ANALYSIS:Irish tax system has become less 'progressive' as a result of the income levy, writes LAURA SLATTERY

THE THORNY issue of who pays what in income tax, who should pay what in tax and who’s getting away with not paying all that much tax will be reignited next Wednesday when Minister for Finance Brian Lenihan presents Budget 2010 to the Dáil.

The graphic opposite, jam-packed with statistics provided to The Irish Times by the Department of Finance, shows how your gross income currently relates to both the share of total tax paid and the share of the income levy.

At the bottom end of the income-earning scale are the tax cases in the income range of €0 to €40,000 per annum.

This represents 60 per cent of tax cases.

However, this group takes home just 26 per cent of gross income.

They pay 6.5 per cent of the total tax paid, with the figure dragged down in part because many tax cases at the very lowest end of the income scale will not be liable to any tax.

(It is important to note that “tax cases” do not always represent individuals but may mean a married couple treated as a tax unit).

In the second lowest income range, those tax cases in the €40,000-€60,000 bracket, the difference between this group’s share of gross income and the total tax paid narrows considerably. But it could still be argued that this income range receives some benefit from the partially “progressive” nature of the Irish tax system.

“Progressive”, in this context, is not really a value judgement, but refers to the concept that someone on a high income should pay a higher rate of taxes than a person on a lower income – a progressive tax, according to the Commission on Taxation’s definition, “takes a higher percentage of income as income rises, so that high earners pay a higher proportion of their incomes than low earners”.

The Irish tax system has become less progressive over the past year as a result of the income levy.

Note how in the two bottom income groups, the share of the income levy that is paid is much closer to the share of gross income compared to the total tax paid.

Although there are three rates of income levy, with higher rates kicking in over and above the €75,036 mark and again over €174,980, it is still a “flatter” tax than general income tax.

There are reasons why the Government has gone for flat levies over the past 15 months. It’s easier.

The Commission on Taxation states that flat taxes may be “highly efficient to implement”.

A flatter system, according to some economists, is also more likely to spur a recovery.

The commission, for example, noted that it was “arguable that, looked at solely from the point of view of encouraging economic growth, a flatter system would be preferable”. (Of course, a growing economy and a fair society are not the same thing).

In the €60,000-€100,000 income group, we find that those earning 24 per cent of total gross income (some 14 per cent of cases) pay almost 27 per cent of total tax.

Meanwhile, in the €100,000-€200,000 income range, those earning 17 per cent of gross income pay 25 per cent of total tax, although they represent just 5 per cent of the tax cases.

In the two top earning groups the share of total tax paid outweighs the share of gross income even further.

So what happens next?

Perhaps not very much – the Government’s €4 billion-raising budget may contain just €1 billion in tax increases; if the carbon levy is introduced it is feasible that very little will be done to income tax.

On the other hand, there are two main possible measures that could represent a change in direction.

In November, Lenihan told the Dáil that “having 50 per cent out of the tax net is not viable if we want to fund the range of services that we expect”.

The other persistent “will-he-won’t-he” involves the mooted third rate of income tax. According to the Irish Congress of Trade Unions, a new top rate for high earners must be part of the budget for it to be fair.

Even the Commission on Taxation, which comes from an ideological position of keeping the overall tax burden low, believes that a three-rate income tax structure “has merit” and “could increase progressivity”.

The counter-argument is the notion that levying higher taxes on the wealthiest people in the country would somehow “impact on the incentive to work and enterprise”.

Of course, the pressure on the tax system to redistribute wealth would be lower if the massive gaps in income inequality did not exist in the first place.