Tuesday, December 15, 2009

Fergus and Fintan

The opinion pages of today's Irish Times and Irish Examiner have two similarly themed pieces on how last week's budget shows that the government is engaged in a "war on the poor".

In his Irish Times piece Fintan O'Toole writes:
...the Economic and Social Research Institute produced stark new figures on tax relief for private pensions. It showed that €8 out of every €10 goes to the top 20 per cent of earners. It also showed that giving this relief at the standard rate of tax (which is to say, making it available on an equal basis to all taxpayers) would raise revenue of €1 billion a year – significantly more than the savings made by cutting social welfare payments. More than four-fifths of this money would have come from the richest 20 per cent.
In the Irish Examiner Fergus Finlay concludes:
This is the first time ever that a country has decided that the poor must pay our debts. In all the years of the Celtic Tiger, the gap between rich and poor in Ireland never narrowed. That’s because when the going was good, all the tax breaks were given to people who had plenty. Dozens of tax breaks, year after year. But now we’re in deep trouble and our best response, uniquely in the world, is to target people who have nothing. Being Irish will never feel the same again.
Both writers are displaying an alarming ignorance of how the Irish tax system, or any tax system, actually works. The Revenue Commissioners Statistical Reports provide income distribution and tax burden data for the Irish workforce. The most recent report is for 2008 and the income distribution data for the year 2006 are available here. Ronan Lyons uses the data on page 6 to produce this graph. Click to enlarge.

The horizontal axis gives incomes in €000s and the vertical axis gives the average tax rate. The tax rate does not go above 10% until income gets to about €40,000. What we also need to consider is how many people are in each income category.

Of the 2.25 million cases the Revenue have, nearly 72% have a gross income of less than €40,000. These 72% of earners received 40% of the total income reported. They paid only 12% of the total income tax collected and had an average tax rate of 5.1%.

The 40% of cases who earned less than €20,000 paid 0.62% of the total income tax collected and had an average tax rate of 0.84%. The average amount of income tax paid by the cases in this bracket was €82.60 - for the year!

Yes Fergus and Fintan you are right - the poor do not get tax breaks. But in your rush to produce some good copy you ignore the fact that we do much,much more for them. Whatever money they earn we let them keep. All of it!

The poor do not get income tax breaks in this country because the poor do not pay income tax. You cannot get a tax break if you don't pay tax in the first place.

Fintan and Fergus have noble and valid aspirations, and are right to promote the needs of the poor. It's a pity that their arguments are so flimsy.

For a primer they can read the parable of how the tax system works.

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