Populist politicians get away with murder when talking about their spending and tax promises; as soon as we get into details most people have tuned out. This is quite understandable: use and abuse of dry statistics means that facts rarely inform this debate.
For example, a key part of Sinn Féin’s fiscal plans is to raise taxes on people in the lucky position of earning over €100,000. An argument then ensues about how much money such a policy change would raise. There is even a row over what the current marginal tax rate is, let alone what it might be under any new regime.
Some politicians and think-tank analysts like to claim that our tax rates are relatively low, using numbers that conveniently don’t label USC as a tax and mis-measure self-employment income.
What are the facts? According to some very helpful datasets recently supplied by Revenue there will be 129,919 people (more technically tax-paying “units”) earning over €100,000 this year. (There are a total of 2,341,200 tax units/payers in the country).
High earners
High earners comprise 6 per cent of all taxpayers. They will hand over 43 per cent of all income tax and USC in 2015. High earners will cough up € 7.5 billion. Depending on whether they are self-employed or PAYE they will face marginal rates of tax of either 52 per cent or 55 per cent.
Any discussion of where marginal rates of tax might end up and how much revenue can be raised has to start from these basic facts. Tax modelling will assume some incentive and other effects from tax changes, such that when rates go up some people work less and others spend more on tax advisers. There will be negative knock-on effects for the broader economy
According to Revenue, an increase of the top rate of tax by 1 per cent will raise €225 million in a full year. But of the 433,600 people who pay the top rate, only 30 per cent earn €100,000 or more. So a lot less than €225 million will be raised by a high earners’ levy. I reckon about €130 million at most. If we are to talk serious money eye-watering increases in taxes for high earners will have to be implemented.
What will be the economic consequences of a marginal tax rate of 60+ per cent? I suspect there will be fewer high earners and plenty of visits to accountants. The economy will be smaller. And it should be noted that very few of our trading partners tax €100,000 incomes in this way.
High earners are also threatened with additional wealth taxes (we already have plenty of these). Recent data prompted left-leaning think tank NERI to conclude that new wealth taxes would not actually yield very much. No surprise there.
At the other end of the scale we have a problem with low earners. No, this is not another analysis of relative poverty levels but merely an observation of another fact: nearly 33 per cent of self-employed people earn less than €20,000 a year. (It’s actually worse than that because of the way self-employed income is recorded). That’s 82,000 members of our entrepreneurial classes making a lot less than average industrial earnings.
And because it is assumed that they must be claiming expenses not allowable for PAYE workers, they don’t get similar tax credits. This means that these lower-paid self-employed workers often face much higher effective tax rates than their PAYE counterparts.
No income tax
Some more facts: this year 881,700 people will pay no income tax at all. That’s 38 per cent of all income earners. Some 648,700 people, 28 per cent of workers, will pay neither tax nor USC.
It is an understandable imperative to “lift as many people as possible out of the tax net”. It is only right for the low paid to pay less. But we should be careful about what we wish for: cynical politicians can now ask 38 per cent of workers to vote for tax-raising polices with the not so subtle message that this will only involve tax hikes for someone else. Who says we are all in this together?
If I was a populist politician I would pretend that tax increases on high earners will have no negative economic consequences and will generate cash to facilitate handouts to anyone who votes for me.
