Analysis & Comparison of Current Overall Tax Take in Ireland

With the budget fast approaching, tax cuts are on everyone’s minds. But is it time for a wider analysis of our tax system?

It’s not something we’re inclined to do. Typically, each year the focus is on helping whoever is in power to stay there by offering some form of sweetener to voters on budget day, be that a cut in taxes or an increase in welfare payments.

How competitive are taxes in Ireland

What we’re not so good at doing is taking some time to consider what is an appropriate rate of taxation, in order for us, as a society, to meet our goals. Of course, that would also mean we’d have to define them, which, given our track record in housing, is likely more difficult than it might first appear.

Other countries, however, appear able to marry higher taxes with better services. In Ireland, it’s argued we have the higher taxes without the matching public services.

But is this really the case? As the budget looms, it’s an opportune time to consider our tax rates in the context of other countries, both in Europe and further afield. So how do we stack up?

Ireland is not a high tax country

Yes, we may all believe that we pay far too much tax but in terms of how much tax the State collects as a proportion of its economic output, or GDP, the Republic is in fact, the country with the third-lowest burden out of 34 countries.

One caveat to note is the size of our GDP. We have one of the highest GDP per capita figures in the world. That being said, other similar countries, such as Luxembourg, also have much higher tax burdens.

According to figures from the OECD, Ireland, with a tax burden of just 23.6 per cent in 2015, was behind only Mexico (17.4 per cent) and Chile (20.7 per cent), and was far lower than the OECD average (34.3 per cent).

This means that for every €1 of GDP Ireland generates, we take in just 23 cent in tax revenue. Contrast this with countries known for their high level of public services such as Denmark, which, for every €1 of GDP it generates, takes about 47 cent in tax, or France, where the figure is a little lower, at 45 cent per €1. While Denmark recently introduced changes aimed at cutting its tax burden by about $3.7 billion in an effort to make it more attractive to work in, it’s still striking that it is double that of Ireland.

So why is it so low?

Well as we all know, the headline rate of corporate tax is low. At 12.5 per cent, corporation tax, as a percentage of GDP, is just 2.7 per cent. That is substantially less than the 4.4 per cent in Luxembourg, but on a par with Denmark (2.6 per cent); France (2.1 per cent) and the UK (2.5 per cent), so this isn’t the main factor.

When it comes to the income tax burden, Ireland, at 7.5 per cent of GDP in 2015, is below the OECD average of about 8.5 per cent, but not out of the ball park.

Denmark, unsurprisingly perhaps, again has the highest rate, at 25.4 per cent, followed by other Nordic countries such as Iceland and Finland. The US (10.7 per cent) and the UK (9.08 per cent) are middle of the table, with Ireland also mid-table not far behind France (8.58 per cent) and the Netherlands (7.75 per cent).

Close to the bottom are countries such as the Czech Republic (3.6 per cent) and Chile (1.47 per cent).

Ireland’s relative rate has been declining, as our GDP has soared, down from 9.18 per cent in 2014 – even if tax rates have not dropped by a corresponding amount.

But there are areas where we significantly lag behind our peers. Social insurance, for example, which is paid via employers’ and employees’ PRSI. According to OECD figures, as a percentage of GDP, our social insurance contributions come to just 3.9 per cent – far below France (16.9 per cent), Germany (14 per cent) and even the UK (6.1 per cent).

This point was picked up on recently by the Nevin Economic and Research Institute (Neri), which, in a comparison of 10 EU countries, found that one of the most substantial tax revenue deficits for Ireland was in the area of employers’ PRSI, currently levied at a rate of 10.75 per cent. It argues that “substantial reform” was needed in this area.

Property taxes too, lag behind other European countries, at 1.5 per cent of GDP, compared with 4 per cent in both France and the UK.

The individual tax burden

Looking more closely at individual tax rates, Ireland emerges as a clear outlier – and not for paying too much tax. Rather, the efforts of successive governments to take more people out of the tax net each year has meant that the tax burden on low-income workers in Ireland is particularly small when compared with the experience of these workers across the world.

Someone earning €18,000 a year in France or Germany can expect to give up about a quarter of their earnings on tax. In “low-tax” Singapore, for example, they would pay 20 per cent and 12 per cent in the UK.

In Ireland, however, given that people only start paying USC at €13,000, and income tax at €16,500, the burden is far lower, at just 3 per cent. In the UK, for example, income tax is levied on your income from around £11,500 (€13,021).

This means that the Irish tax system is very progressive, in that the more people earn the more tax they pay. But it does also mean that the tax burden – and this is the income tax burden it should be stressed, as people will pay other taxes such as Vat – on low-income workers is very small by international standards.

When we consider the “tax wedge”, a measure of the tax take on income, including income tax and levies as well as employee and employer social insurance contribution, OECD data again shows that Irish families are among the lower-taxed in the world.

Single people in Ireland for example, incurred a “tax wedge” of 27.1 per cent on their income in 2016 – the seventh lowest across the OECD, and less than the OECD average of 36 per cent.

Moreover, Ireland’s child benefit regime, offered at a rate of €140 a month per child, combined with the nation’s favourable method of taxing families, means that some families actually pay a negative rate of tax on their income. In other words, they receive more from the State than they pay back in taxes. Ireland is the only country across 35 OECD countries (Latvia joined the organisation in July 2016) where this is the case.

But . . . we start paying tax at the higher rate much earlier

But before we start to wonder how come we all have so little money at the end of the month, it’s worth considering the experience of the “squeezed middle”.

It’s one of the biggest bug-bears of middle-income earners, and an area that is likely to be a focus in the upcoming budget: Ireland still has one of the highest marginal rates of tax in the world.

Figures from the OECD for 2016 show that Ireland, with a top rate of 52 per cent, including USC and PRSI (55 per cent for the self-employed on earnings over €100,000) is one of only 15 out of 34 OECD countries with a marginal rate in the 50s. Even here, it has slipped out of the top 10, with its rate now the 14th highest on the back of changes in previous budgets.

Typically, the level of earnings at which it kicks in is €70,044. That’s broadly in line with countries such as Sweden (€66,997); Denmark (€64,453) and the Netherlands (€67,703).

However, people start paying just a slightly lower rate, or 49 per cent, at a much lower level of earnings. That means a greater proportion of people’s incomes may be taxed at this higher rate in Ireland, compared with other countries in the world.

Individuals earning above €33,801, for example, will start paying tax at the higher rate of 40 per cent (or, when USC and PRSI is factored, 49 per cent) on everything over this, while married couples with one income will start paying the higher rate on income over €42,800. For those with two incomes, the threshold is €67,600.

Contrast this with Germany, where you only start paying 44 per cent on earnings over €54,058, or the UK, where the 42 per cent rate kicks in at €49,606.