Who has an effective tax rate of just 2.4%?

In an article by Vincent Browne in today’s Irish Times the following information was presented in bullet-point form on the income tax paid by different income groups:

• More than half (54 per cent, nearly 1.2 million) of income tax payers earning €30,000 and less have an average gross taxable income of €14,712.
• Nearly 110,000 earners getting more than €100,000 in gross taxable income have an average income of €183,750, they pay an average of €46,695 in income tax, representing 26 per cent.
• More than 22,000 earners getting more than €200,000 have gross taxable income of €389,742 on average and pay €108,666 in income tax on average – 28 per cent.
• The 141 paid more than €2 million a year have an average gross taxable income of €4.1 million. They pay an average of €1.1 million in tax – 27 per cent.

The data used by Browne is from this recent PQ (which can be located now that the excellent KildareStreet.com site is back in action).  Here is the same information provided above in tabular form:

The text of the article provides all the information necessary for the table except the average tax paid and the effective tax rate for those with a gross income for income tax purposes of less than €30,000.  Was it space concerns that resulted in these two numbers being omitted?

Using the data in the PQ we can easily work them out.  So for those with a gross income of less than €30,000 we have:

• Average tax paid: €358
• Effective tax rate: 2.4%

It is also worth noting that the 54% in this group pay 3.6% of all income tax.  By way of contrast, the 5% of tax cases with incomes over €100,000 pay 43.7% of all income tax.

It is a little incongruous that an article that claims the tax system “zealously protects the wealthy” fails to mention that the effective tax rate on 54% of income tax cases is just 2.4%.  An effective tax rate of 28% on those earning more than €2,000,000 may be low but an effective tax rate of 2.4% on those earning less than €30,000 is incredibly low. 

In both cases the progressive USC and proportional PRSI would have to be included to get the full amount of income-related deductions.  More than two-thirds of the earners in the over €100,000 are non-PAYE earners so they will face the increased rate of 10% on income over €100,000.

The impact of the changes in these deductions introduced since 2008 are explored in this post.  While this post shows that Ireland has the highest level of earned income inequality in the OECD but the most impactful tax and transfer system at reducing inequality in disposable income.  Understanding why there is this large inequality in earned income should be addressed.

The Browne article includes a proposal for “an effective tax rate of 35 per for those earning more than €100,000” which is termed “a modest increase in income tax”.   If applied linearly to the data linked above this would give rise to an increase in income tax of €1.9 billion, bringing the total raised to €13.5 billion.  This is a considerable increase.

As shown above it would impact 108,000 tax cases. Of these, 68,000 have a gross income of between €100,000 and €150,000.  A certain proportion of these will be couples making a joint tax return but let’s ignore that wrinkle for simplicity.

The proposal would increase the average income tax bill for this group from €27,300 to €41,600.  I doubt there is many who would consider a 52% increase in their tax bill as “modest”.  The massive tax increase on this group would give rise to more than half of the improbable €1.9 billion revenue increase from the proposal.