Many people, when looking at their pay slips, find it very hard to believe that we in Ireland pay less tax than our counterparts in peer countries. More often than not, when someone makes the point that the Irish State taxes its residents comparatively lightly, he/she goes on to advocate increasing taxes on those earning higher incomes. By so doing, it is claimed, the Irish tax take would move closer to the European average. The implication of all this is that Ireland has a comparatively low tax take because the better-off are not paying as much as their counterparts in peer European countries.

This is utterly false.

Let's start with some basic facts about tax. Revenues in rich countries come from four main sources: consumption taxes (such as VAT), corporation tax (though this is a small fraction of the total everywhere), income tax and social security
contributions.

As the chart shows, both before the boom in 2006 and after the crash in 2011, revenues from the first three of these taxes in Ireland were near the euro zone average as a percentage of gross domestic product (if the gross national product measure is used, Ireland was and is a relatively high tax-raising economy as far as these three taxes are concerned).

Low social insurance

So why has Ireland been called a “low-tax” country in recent times? As the chart shows very clearly, the reason for the gap in the overall tax take is because social insurance contributions are very low here compared to the average in the euro zone.

This brings us to the distributional aspect of taxation. From a personal tax perspective, social insurance contributions are no different from income tax in how they affect takehome pay. Therefore, when the two are added together, Irish taxpayers on average still have less taken from their incomes by the State than their counterparts elsewhere in Europe.

But averages can mask a great deal. In this case, they mask a very unusual personal income tax structure. In Ireland, those on low incomes pay very little tax compared to their counterparts in Europe. As incomes rise to the economy-wide average, taxes jump.

For those on above-average incomes, they soar and are comparable to the Nordic countries (anecdotally, a newly arrived and decently paid Swede who thought he was moving to “low-tax Ireland” recently recounted to this columnist his shock when he opened his first pay slip and found he was paying as much tax as he did in his famously high-tax homeland).

How did this state of affairs come about? During the years of plenty before 2008, successive finance ministers almost inevitably included the following sentence, or a variation thereof, in their budget speech: “We have taken x number of people out of the tax net . . . ”

The result was that, by 2007, most people on the average industrial wage in Ireland paid no income tax. With one of the lowest rates of social contributions in the rich world, a large chunk of the workforce paid little or nothing in tax on their personal incomes.

Stretching the tax net
Ireland's extremely low levels of taxes for those in the bottom half of the income spectrum have long been clear from the highly detailed comparative work done by Organisation for Economic Co-operation and Development. But a domestic study recently drove the point home. The Economic and Social Research Institute, whose scholars are not generally known for their hostility to redistributionism, laid it out in plain English: "If Irish income taxes were to approach European levels, it is likely that marginal tax rates in low- to middle-income ranges would have to rise."

On the idea of taxing higher incomes even more, it noted that a new income tax band of 48 per cent (ie seven percentage points above the current top rate of 41 per cent) for those earning more than €100,000 would raise only about €400 million annually (note that the Government’s annual budget deficit is running at 30 times that figure ).

It is time for those who want the tax/GDP ratio to rise to Nordic levels to admit that the only way to achieve this is for the State to take more money out of the pockets of low- and middle-income earners.