Are middle earners ripped off by the Irish income tax system?

Fuelled by promises from Minister for Finance, Simon Harris, about tax cuts for middle Ireland, the income tax debate ahead of the budget has taken off. So are middle earners “ripped off ”? Like most things, the answer is not completely straightforward. Here is what we know. The top line State deductions from your income are made up of income tax, the universal social charge (USC) and pay-related social insurance (PRSI). Income tax and the USC fit under one heading in that they are straight charges which go into the general exchequer. PRSI is different as it is a social insurance charge, which entitles those who pay it to benefits, such as unemployment payments and the contributory State pension. Nonetheless, for the employee what matter is the gap between what they earn and what they take home. And the tax bill that faces them if they earn a bit more.READ MOREDealing with inflation If the tax bands and credits which determine how much you pay are not adjusted for wage inflation each year, then you pay a small bit more proportionately to the exchequer. This is because people can get pulled into the tax system for the first time or they could face paying some, or more, of their income at higher tax or USC rates.Analysis in the Tax Strategy Group Papers drawn up by civil servants ahead of the budget and published last week shows that the changes in bands and credits between 20020 and 2025 more or less kept pace with inflation, though no more than that. So the income tax burden remained constant over that period. However this year there was no income tax package and so the real income tax burden has risen in 2026. [ Ireland’s Potemkin budget: figures belong in the fiction section of the libraryOpens in new window ]Adjusting the income tax system for wage inflation next year is estimated to cost just over €1 billion- and so this would account for a large proportion of the €1.5 billion proposed tax package.The comparisons The Organisation for Co-operation and Development (OECD) Taxing Wages report the annual comparator of income tax and social insurance across the industrialised world, provides enough information to allow both sides of the income tax debate to support their point of view. The top line is that income tax and social insurance (PRSI) here are, combined, in line with the OECD average in terms of those on average wages. A single employee on average earnings (€60,000) pays just over 25 per cent in tax and PRSI, the same as the OECD average. At earnings of around €100,000 our single earner pays 35.4 per cent of income in tax and PRSI Two earners with two children are also close to the average, paying 17.4 per cent versus an average of 18.9 per cent. Here the OECD figures also take account of State payments, such as child benefit. But of course there are twists and turns in the argument. A key one is that income tax is relatively high in Ireland, taking 21 per cent of the average salary compared to an OECD figure of 15.5 per cent. In contrast PRSI payments in Ireland, at 4.1 per cent, is below the 9.6 per cent average of social insurance payments across the OECD.[ Adjusting income tax bands and credits for inflation would cost more than €1bn next yearOpens in new window ]Here we get into arguments about what people receive in return for their social insurance – generally more in other Northern European countries, for example, which typically have higher contribution rates.Different income levels In broad terms, lower income people pay relatively less tax in Ireland, but this is made up for at higher income levels. This is the result of a series of policy choices, including – for example – USC reliefs over a number of years, which have lifted the level at which the USC applies and thus relieved the burden on lower earners and removed many from the tax net entirely. This reversed one of the reasons for introducing the tax after the crash, which was widening the income tax base.If we look at our single employee on two thirds average earnings – around €40,000 – they pay 16.1 per cent of income in tax and social insurance (PRSI) versus an OECD average of 20.7 and an average of 24.1 per cent in European countries. We saw earlier the comparison at average full-time earnings of around €60,000 (The OECD adjusts the level to adjust for purchasing power across different countries but this is its base average figure for Ireland). What size does your pension actually need to be for a comfortable retirement?The picture changes as wages rise. At earnings of around €100,000 our single earner pays 35.4 per cent of income in tax and PRSI versus the OECD average of 30.3 per cent and 34.8 per cent among European countries. For married people the Irish system compares more favourably. A married couple both on average earnings with two children pays 25.1 per cent in tax and social insurance in Ireland versus an OECD average of 23.8 per cent and 27.4 per cent in European countries. Lower income married couples generally pay a bit less than their international counterparts. A married couple both earning the average wage pay around 25.1 per cent in tax and PRSI compared to an OECD average of 23.8 pr cent. Again, if we look at purely income tax and exclude social insurance, payment levels tend to be higher in Ireland. The OECD finds that the Irish tax system is among the most progressive – in other words the gap between the burden on higher and lower earners is high in Ireland. [ Harris expects ‘intense engagement’ in Government over tax package for Budget 2027Opens in new window ]The marginal rate The marginal rate is the rate which applies to an additional euro of income that you earn. For many lower and middle earners it is just over 46 per cent in Ireland. If you earn more than €70,000 then you move into the higher USC rate and your marginal tax rate is around 52 per cent – creeping slightly higher as PRSI rate nudge upwards. For self-employed people earning over €100,000 the marginal rate climbs to 56 per cent due to a USC surcharge.Marginal rates are generally higher in Ireland and kick in at relatively low levels – across the OECD, average marginal rates range from around 42 per cent to 46 per cent, though in Europe rates just over 50 per cent are more common.Marginal rates are seen to be important economically as they influence people’s incentives to work longer hours, take a higher paying job or even return to the workforce after a period away. The relatively high marginal rate on average incomes in Ireland is the reason why there is such focus on increasing the income level at which the higher 40 per cent income tax rate kicks in. The policy issues How to tax and spend is a core responsibility of the political system. Recent years have seen spending soar in Ireland, fuelled in large part by rising corporate taxes. We have seen how the Irish income tax system compares – generally generous to lower earners and families – taking into account payments as well as taxes – but with higher burdens up the earnings ladder and relatively high marginal tax rates. This means what might be defined as middle/higher and higher earners here pay a lot of the total tax. The top 10 per cent of taxpayers “units”- including jointly assessed couples – earning over €109,00 pay 47 per cent of all income taxes.Remember, too, that income taxes are just one of the ways the State takes money. Indirect taxes like VAT tend to be relatively high in Ireland. Taxes on property and wealth, on the other hand are low. Many other countries have water charges. And so on.How could the tax burden on middle earners be cut? In a number of ways. First, the system could be restructured to take a bit more from lower earners. Given the cost of living crisis, this looks unlikely. An increase in property taxes looks unlikely. Second, more tax could be raised elsewhere – for example from wealth or property, or VAT Given the debate over inheritance tax, where reductions are promised, and the small increase in revenue from the reform of the local property tax, this looks unlikely, too. Higher indirect taxes would push up prices further. But the cut last year in VAT on parts of the hospitality sector was a clear decision to direct tax relief here, rather than to income tax payers.Third, the Government could cut spending growth, which is the highest in the EU. While there is significant debate about the efficiency of Government spending and overruns on high profit projects, there is, right now, no larger political party calling for this to happen. The Progressive Democrats were the last party to campaign on a specific lower spend/low tax agenda. Fourth, the Government could use some of the budget surplus to cut taxes. The Fiscal Council, the Central Bank, the ERSI and the Department of Finance itself all warn, however, that this surplus turns into a deficit if potentially volatile corporate taxes are deducted. The last time income tax was slashed in the early 2000s, Ireland ended up with a tax base which was undermined by a property crash. A big reversal in income taxes then followed.In short, there are options to pay for a lower income tax. But they all require political choices and trade offs.