Effective tax rates on the squeezed middle are much lower than generally perceived

Brendan Burgess

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A lot of media commentary is on the fact that a person hits the tax rate of 40% at a salary of €33,800 which is less than the average industrial wage.

But this is nonsense.

Here are the effective tax rates for people earning €40,000

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I have left out PRSI as people on €40,000 a year pay €1,600 a year, which is great value for the pension and other benefits which that contribution earns them.

But even if you include PRSI, a married man with two children, earning €40,000 pays an effective tax rate of under 5%.

The effective tax rates are reduced even further by tax relief on pension contributions, private health care and medical expenses.
 

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Hi Brendan, what's the effective tax rate on that portion of their earnings over €33,800?

That's how I would have always interpreted "hitting the tax rate".
 
You are missing the point - What you need to look at is the proportion of your income you pay in tax - that is the effective tax rate.

It's less than 20% for a single person earning €40,000 and it's 0% for a married man with two children.

Brendan
 
Brendan,

I think it would be better to compare apples with apples.

(a) Single folk do have a marginal rate of income tax of 40% in respect of taxable income in excess of €33,800

(b) Their effective/composite tax rate is much lower, as you have pointed out.

I can accept if you feel that it is nonsense to highlight (a) without sufficiently referencing (b). If this is your position, the inverse should follow also! ;)
 
Maybe the word "nonsense" is too strong. But the rate is pretty much irrelevant.

The effective tax rate is the key rate.

You rarely hear anyone talking about it. I guess that this because effective tax rates for the lower paid and middle earners are so much lower in Ireland.

Brendan
 
Is it reasonable to add back benefits when calculating an effective tax rate?

I think that it is.

Tax is a straight payment from the tax payer to the Exchequer.

Child benefit is a straight payment back from the Exchequer to the tax payer.

Also, it is the practice of the OECD when doing comparisons to treat child benefit as a negative tax, so that fairer comparisons can be made with countries who provide tax credits for children instead of child benefit.


It's also important to highlight to people who complain about high taxes on middle earners that they get most or all of it back in benefits.


Brendan
 
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If I'm on 30,000 a year, or near to the limit, it seems rather important to me what tax rate will be applied to any additional earnings. In that sense, people feel they are hitting the top tax rate too early. Where's the incentive to increase your earnings?
A worker on €25k earns 1.4 times the salary of someone on €18k but pays over five times the amount of tax. Do they get 5 times the benefits back?
Someone on €75k earns 4.2 times what someone on €18k earns and pays 44 times the tax.
Do they get 44 times the benefits back?
(figures from Irish Independent)

That's why the middle feel squeezed because the squeezing gets tighter with every extra 1000 you earn. The returned benefits do not compensate for the hit on those additional 1000s for example child benefit is the same at 20k as 30k as at 50k.
If the middle gets squeezed so much, why bother struggling to get there?

I think effective tax rate on overall income is a separate point which is important, but not in the context of a conversation about the squeezed middle.
 
Brendan

Your point about the margin rate and the effective rate is well made.

But I think the point you are actually illustrating is that a high proportion of tax paid falls on a narrow enough group.

The single person paying 22.50% on €40k.
It's 28% on €50k
It's 31.5% on €60k
 
Brendan,

yes, MTR are too high on average incomes.

YET

average tax rates on some earners are too low.


My parents earn 50k, pay under 10% effective direct taxes - way too low for the benefits they get.
 
PRSI is a tax - it's not optional and the benefits are pretty minor. Many (most?) people will never claim unemployment benefit; & people who have never paid PRSI can still claim the dole and the non-contributory pension.

Leaving that aside, whilst you're right about the effective tax rate, you can't ignore the marginal rate. Someone get paid an extra €100, and €52 of that goes to the government even though they're on a relatively modest income, that's tough to take.
 
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People don't just start to pay the high tax rate €34k, they also lose, or have just lost, a raft of benefits.
To name a few:
* Family Income Supplement (€27k)
* Social housing (€27k-€39k depending where you live)
(47,000 new homes to be built in nice mixed schemes + can be bought by tenants at 60% discount to market value.)
* Medical card (€27k)
If you add on the cost of kids (€270k according to one survey last year), middle earners who try to earn more to pay their way rightly feel they can't cope. Now Zappone wants to restrict childcare relief to €48k joint incomes - i.e. €24k for each parent.
There needs to be a more graded system of benefits and less tax on lower-middle incomes.
But middle income workers are too busy working or dropping kids to creches to complain, strike or go on Joe Duffy, unlike pensioners, farmers, public sector unions and the constituency of the Anti-Prosperity Alliance.
 
OK, let me put it another way.

Which would you prefer, if you were earning €30,000?
An effective tax rate of 10% but a marginal rate of 40%
or
An effective tax rate of 20% but a marginal rate of 20%?

Personally, I would prefer to see 10% of my income going in tax, rather than 20%, even if the last euro had been taxed at 40%.

Brendan
 
Not so sure its appropriate to include benefits received when looking at a tax payers affective rate ... surly CB is matched with expenses related to raising children?
 
I think that it is.

Tax is a straight payment from the tax payer to the Exchequer.

Child benefit is a straight payment back from the Exchequer to the tax payer.

Also, it is the practice of the OECD when doing comparisons to treat child benefit as a negative tax, so that fairer comparisons can be made with countries who provide tax credits for children instead of child benefit.


It's also important to highlight to people who complain about high taxes on middle earners that they get most or all of it back in benefits.


Brendan

I don't see how you can justify adding back the value of child benefit, since it's a universal benefit and therefore the person earning 40,000 Euro is entitled to the same amount of child benefit as they would be if they were earning zero. It is a subsidy for having children, not for being a taxpayer earning a particular amount of money.
 
The reason why it's called the squeezed middle is that...

You got above 27,000 and starting losing benefits.
You get to 33,000 and start getting hit with higher rate of tax.

The additional benefits you get > 27,000 do not compensate for the benefits you lost.
At < 27,000 you were getting child benefit and medical card.
At > 27,000 MED1 refunds are 20% of your medical expenses, whereas before you were getting 100%.

I think the calculation needs to be done on what benefits are lost at 35,000 versus 25,000 balanced against the additional income, minus tax.
 
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Hi Brendan,

I would still feel that Child Benefit is not a " Negative Tax " and shouldn't be added back when looking at effective tax rate.
Child Benefit to my mind is a reimbursement to parents for the cost of raising children ... thus as a reimbursement no net benefit has accrued to that couple from receiving CB. It is the responsibility of all members of society to contribute towards the cost of raising the next generation.

Codogly.
 
Hi Codogly and others

I understand your points of view. But we used to have tax free allowances for children, and no one would have suggested that they don't reduce the effective tax rate. The OECD adds them back so that fair comparisons can be made.

But let's ignore them. The effective tax rate for a married couple on €40,000 is still just 8.9%

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Hi Brendan,

I would accept the 12.9% effective rate ( realistically no real benefit is derived from paying PRSI ... looking down the road I can see us A1'ers getting robbed in terms of state pension ).

Codogly
 
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