax payers.
A reduction in the PAYE and personal tax credits to 2006 levels would, according to some estimates, bring in an extra €860 million in a full year. However, the bulk of this would come not from the low paid but from those higher up, who would also be affected.
The standard rate of tax is 20 per cent and the higher rate, which begins at an income of €36,400, is 41 per cent. The income levy is 1 per cent for income up to €100,000, 2 per cent up to €250,000, and 3 per cent thereafter. PAYE workers who earn less than €18,300 do not pay income tax or the levy.
It has been estimated that a 2 percentage point increase in the standard rate would bring in an extra €1,075 million in a full year, while a similar increase in the higher rate would bring in €440 million.
A 3 percentage point increase in the top rate would bring in €650 million in a full year. These increases would of course be in addition to the levy. A number of commentators have also suggested a third, higher rate of tax for the particularly well-off.
The bulk of the figures in the table were given to the Labour Party’s spokeswoman on finance, Joan Burton, after she submitted detailed questions to Minister for Finance Brian Lenihan in the Dáil in November.
The Revenue has actual distribution figures for gross incomes and income tax for 2005, and extrapolated the 2008 figures from them using certain economic assumptions. The 2008 figures have obviously been affected by the recent economic downturn.
The figures include income in Ireland earned by Irish people who are non-resident for tax purposes. Such people pay tax on their income earned here. The percentage figures in the table for gross income and number of taxpayers have been computed by The Irish Times. When considering how to squeeze extra income out of income tax payers, the Government has the option of altering or ending certain tax reliefs, such as the pension scheme reliefs mentioned above. Significant additional income could be achieved in this way. It is an issue that will be considered tomorrow.
Some economists consider it likely that 2009 will see deflation of in the region of 4 per cent. On that basis, someone could lose 4 per cent of their income in extra taxes and not be any worse off.
Tomorrow: the high earners