Thursday, November 22, 2012

Taxing Income (again)

A couple of previous posts have looked at the implications of changes to income tax, here and here.  A recent parliamentary question provides some details of what would happen if:

  1. the marginal rate of tax on Income Tax was increased to 71% for very high earners or
  2. if the effective tax rate of Income Tax + USC + PRSI was increased by nearly a third for high earners. 

The answers to these questions were provided in a recent PQ set by Socialist Party TD Joe Higgins.  The emphasis was on tax cases with incomes over €100,000.   The marginal rate of tax for PAYE employees in this category is 52% (41% Income Tax + 7% USC + 4% PRSI).  For self-employed/non-PAYE earners the marginal rate is 55% as there is an additional 3% USC levy for non-PAYE earnings over €100,000.

The question set looked for the impact of marginal rates ranging from 48% up to 78% on different income ranges excluding PRSI.  With a 7% USC rate the proposed income tax rates start with the existing 41% rate up t0 71%.

Nominal Tax Rates

Unsurprisingly the proposed 48% raise no additional revenue as that is identical to the existing rate.  There is a minor gain from the 50% rate and from 55% up the suggested impact of the new tax bands and rates can be seen.  The largest amount of additional tax revenue is in the widest band between €250,000 and €1 million with over €400 million raised from a new 75%. tax rate. 

The marginal tax rate of 78% on earnings over €1 million raises just €110 million.  This is because there are so few people earning this amount.  The 2011 tax distribution statistics from the Revenue Commissioners show that just 636 tax cases reported an income of greater than €1 million.  It is not clear how many individuals have incomes in excess in €1 million.

If there was 636 such people they would face an extra tax bill of around €175,000 from the 78% rate alone.  The increased rates on lower income bands would mean the overall tax increase for such earners from these measures would be larger.

In total nine proposed new tax bands with a top marginal rate of 78% would raise a little over €850 million.  This would help close a budget deficit of €13.5 billion but makes clear that increased taxes on high earners alone falls far short of the eliminating the deficit.

The second set of proposals had to do with increased effective or average tax rates for earners in similar income ranges used above.  For incomes over €90,000 the proposal would see the overall effective tax rate rise from 34.6% to 40.2%, with an effective tax rate of 50% or more for all incomes over €300,000.

Effective Tax Rates

In total these increases would raise €1,337 million which is equivalent to around 10% of this year’s deficit.  This is similar to an earlier proposal from NERI but gives specific effective rates for each income range.  It differs in that the proposed tax increase is about twice as large and focussed on a third as many people.  In both cases no specifics are given on how implementing these effective tax rates would actually be achieved.

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