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December 08, 2010


Ronan L

Hi Michael,
Good post. Out of interest, would you favour a flat rate tax on anyone earning over, say, €250,000 (seems to be the cap people are talking about these days)? Would presumably make the system a lot harder to game.

And if so, what rate would you use? I had been working off a 33% income tax flat rate, so that we are sure they pay more even in percent than any other income group, but looking at the above, one would need to work in the USC. 40% flat rate?

Mark Brennock

Hi Michael

This is very striking. Just to be clear, have you factored in the abolition of the PRSI ceiling? You probably have but just to be sure.....

Michael Taft

Ronan - actually haven't given much thought to a flat-rate at the top. However, I think this touches upon a point that is constantly missed out (though I know that you have addressed this); namely, the benefit that a greatly simplified and transparent tax system would have on income distribution, burden sharing and marginal tax rates.

Take the Income levy (now gone): it had the great advantage of levying all income with none of the reliefs allowed under income tax, PRSI and Health levies. Therefore, at a low rate it took in quite a bit of money. It remains to be seen whether the new Social Charge follows this base.

Another way of addressing this is to look at the total amount of personal income in the economy: the CSO estimated it to be €123 billion in 2009 while income tax took in something like €15 billion (off the top of my head). So, an effective tax rate of 12 percent.

If we did an exercise – exposed all income to tax (removed every tax break on the books; a tabula rasa if you will) and then worked backwards. We’d allow a personal credit of course and exempt social welfare income (which would be caught by the credits anyway). Then we would work in a progressive schedule. Though we might knock about thresholds, rates, etc.; one thing’s for sure – we’d get a whole lot more at rates significantly less.

If there were subsidies which were considered socially just (housing support, child income support, pension support, etc.) they could be delivered through social transfers which would be taxed, thus locking in the progressivity of the system.

Then we could work up social insurance, property and capital taxes, a proper local government tax, etc.

The advantage of this approach would be to restore credibility, transparency and consistency to the system – though we’d have to factor in the unemployment costs of redundant tax accountants and lawyers.

A long way of saying that rates sans all the reliefs – which for the most part go to benefit higher income groups – are better if they are clean and transparent. The closer we can bring the effective tax rate closer to the nominal rate, the better off we would be. As to whether the top rate should be 33 percent or 40 percent, I wouldn’t want to say at this point but somewhere at that level (as an effective tax rate) would seem reasonable.

Michael Taft

Mark - the examples I worked up are based on Schedule D taxpayers. They didn't have a PRSI threshold to abolish. Previously, they paid 3 percent on all income; the budget increased this to 4 percent.

The reason I focused on this group is that, according to the Revenue Commissioners, Schedule D taxpayers dominate at the higher income levels (75 percent of all income earnerd above €150,000 is reeived by these taxpayers - PAYE eaners take only 25 percent; though these proportions might have changed somewhat in the last couple of years).

As for high earning PAYE taxpayers - someone on €500,000 would find their net income reduced by 1.9 percent. This is still considerably less than low-average income earners.

I'd just make this point - most millionaires are not employees.


What year are you getting your 75% figure from?

If it's a pre-bust year, then there's a good chance that many, maybe even most, of those non-wage earning millionaires were in the property development business and haven't made anywhere near that kind of money in the last two years. Is there any way of getting more up to date figures?

Antoin O Lachtnain

This is a scandal. How could they have missed this? What drugs were they on?

Michael Taft

Denito - the only figures I have is from the ESRI which gives a global figure for non-wage income. In 2007 it stood at €15.4 billion. They project that by 2011, this will rise to €18.8 billion. This income did fall in 2009 - but regained growth this year. It would be a mistake to think that all those taking income through non-wage were/are property developers. In numerical terms, they probably make up a small segment. It would be helpful to get a breakdown of income per relevant capita - but that isn't available. Hope this helps.

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