This note examines the latest OECD data (Taxing Wages 2017) on the progressivity1 of the Irish income tax system in comparison with other OECD countries. It finds that according to OECD measures the Irish system is the most progressive and that taxes in Ireland are relatively low on those with average incomes and below.
Ireland has the most progressive income tax system (including employee social insurance contributions) in the EU. The tax paid by a single person on two-thirds average earnings(average earnings are just under €35,600) is the fifth lowest in the OECD (out of 35 countries) after Mexico, Chile, Korea and Israel. If raised to Danish or German levels, a single person in Ireland would pay over €5,000 more in tax on an income of about €24,000.
The tax paid by a single person on average earnings is the 28th highest in the OECD. A single worker on an average income pays about €14,500 in income tax and social insurance contributions in Belgium compared to over €6,830 in Ireland a difference of over €7,650.
The tax paid by a single person on one and two-thirds average earnings (€59,400) pays €18,660 in tax which is slightly above the OECD average. A person at the same income level in Belgium would pay €28,800 in tax- just over €10,000 more.
A major reason for the relatively low direct tax burden in Ireland is that PRSI is lower here. In many higher tax countries PRSI funds pay-related unemployment, pension and health benefits while the Irish system provides flat-rate benefits only. Irish employees (and their employers) have to fund supplementary pensions separately. For example, Irish employees pay about €2 billion (after tax relief) towards their pensions annually. In many higher tax countries, these are funded through the tax system.
If we look at the tax payable (excluding PRSI), the tax paid by a single person on one and two-thirds average earnings is the 10th highest in the OECD .
Marginal Tax Rates
How do marginal tax rates in Ireland compare with other countries ? For a single person on two-thirds average earnings, the marginal rate in Ireland is 29.5 per cent compared with an OECD average of 32.1 per cent. The UK rate is 32 per cent. We are the 20th highest in the OECD at this level of income where rates range up to 54.6 per cent found in Belgium.
At average earnings a single person in Ireland faces a marginal tax rate of 49.5 per cent: the third highest in the OECD (average 36.2 per cent). Again Belgium is the highest at 55.9 per cent while the UK rate is 32 per cent.
At one and two thirds average earnings, the marginal rate of tax in Ireland (49.5 per cent) is the 9th highest in the OECD and above the OECD average of 43.4 per cent. Sweden is highest at just over 60 per cent and the UK is at 42 per cent.
Compared to other OECD countries
- The level of direct tax paid in Ireland is low particularly for those below average earnings
- Employee PRSI in Ireland is less than half the OECD average2
- The Irish system is the most progressive in the EU
- The top marginal rate is not particularly high but it applies at a relatively low level of income
Source: Taxing Wages 2017, OECD 2017
1 The measure of the progressivity of the tax system is obtained by comparing the tax due by a single person on 67% of average income with that payable on 167% of average income. Tax includes income tax, universal social charge and employee social security contributions.
2 In many higher tax countries PRSI attracts pay-related unemployment, pension and health benefits while the Irish system provides flat-rate benefits only