Ibec, the group that represents Irish business, today published 'General Election 2016: Rethinking the tax debate', a new report which looks at the tax issues dominating the campaign so far, against the reality of the Irish tax system. The report highlights that Ireland is not a low tax, low spend economy. Tax on work is too high, but at the same time too many are not paying anything at all. Ibec stressed the need to bring the marginal tax rate down to 45% and into line with competitor economies, and said the USC should be used to provide for future pension needs.
The report finds Irish income tax levels to be above the European average and while the Irish social insurance model has lower rates than others in Europe, it is more redistributive. Ireland is not a country that spends less than others on public services. Adjusted for demographics, Ireland spends above the European average on health and working age benefits. However, we spend below the EU average on education and investment.
Ibec Senior Economist Gerard Brady said: "The general election tax debate needs to be informed by the facts. Ireland raises more than average European countries through income tax, but our marginal rate is out of line and workers hit it too early. Election tax promises have focused on who will get what, but we need to ensure the tax system as a whole works to support growth and job creation."
Key report findings:
- Irish income tax take is above average: Core taxation, which funds services such as health and education, in Ireland is slightly above the European average, ninth out of 28 countries. We pay less social insurance than average, but the Irish system redistributes those benefits to poorer households, in contrast to other countries. Comparisons need to take into account the stark difference in social insurance models.
- Government spending is above the European average: Other EU countries spend much more than Ireland on pensions, because they have much older populations. When you adjust for demographics, Ireland spends above the European average on health and working age benefits. However, we spend below the EU average on education and investment.
- Tax on work is too high: Income taxation in Ireland, at 40% of total taxation, is the fifth highest in the EU. This is far from ideal. Excessive labour tax slows economic growth as it reduces productivity and labour market incentives.
- Workers hit the marginal tax rate too early: About 50% of Irish workers pay at the top marginal rate of income tax. In the UK only 12.4% workers pay more than 50c from a €1 pay increase in tax and benefit withdrawals, in Ireland the figure is 39%. This is causing serious issues for Irish employers trying to reward and incentivise workers.
- Too many people are not paying income tax: Under Ireland’s tax credit system 32% of all income tax cases end up paying neither income tax nor USC. This compares poorly with our nearest neighbour the UK, where only 11% of income earners are exempt from income tax. Abolishing the USC would exacerbate this.
Ibec tax recommendations:
- The total tax burden on the economy is about right and should not exceed one-third of GDP over the coming years.
- Plans to increase labour taxation further through either income tax or employer PRSI contributions would damage employment growth.
- The income tax system should be broad based, with top marginal rates (inclusive of USC and PRSI) of no more than 45%.
- Half of workers already pay tax at the 49.5% marginal rate or above. The entry point to the top marginal rates should be linked to above the average wage (currently €35,700).
- Abolishing the USC would be a step in the wrong direction. Its abolition would narrow the tax base and put more pressure on a smaller numbers of tax payers.
- Rather than abolition, part of the USC should see be converted to a contribution for workers to a defined contribution pension scheme.
- Election 2016 - Rethinking the tax debate.002.pdf - 623 Kbytes