Irish Economy
Benchmarking income tax to attract Irish emigrants home - spin or substance?
By Michael Hennigan, Finfacts founder and editor
Feb 6, 2015 - 6:40 AM

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Michael Noonan, Irish finance minister

The Government is considering benchmarking income tax to attract Irish emigrants home according to a leak to the Irish Times as part of the publicity chorography leading up to the new "spring statement" on the economy that will be issued in April.

Keep in mind that the focus of ministers is on income tax and the Universal Charge not on giving a commitment on keeping overall taxes down. Stealth taxes and other levies remain on the table.

The leak to Fiach Kelly of the Irish Times is that "the tax system would be benchmarked against countries such as the UK, Australia, US and Canada."

It's odd that the UK, likely the destination of the majority of emigrants, is not included.

This is like something that would be produced by an "ideas" competition and even this line from Fiach Kelly in referring to the "tax system" is wrong.

The overall marginal income tax rate + the Universal Social Charge and PRSI, is at 51% and the "benchmarking focus would be on middle-income groups, which Michael Noonan, finance minister, has defined as those earning between €32,800 and €70,000."

Last October in Budget 2015, Noonan announced the removal of restrictions on the 30% income tax + benefits  discount that is available to people who are hired from overseas.

The Special Assignee Relief Programme (SARP), an income tax relief for individuals assigned or contracted to work in Ireland was introduced in 2012 for overseas employees allowing them to disregard 30% of income between €75,000 (lower threshold) and €500,000 (upper threshold) for income tax purposes.

In Budget 2015 the upper threshold was abolished, regardless of the year of arrival, and some restrictions on tax residency were also removed.

Budget 2015 also reduced the requirement to have been employed abroad by the same employer for 12 months prior to being assigned to Ireland to 6 months in order to align with recent changes to employment permit legislation.

There cannot be discrimination between returning Irish and emigrants from the rest of the EU while creating a special status for all immigrants does not seem viable.

This appears to be simply spin and the labelling dovetails the aspiration for lower rates with some an economic dressing.

Let's see how benchmarking with Australia would work - there is no employee or employer social security (the equivalent of Irish PRSI) and if the benchmarking was extended to general taxation: 10% GST (General Sales Tax) compares with 23% VAT (Value-Added Tax).

The price of a new car in Ireland is about 30% above the EU average and the cost of childcare for 2 full time workers on average earnings  + 2 children in Ireland = 24% of net income; EU average =10%  and Australia at 18%.

Source: OECD

Australia

The Australian social security system is funded from general taxation revenue and not from employer or employee social security contributions.

The OECD’s annual Revenue Statistics report found that the tax burden in Australia increased by 1 percentage point from 26.3% to 27.3% in 2012. The corresponding figure for the OECD average was an increase of 0.4 percentage points from 33.3% to 33.7%. Since the year 2000, the tax burden in Australia has declined from 30.4% to 27.3%. Over the same period, the OECD average fell from 34.3% to 33.7%.

Irish tax burden in 2013 in GNP terms similar to UK's; Down from 2000

Australia ranked 28th out of 34 member countries in terms of the tax to GDP ratio in 2012 (the latest year for which tax revenue data is available for all OECD countries). In that year Australia had a tax to GDP ratio of 27.3% compared with the OECD average of 33.7%.

The 2011 average wage level was AUD 73 494 (€50,0000) while  data published by the CSO last September showed that Irish average earnings in 2013 were at €35,830.

Allowing for price differences, the per capita standard of living based on consumption of public + private goods and services is 17% higher in Australia. [pdf].

The Australian standard GST rate of 10% is one of the lowest in the OECD. The average VAT/GST standard rate in the OECD was 19.1% on 1 January 2014, up from 17.6% on 1 January 2009

Tax rates 2014-15

The following rates for 2014-15 apply from 1 July 2014.

Taxable income

Tax on this income

0 – $18,200

Nil

$18,201 – $37,000

19c for each $1 over $18,200

$37,001 – $80,000

$3,572 plus 32.5c for each $1 over $37,000

$80,001 – $180,000

$17,547 plus 37c for each $1 over $80,000

$180,001 and over

$54,547 plus 45c for each $1 over $180,000

The above rates do not include the Medicare levy of 2%

Foreign residents

If you are a foreign resident (does not apply to permanent foreign nationals) for the full year, the following rates apply:

Tax rates 2014–15

The following rates for 2014–15 apply from 1 July 2014.

Taxable income

Tax on this income

0 – $80,000

32.5c for each $1

$80,001 – $180,000

$26,000 plus 37c for each $1 over $80,000

$180,001 and over

$63,000 plus 45c for each $1 over $180,000

Foreign residents are not required to pay the Medicare levy.

The above rates do not include the Temporary Budget Repair Levy. The Temporary Budget Repair Levy is payable at a rate of 2% for taxable incomes over $180,000.

The tax wedge – a measure of the difference between labour costs to the employer and the corresponding net take-home pay of the employee – is calculated by expressing the sum of personal income tax, employee plus employer social security contributions together with any payroll tax, minus benefits as a percentage of labour costs.

Employer social security contributions and – in some countries – payroll taxes are added to gross wage earnings of employees in order to determine a measure of total labour costs. The percentage of labour costs paid in income tax varies considerably within OECD countries.

The lowest figures are in Chile (zero) and Korea (4.6%).  The highest values are in Denmark (35.8%), with Australia, Belgium and Iceland all over 20%.

The percentage of labour costs paid in employee social security contributions also varies widely ranging from zero in Australia and New Zealand to 17.1% in Germany and 19% in Slovenia. Employers in France pay 28.7% of total labour costs in social security contributions, the highest amongst OECD countries. The corresponding figures are also more than 20% in ten other countries - Austria, Belgium, the Czech Republic, Estonia, Greece, Hungary, Italy, the Slovak Republic, Spain and Sweden.

As a percentage of labour costs, the total of employee and employer social security contributions exceeds 20% in more than half of the OECD countries. It also exceeds one-third of total labour costs in eight OECD countries: Austria, Belgium, the Czech Republic, France, Germany, Greece, Hungary and the Slovak Republic.

Ireland

The OECD says that the average worker in Ireland faced a tax burden on labour income (tax wedge) of 26.6% of total labour costs in 2013 compared with the OECD average of 35.9%. Ireland was ranked 28 of the 34 OECD member countries in this respect.

Some examples for Ireland are:

  • The tax burden for the single average worker decreased by 2.3 percentage points from 28.9% to 26.6% between 2000 and 2013. Between 2009 and 2013, there was an increase of 1.9 percentage points;
  • The corresponding figures for the OECD were a decrease of 0.8 percentage points from 36.7% to 35.9% between 2000 and 2013 and an increase of 0.8 percentage points between 2009 and 2013;
  • The tax burden for the one-earner couple with 2 children at the AW level decreased by 8.7 percentage points from 15.5% to 6.8% between 2000 and 2013. Between 2009 and 2013, there was an increase of 4 percentage points;
  • The corresponding figures for the OECD were a decrease of 1.3 percentage points from 27.7% to 26.4% between 2000 and 2013 and an increase of 1.4 percentage points between 2009 and 2013.

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