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FactFind: How do our personal tax bills compare to those living around the world?

There’s a lot of chat about what’s taken from our pay by Revenue at the moment – here are some facts.

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TALK OF TAX cuts is in the air.

Taoiseach Leo Varadkar told Fine Gael parliamentarians last week that “where we have scope in the budget, it will be used to reward work and enterprise, and will benefit those on middle incomes who pay the highest rates of tax on far too modest incomes… High taxes on the middle classes are a barrier to opportunity and to work.”

There will be a lot of opposing commentary in the coming weeks with some people claiming Ireland is a high-tax nation, others saying there is scope for more taxation to fund public services.

So, TheJournal.ie FactCheck is going to lay out the figures available and find out just how high are income taxes in Ireland as things stand?

Beware quick answers

Before we get into the meat of the question, some words of warning: Tax is complicated.

“Ireland’s personal tax system has 53 different moving parts,” according to the Irish Tax
Institute.

FactCheck’s man on the inside at the Fiscal Advisory Council was quick to point out that the subject is “a can of worms”: you can get very different takes on what proportion of their income people pay in taxes depending on what taxes and charges you count and how you break down people’s different income levels.

That’s just looking at our own system. Ready comparisons with other countries are trickier still, because of the way those systems are set up. German income tax, to take one example, involves a hefty extra levy that goes to the church if you’re a member of one. UK income tax only kicks in on incomes above £11,500. Neither of these things have precise equivalents in Ireland.

In addition, a country with higher taxes might use that money to fund better public services and welfare payments. So we’d advise caution before drawing too many conclusions about tax rates in isolation.

Taxing Irish Incomes

The main direct taxes on personal incomes are income tax, Universal Social Charge (USC) and Pay Related Social Insurance. USC is just “another income tax”, as accountancy firm KPMG points out.

PRSI is kept in a special fund, so you can call it social insurance rather than a tax. To the taxpayer though, the distinction isn’t all that relevant. In this article, wherever we say “taxes on income”, we mean all three of these together.

Income tax is 20% on earnings up to €33,800 (for a single person with no children). On income above that amount, it is 40%. In addition, you’ll have to pay different rates of USC depending on your income – most people liable for USC pay 5% – and PRSI is typically 4%.

The headline rates don’t reflect what people actually pay, for reasons we’ll touch on later.

recent report by the Irish Tax Institute shows the effective rate for different individual salaries.

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This analysis takes into account two widely available tax credits – discounts on your overall tax bill – but “all other tax credits and reliefs are ignored”, the Institute confirmed to FactCheck.

You can plausibly include more than just direct taxes on income in these kind of calculations. Everyone pays VAT, for example, so you’ll see people factor this in too.
By contrast, not everyone pays tax on their income. Almost one third of earners pay no income tax or USC, according to the Revenue Commissioners.

How do Irish taxes on income compare internationally?

There are a few ways of looking at this so we’ve picked out the most common.

One approach is to look broadly at the economy and see how much of that value is channelled to the government in taxes on income.

Overall, Ireland is a low-tax economy compared to most others in the OECD, a club of relatively rich countries. But income tax (including USC) specifically was until recently a bit above the average. That changed in 2015 when the sharp rise in the value of the Irish economy brought income taxes to 7.5% of gross domestic produce (GDP) – below the likes of the UK, USA and Germany.

Social security contributions (basically PRSI), which the OECD considers separately, have always been much lower than average.

What this adds up to is the average Irish worker paying considerably less of her gross income in tax than in other nations.

Taking income taxes and social security together, Ireland comes in 28th out of 35 countries, with a single, childless worker on the national average salary paying 19% in taxes on income. The OECD average is 26%. We’re even more low-tax when it comes to the average family, ranking above only Switzerland, Chile and the Czech Republic for taxation on the income of a one-earner family with two kids.

And if you add into the mix the benefits this typical family receives in each country, Ireland really stands out. “Cash benefits exceed the income tax and social security contributions” for the average one-earner couple, researchers say – the only OECD country for which this is the case.

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Another way of looking at it is to take the total tax paid on incomes and see how that shakes out per person.

On this measure, Ireland again comes out as the lowest taxed country in a group of 11 “high income EU economies”, behind Germany and the UK, according to the Nevin
Economic Research Institute.

All these are averages of one sort or another. You might also want to know people at different incomes are taxed.

“At lower income levels, Ireland has the lowest effective personal tax rate of all ten countries examined,” according to the Irish Tax Institute.

The €600 in tax paid by someone on €18,000 a year is lower than any of the other nine mostly European countries studied, including the UK, USA and Germany.

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We’re also a comparatively low-tax nation if you earn about the average, coming in eighth out of ten.

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But Ireland’s system of tax on incomes is more progressive than most – so we’re consistently in the top half of this sample in taxing salaries of €55,000 and above.

That tallies with a recent Guardian survey of eight countries, including Ireland. At an income of £25,000 sterling, Ireland’s taxman takes the lowest of the lot. But for incomes of £40,000 and £100,000, Ireland rises up the list to third place in each case.

You can see this shake out in other ways. We’ve seen that the average Irish worker is lightly taxed by OECD standards. But the Irish worker making much more than average (167% more, to be precise) loses slightly over the OECD average to taxes on income.

So overall, “Ireland has a comparatively low tax burden on labour, particularly at low and middle income levels”, as the Department of Finance put it in a report last year.

When do we hit the highest tax band and how many of us do so?

As a single person with no children, you become liable for the higher rate of income tax once your income reaches €33,800.

Around one in five earners pay the top rate of income tax – well over half a million people or couples, Revenue estimates suggest. But not all will be paying very much at this rate.

Only 6% of income taxpayers were liable for the higher rate on more than half their incomes in 2012, analysis by the TASC think tank has found.

The top 8% rate of USC kicks in at €70,045. Around 9% of us – some 220,000 people – pay it.

Put both top rates together with PRSI, and you get a 52% “marginal rate” on incomes above €70,045. In other words, any income above that amount is taxed at 52%.

And a pretty similar marginal rate (49%) kicks in at just €33,800. So even some people earning less than the average Irish salary, which is €37,000, might start paying close to the highest rate possible.

However, it’s worth remembering that this only kicks in on earnings above a certain level – the first chunk of income is taxed at the lower rates. There are also various tax breaks that can reduce bills substantially.

So the total percentage of your salary handed over to the Revenue is never as high as the marginal rate.

How does that compare internationally?

Ireland’s 52% top marginal rate is slightly above the average for OECD countries, and it kicks in at a lower level than most. We rank 23rd out of 35 countries, ranked by top
marginal tax threshold as a multiple of the national average income.

What that means is, people in Ireland start paying the top marginal rate once their income hits twice the average. In 22 other countries, you can earn more than twice the average before hitting the top rate. In the UK, you can earn four times the average before hitting top rate; in Germany, five and a half times the average; and in the United States, eight times the average.

The Irish Tax Institute has done a direct comparison between Ireland and a few other
countries:

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Again, it’s worth bearing in mind that the 49% rate kicks in for Irish earners at €33,800 – Germans and Brits only start paying rates of that level when they earn triple figure incomes.

How do these high marginal rates, at fairly low incomes, square with what we said earlier about Irish taxes on incomes being relatively light?

Economist Ronan Lyons explained to FactCheck that the two are “flipsides of the same coin”.

Ireland has a generous system of tax credits and reliefs. There are lots of ways to reduce your overall tax bill using these – so even though there are high marginal rates in principle, the overall burden of taxes on income isn’t massive compared to other comparable nations.

  • Tune in to TheJournal.ie’s FactCheck slot on The Pat Kenny Show tonight, Wednesday, 20 September, on TV3 at 10pm for more on the claims, facts and figures around personal tax bills.

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