Tax Burden

meglome

Emailed Ronan Lyons to ask about a follow-up to his 'A little quiz on Ireland’s income tax' from 2009. As it happens he'd just done one.

In two parts...
Who pays tax in Ireland? The little quiz revisited
Paying tax in Ireland: Where the richest (and poorest) pay

Some interesting points

By these figures, the richest 10% of households pay almost 40% of all receipts from income tax, VAT, USC and PRSI. The second richest 10% pay a further 20%. Each of the poorest five deciles contributes less than 5% of all tax receipts – their combined contribution is just over 10%.

Our top 20% of earners are paying 60% of all income tax, VAT, USC and PRSI.


In the Poll results on the question "Taking into account income tax, PRSI and USC, what do proportion of income do you think a household earning roughly the average industrial wage (€35,000 per annum) is paying in tax?"

50% of people thought they were paying more than they actually were. Shows the myths on how much we're actually being taxed still exist.


I'm going to avoid any analysis of this as I wouldn't do it justice.

beeftotheheels

It is interesting, especially in relation to the meme about indirect taxes being a tax on poor people and thus poor people paying an excessively high tax rate. This is borne out in relation to the poorest, but then not borne out again as the system becomes incredibly progressive.

Idbatterim

This is borne out in relation to the poorest, but then not borne out again as the system becomes incredibly progressive

is it really progressive? i think its regressive! why not have a flat rate of say 25% of all earning over 30k or so? Those earning more most likely wont avail of state education, they will likely have private health insurance, they wont be entitled to any bigger pensions or unemployment benefit...

antoobrien

Idbatterim wrote: »

is it really progressive? i think its regressive! why not have a flat rate of say 25% of all earning over 30k or so? Those earning more most likely wont avail of state education, they will likely have private health insurance, they wont be entitled to any bigger pensions or unemployment benefit...

Flat rate of 25% with no tax deductions (e.g. investments income) except pension contributions - mandatory 5% of income (tax free) to be put into pensions (voluntary deduction up to total 25% of income for first 30k, 20%, next 10k etc, down by 5% per 10k earned to 0% relief over 80k earned - would cut the maximum amount of tax relief on the pension to 12,500, while favoring the lower paid).

Tax credits to make allowances for civil unions with families (i.e. common law marriage, marriage and gay marriage), carers & disabilities but f*ck all else.

That should allow for the abolition of PRSI & USC.

murphaph

I'd favour a flat tax with absolutely no reliefs for anyone. Under the present system the "low earners" get away with it as do the super rich who can afford very clever accountants and lawyers to legally avoid taxes. The middle class PAYE schmuck gets it in the neck mostly.

Manach

Life is complex. Having a flat tax, that say would be understood by reading one A4 piece of paper, would simplify things a tad. Who knows, might even have the rate set by the people in a yearly vote, just to annoy the Dept of Finance.

murphaph

Manach wrote: »

Life is complex. Having a flat tax, that say would be understood by reading one A4 piece of paper, would simplify things a tad. Who knows, might even have the rate set by the people in a yearly vote, just to annoy the Dept of Finance.

Governments hate flat taxes alright...far too easy to understand and it makes it hard to conceal the taxes they are taking from you.

beeftotheheels

murphaph wrote: »

I'd favour a flat tax with absolutely no reliefs for anyone.

That would be completely regressive and if it were to raise sufficient revenue the rate would still have to hit the middle earners hardest since that's where most of the taxpayers are.

murphaph wrote: »

...as do the super rich who can afford very clever accountants and lawyers to legally avoid taxes.

While I'm obviously flattered at the compliment you paid to my profession what on earth makes you think that a flat tax will be any more difficult to scheme than the current system?

The Gov has to define the tax base on which it levies the tax. To some extent it is constrained in this regard by EU law and bilateral tax conventions. It will, like it or not, be constrained by policy considerations e.g. investment creating jobs is good, investment creating free lollipops for rich people is bad.

But once the rules are there, the loop-holes are there. And there is good money to be made in finding loop holes. The best loop hole finders are generally a class above the best the public sector can afford.

Morally I don't think individuals should engage in aggressive tax planning. I would never engage in tax planning myself, I've paid taxes which technically didn't apply to me. But in a professional context I am obliged to act in the best interests of my clients and I cannot unilaterally assume that it is in their best interests to pay more tax than is needed.

For the fuller picture I should point out that some times it isn't all that clear cut morally. Say Mr X is about to sell his existing business X Shops to a foreign purchaser with lots of cash (so all the employee jobs look safe). He's going to get 1m for the business. He can do it in a manner that attracts CGT or in a manner that attracts income tax. In the first case he ends up with around 700k of cash, in the second closer to 500k.

Now before the outrage starts, lets assume that Mr X is actually intending to set up a new business with all the cash. If he has 500k he'll create 5 jobs, if he has 700k he'll take the risk of employing 10 people at the start.

This is why, historically, we tax capital gains at a lower rate than income, it encourages people to start businesses, to create wealth and to create jobs.

A flat tax couldn't take this into account.

We need to close off loopholes. We probably need to simplify the system. But we need to keep the tax burden as fair as possible which means keeping it progressive. We also need to use tax policy, as we did so successfully in attracting MNCs and so abysmally in preventing the property bubble to target areas of the economy which need addressing. A flat tax just can't do this.

murphaph

beeftotheheels wrote: »

That would be completely regressive and if it were to raise sufficient revenue the rate would still have to hit the middle earners hardest since that's where most of the taxpayers are.

How would it hit the middle earners hardest? 15% (or whatever the rate would be) is 15%. It would hit everyone to the same percentage.

beeftotheheels wrote: »

While I'm obviously flattered at the compliment you paid to my profession what on earth makes you think that a flat tax will be any more difficult to scheme than the current system?

Not scheme per se, but with all the complex reliefs available under the current system, only people with quite a lot of financial nous can take advantage of said reliefs, or people who can afford the advice of financial professionals. Average and low earners cannot generally afford to take advantage of many of the tax reliefs available under the current system.

beeftotheheels wrote: »

The Gov has to define the tax base on which it levies the tax. To some extent it is constrained in this regard by EU law and bilateral tax conventions. It will, like it or not, be constrained by policy considerations e.g. investment creating jobs is good, investment creating free lollipops for rich people is bad.

But once the rules are there, the loop-holes are there. And there is good money to be made in finding loop holes. The best loop hole finders are generally a class above the best the public sector can afford.

Morally I don't think individuals should engage in aggressive tax planning. I would never engage in tax planning myself, I've paid taxes which technically didn't apply to me. But in a professional context I am obliged to act in the best interests of my clients and I cannot unilaterally assume that it is in their best interests to pay more tax than is needed.

For the fuller picture I should point out that some times it isn't all that clear cut morally. Say Mr X is about to sell his existing business X Shops to a foreign purchaser with lots of cash (so all the employee jobs look safe). He's going to get 1m for the business. He can do it in a manner that attracts CGT or in a manner that attracts income tax. In the first case he ends up with around 700k of cash, in the second closer to 500k.

Now before the outrage starts, lets assume that Mr X is actually intending to set up a new business with all the cash. If he has 500k he'll create 5 jobs, if he has 700k he'll take the risk of employing 10 people at the start.

This is why, historically, we tax capital gains at a lower rate than income, it encourages people to start businesses, to create wealth and to create jobs.

A flat tax couldn't take this into account.

We need to close off loopholes. We probably need to simplify the system. But we need to keep the tax burden as fair as possible which means keeping it progressive. We also need to use tax policy, as we did so successfully in attracting MNCs and so abysmally in preventing the property bubble to target areas of the economy which need addressing. A flat tax just can't do this.

Could we not have a flat income tax rate and a different (lower) flat CGT rate?

I am not in favour of a flat tax just to prevent the very wealthy from exploiting the various reliefs under the current system, but to ensure that lower earners pay a fair share of tax as well. I get the feeling that many lower earners in Ireland are completely disengaged from the political process because they don't contribute much by the way of income tax and so aren't really bothered about how it's spent.

I understand that a flat tax could see me personally pay more tax, but I think it's worth it to bring more people into the tax net.

This is all very subjective. Your view of regressive/progressive is clearly different from mine.

hognef

I'm no expert on taxation, but I think this thread needs a clarification on the meanings of progressive and regressive taxes. These concepts are clearly defined, and not matters of opinion:

Taxation is progressive when the average tax rate increases as the amount subject to taxation increases.

The current system, in which the rate of taxation increases in steps with increasing income, is therefore progressive.

A system with no tax on income below a certain amount, and 15% (say) on everything above that amount, is therefore also progressive (albeit much less so than the current system).

Taxation is regressive when the average tax rate decreases as the amount subject to taxation increases.

An example would be a system in which a tax of 30% applied to all income below a certain amount, and 10% applied to income above that amount.

Tax is proportional or flat when all amounts are charged at exactly the same rate.

--

Now personally, my opinion is that the current system is far too progressive, with a lot of earners paying little or no tax, and anybody lucky/talented enough to be earning a bit more gettting loaded with most of the burden.

I'd prefer to see a flattening of the system, with the low rate kicking in at a lower income level (€5000, say), a stretching of the lower rate band, and a slight reduction of the higher rate itself.

woodoo

It isn't really as straight forward as making the low paid pay more tax. They are already close to welfare payments and many would be better off on welfare than working anyway.

Villa05

Figures based on single person using PWC Calculator http://www.pwc.com/ie/en/budget/calculator.jhtml

Salary Deductions Effective Tax Rate
50,000 14867 29.7%
40,000 9667 24.1%
30,000 5055 16.85%
25,000 3505 14%
20,000 1955 9.8%

At the 20 to 30K wage, how much more can we squeeze out of them in taxes?
Will it be tolerated considering their taxes are used to keep their costs up e.g. Rent, bailing out banks, protecting monopoly's like ESB, artificially inflating medical costs (overpaid consultants, protecting chemists)

murphaph

woodoo wrote: »

It isn't really as straight forward as making the low paid pay more tax. They are already close to welfare payments and many would be better off on welfare than working anyway.

You're right-welfare needs reducing as well for the long term unemployed. It's just not affordable at current rates, like a lot of things we are still spending money we don't have on.