Budget 2013 – Progressivity of Irish Income Tax System

Budget 2013 – Progressivity of Irish Income Tax System

Key Point

Based on the standard OECD measure Ireland has the most progressive income tax system (including social insurance contributions) in the EU.

Introduction

This note examines the progressivity of the Irish income tax system in comparison with other OECD countries. It finds that according to OECD measures the Irish system is one of the most progressive.

Progressivity of Irish Income Tax System

The progressivity of the Irish income tax system is clear. According to Revenue data for 2009, there were 100,000 taxpayers who had an income of over €100,000. These comprised 4.7 % of taxpayers and they accounted for 22.6 % of income but paid 45.3% of the income tax. The Revenue data excludes social insurance contributions and income levies.

How progressive is the Irish tax system when compared with other countries?

The OECD method of judging the progressivity of the tax system is to compare the tax due by a single person on 167% of average income with that payable on 67% of average income. Tax includes employee social security contributions.

The data are set out below.

On this measure Poland has the least progressive system in the OECD while Mexico followed by Israel has the most progressive. Ireland has the greatest absolute difference between the two examples at 19.3 % of income compared with an OECD average of 9.6 % and has the third most progressive system in general and the most progressive in the EU.

However to get an indication of the degree of progressivity imparted to the overall system one needs to take account of the importance of income tax (including employee social security contributions) in the economy.

If we weight the results by the share of income tax as a % of GDP (GNP for Ireland) we find that the progressivity of the Irish system is at no 2 (of 33 countries) just behind Finland and just ahead of Sweden but considerably ahead of the UK and US.

Conclusion

The degree of progressivity in the tax system is in the final analysis a matter for  political judgement. The fact that the evidence suggests that Ireland is an outlier does not necessarily imply that the correct course is to make the system less progressive.

Estimates of Progressivity of Tax System

   
Income Tax Plus Employee Contributions 
Source: OECD Taxing Wages 2011          
Tax Burden on Single Person on 67% and 167 % of Average Income    
           
Country 67% 167% Difference Ratio
Australia 15.9 28.2 12.3 177
Austria 27.3 38.5 11.2 141
Belgium 35.6 49.1 13.5 138
Canada 17.5 26.8 9.3 153
Chile 7 7.8 0.8 111
Czech Rep 18.9 26.2 7.3 139
Denmark 36.8 44.8 8 122
Estonia 17.7 21 3.3 119
Finland 23.1 36.9 13.8 160
France 26.1 33.6 7.5 129
Germany 34.9 43.8 8.9 126
Hungary 29.5 37.8 8.3 128
Iceland 23.1 32.9 9.8 142
Ireland 12.8 32.1 19.3 251
Israel 9.4 24.7 15.3 263
Italy 26.7 37.9 11.2 142
Japan 19.5 24.8 5.3 127
Korea 9.4 15.3 5.9 163
Luxembrg 20.5 36.6 16.1 179
Mexico 1 13.6 12.6 1360
N’Lands 26.8 37.4 10.6 140
N Zealand 12.9 22 9.1 171
Norway 25.6 35.7 10.1 139
Poland 23.6 25.4 1.8 108
Portugal 17.3 32.9 15.6 190
Slovak R 19.4 25.5 6.1 131
Slovenia 28.8 39.3 10.5 136
Spain 17.7 26.7 9 151
Sweden 22.1 35.4 13.3 160
Switzland 13 20.7 7.7 159
Turkey 24.8 31.2 6.4 126
UK 21.7 30.4 8.7 140
US 19.6 28.6 9 146
Irl Ranking 29 16 1 3
OECD Avg 20.8 30.4
OECD -EU 21 24.4 34.6
http://www.oecd.org/tax/taxpolicyanalysis/taxingwages.htm

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2 Comments

  1. Nat O’Connor 18 Sep 2012 at 12:40 pm

    The apparent progressiveity of the Irish income tax system is undermined by Ireland’s considerably higher level of tax breaks/tax reliefs/etc.

    See, for example, OECD Economic Surveys Ireland (November 2009) that points out that Ireland’s tax expenditures excluding core personal credits were equivalent to 18.3 per cent of all tax revenue, compared to an average of 5.6 in 22 other EU countries (page 60). That’s based on 2005 data (from Revenue Statistics income tax table IT6) but replicating this for more recent years shows a high and increasing proportional importance of tax reliefs, even into the recession years.

    Also, I’d argue that the progressivity of a tax system needs to be based on the aggregate effect of all taxes, including social insurance, property tax, VAT, etc. It’s not so clear that Ireland would be one of the more progressive countries from this perspective.

  2. Michael McPhillips 6 Oct 2012 at 4:34 pm

    So how much more or less total tax, which includes all indirect taxes and government charges, is someone on 167% of average income paying than someone on 67% of average income? Income tax is just a fraction of the total tax take and progressivity figures without adjustment for regressivity paint a false picture of reality for taxpayers in general.

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