Ireland has the most progressive income tax system (including employee social insurance contributions) in the EU and the wider OECD. The tax paid by a single person on half average earnings is the second lowest in the OECD and is less than one-thirteenth that in Denmark while the tax paid by a single person on two and a half times average earnings is the 9th highest in the OECD. At average income levels we are the 27th highest in OECD.
To reach Nordic levels of taxation everybody in Ireland would have to pay more but the increase would bear most heavily on the bottom half of the income distribution. For example, to pay the same tax as the average of the 5 Nordic countries a single person on half average earnings would need to pay an additional €3,204 per year while the corresponding figure for the single individual on two and a half times average earnings is € 1,980.
This note examines the latest OECD data on the progressivity of the Irish income tax system in comparison with other OECD countries. It finds that according to OECD measures the Irish system is one of the most progressive.
Progressivity of Irish Income Tax System
We base our estimates of the progressivity of the tax system is to compare the tax due by a single person on 50% of average income with that payable on 250% of average income. Tax includes employee social security contributions.
The data are set out below:
On this measure Hungary has the least progressive system in the OECD while Ireland has the most progressive. Ireland has the greatest absolute difference between the two examples at 32.2 % of income compared with an OECD average of 14.7 %.
Only Mexico has a lower tax burden at 50 % of average income. If the average single worker in Ireland on an income of about €36,000 paid tax at the rates applicable in Denmark, they would pay over €7,600 more in income tax and social insurance contributions.
The degree of progressivity in the tax system is, in the final analysis, a matter for political and value judgment. The fact that the evidence suggests that Ireland is an outlier does not necessarily imply that the correct course is to make the system less progressive.
[table id=28 /]