Hammering high earners is the easy way out

Cormac Lucey argues that accountants need to discuss one of the most unjust outcomes of Government profligacy – the over-taxing of the State’s high earners.

The UK electorate recently faced a general election where, under the leadership of an Islington Marxist, the British Labour Party was offering its most left-wing proposals for a generation. It proposed raising the rate of income tax on earnings above £125,000 (equivalent to €146,000) to 50%. With the 4% UK rate of PRSI, that would have required Britain’s top earners to pay a marginal rate of deduction of 54%. In the Republic, those of us of a right-of-centre political disposition are lucky not to have to face the prospect of barely diluted Marxism as a real policy prospect. Here, government control switches pretty seamlessly between right-of-centre Fine Gael and right-of-centre Fianna Fáil-led administrations.

That’s the theory. The reality is something very different. Down south, top earners must already face a 52% (income tax 40%, universal social charge 8% plus 4% PRSI) rate of deduction on income above €70,000. Indeed, if a person is self-employed, they face a marginal rate of 55% on income above €100,000. In terms of top tax rates, high earners in Ireland already face marginal rates of deduction in excess of 50% at incomes of around twice the national average that the UK Loony Left was only contemplating applying on incomes of about four times that average.

Largely unnoticed, the contours of the Irish tax system have changed very substantially since 2007. Income tax receipts are up €9.3 billion, or 68%, from 2007 levels. They have risen from 29% of total tax receipts to an expected 40% this year. Thirteen years ago, income tax proceeds were slightly lower than VAT receipts. Last year, they exceeded VAT receipts by 52%.

The Organisation for Economic Co-operation and Development (OECD) has concluded that Ireland has the second most progressive income tax system among its 36 member countries and the most progressive among its EU members. In other words, high earners pay disproportionately more in income tax here than in nearly every other developed country in the world.

Revenue’s Budget 2020 Ready Reckoner document reveals that the top 1% of income earners (those earning more than around €250,000) contribute more than a fifth of all income tax receipts, while the top 5% of income earners (those earning more than about €125,000) contribute more than 40% of total receipts. By contrast, the bottom 75% of income earners (those earning around €55,000 or less) contribute a mere 18% of total income tax proceeds. The top 1% lose an average of 42% of their income in State deductions while the bottom 75% lose an average of 9%.

One might accept this dramatic soaking of high earners if it was required to save the State from imminent insolvency, but the Troika left town in 2013. Large rises in tax revenues since then have been used to fund dramatic increases in State spending rather than to reduce the national debt. When the Government first officially forecast total 2018 Government spending, it expected a total spend of €60.3 billion (according to the 2014 Stability Programme Update). In reality, the Government ended up spending €76.8 billion in 2018, 27% more than its original forecast.

High earners are being soaked, not to save the State from bankruptcy or to secure minimum levels of State spending but, rather, to indulge a fiscally incontinent and gruesomely inefficient Government apparatus. It strikes me that we (as a profession) and Chartered Accountants Ireland (as a representative body) should speak more loudly about the clear errors and short-sightedness of this approach. 

Cormac Lucey FCA is an economic commentator and lecturer at Chartered Accountants Ireland.