Taxing Labour: Beyond “too much” or “too little”

Regan_Aidan HDLouiseThe question of taxing labour income continues to elicit fierce debate in Ireland. Much of this has centred on the question of whether Ireland has a “high” or “low” income tax regime. Confusingly, there has been a lack of consensus on the fundamental question: do workers in Ireland, relative to workers in other countries, pay more or less income tax? In this blog post Dr. Louise Caffrey and Dr. Aidan Regan argue that public debate needs to shift away from the narrow question of how much workers pay, toward a discussion on what people actually get in return for their tax contributions.

Disagreement on whether Ireland is a high or low tax regime persists because it is possible to calculate the answer in multiple ways. It is usually a debate on measurement. For example, it makes a big difference whether income tax is measured as a percentage of Gross Domestic Product (GDP) or of Gross National Product (GNP); whether we calculate only the percentage of workers paying any tax; or whether we calculate the percentage of income paid in tax at various income levels. In addition, it is possible to define the concept of “tax” in different ways: strictly counting only income tax and/or counting income tax plus social contributions such as the Universal Social Charge [USC] and Pay Related Social Insurance [PRSI].

Generally, the calculations adopted have been convenient to the arguments those formulating them wish to make. For example, IBEC (the employers group) suggest their calculations prove Ireland is a ‘high’ tax regime, while the Think Tank for Action on Social Change (TASC), argues that their calculations demonstrate the reverse.

We urge a fundamental reconceptualization of this debate in two directions. First, we argue that debate on this issue should be grounded in the actual lived experiences of residents. In this vein, we suggest a means to calculate contributions that better reflects the lived experiences of workers and is more easily understandable in public debate. Second, we argue that it is necessary to move away from the simplistic question of whether people in Ireland pay too much or too little tax, to focus on what people actually get in return for the tax and contributions they pay.

The graph and table below present the percentage of income currently paid by individuals in income tax and social contributions (USC and PRSI) at various salary levels in Ireland. For comparison, we have provided the same calculations for England.[i] This comparison inevitably excludes important nuances. For example, it excludes deductibles and is a measure of individuals and therefore excludes tax breaks for married couples. Furthermore, we have only made a comparison with England, Ireland’s nearest neighbour (and where so many Irish citizens work). This is by no means an exhaustive exercise and other comparisons could also be made, with varying results. Despite these limitations, we suggest that this measure on income tax provides a useful starting point for the discussion we develop below.

Graph 1: Percentage of Income Paid in Tax & Contributions in Ireland and England in May 2015

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Table 1: Percentage of Income Paid in Tax & Contributions in Ireland and England in May 2015

Income ENG IRE Difference
£10000 (€13,910) 2% 2% 0%
£15000 (€20,865) 11% 11% 0%
£20000 (€27,865) 17% 16% -1%
£25000 (€34,776) 20% 20% 0%
£30000 (€41,731) 22% 25% 3%
£40000 (€55,642) 24% 31% 7%
£50000 (€69,552) 27% 35% 8%
£60000 (€83,463) 28% 38% 10%
£70000 (€97,372) 32% 40% 8%
£80000 (€111,284) 33% 41% 8%
£90000 (€125,195) 34% 43% 9%
£100000 (€139,105) 35% 44% 9%
£200000 (€278,211) 42% 48% 6%
£300000 (€417,312) 44% 49% 5%

As these figures demonstrate, below an income of £30,000 (€41,731) workers in Ireland and England pay roughly an equal percentage of their income in tax and contributions, with Irish workers paying 1% less at £20,000 (€27,865). On incomes above £30,000 (€41,731) workers in Ireland pay a significantly higher percentage of their income. Workers in Ireland pay 3% more than those in England at £30,000 (€41,731) and between 8-10% more than their counterparts in England when earning between £60,000 (€83,463) – £100,000 (€139,105). Overall, middle to high-income earners in Ireland pay more labour tax than their equivalent in England.

As we set out at the beginning of this article we wish to encourage a shift away from concentrating on how much tax people pay, to a broader consideration of what people actually get for the tax they contribute. This is much more difficult to measure as it implies comparing the quality of services. In both countries, tax pays for multiple public services, including a police force, roads, defence, education and subsidies for public transport. It also provides a financial safety net in periods of unemployment, low pay and in retirement. While there are certainly differences in provision between the two fiscal regimes one of the most striking differences is in healthcare.

Residents in Ireland ordinarily pay for GP and dental appointments. It was recently estimated that the average fee to see a GP in Ireland was €51 and €61 for a dentist. Prescription charges are capped at €144/month per household. Those who are unemployed or on a low income may be entitled to a ‘Medical Card’ which provides free GP and dental visits and prescriptions if earning less than around €10,000/year and to free GP visits if earning less than around €14,500/year.

By contrast, no one needs to pay to see a GP in England and everyone’s prescriptions are capped at £8.20 per prescription. This is a universal provision. Certain groups of people are also exempt from paying for prescription. This includes people under the age of 16 (or 18 if in full-time education) those aged over 60, pregnant women and people with certain life-long conditions e.g. diabetes. Additionally, prescribed contraception (e.g. the pill, IUDs etc.) is free for everyone. While there are fees for NHS dentistry, these are significantly capped.

In terms of public hospital care: Irish residents are charged when attending Accident & Emergency (€100 unless they have previously paid for a GP referral) and as in-patients (€75/day to a max of €750 in 12 months). Some people are exempt from payment, for example those on Medical Cards. There are no charges for public hospital care in England.

In the most recent British Social Attitudes survey only 15% of people said they were dissatisfied with public health care. It is therefore unusual for residents in England to avail of private health insurance. In 2014 roughly 11% of the UK population had some form of private medical insurance. However, just 18% of these individuals had taken out an individual subscription; 82% of policies were employer-based. By comparison, in 2013 43% of Irish residents had private health insurance. To our knowledge there is no public data on how many employers pay for the health insurance of their employees, although large US MNC’s tend to do so.

Arguments that rest simply on the question as to whether Irish workers are paying too much or too little income tax distract from the wider issue of what can be achieved through tax and social contributions. Ireland has choices about the kind of society it wants to be and the debate needs to reflect this. Our comparison with England demonstrates one example of what can be achieved: it is possible to provide a universal health system, with high levels of public satisfaction, in an income tax system that does not over-burden workers. While large-scale institutional change may seem like an insurmountable task it should be remembered that Britain did not always have the NHS. It was established in 1948 against a backdrop of opposition from the Church, local authorities and much of the professional medical profession, including doctors. But with sufficient political will it was established.

Instead of focusing on whether Irish workers pay too much or too little, policymakers and politicians should urge a debate around what people actually get (and want) in return for their contributions. For this to happen we need greater transparency about public service provision: clearly showing what individual tax contributions pay toward, where this money comes from, and what exactly it is spent on. In particular, the public needs a clearer picture of how their income tax sits in relation to other forms of tax and contributions such as employer contributions, capital and corporate taxation.

[i] The conversion of Pound Sterling to Euro uses the exchange rate on 30/05/2015: 1GDP= 1.39104 Euro. The calculation for England includes National Insurance.

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