Changes to the income tax code in recent budgets “echo the motivations” of budgets in the run-up to the collapse of Ireland’s public finances in the late 2000s, the Central Bank of Ireland has warned, and might similarly weaken the “robustness” of income tax receipts.
However, income taxes in the Republic remain “highly progressive” compared with other countries, and the Irish taxpayer pays a relatively high average rate compared with other OECD (Organisation for Economic Co-operation and Development) countries.
Published on Thursday, the insights are contained in a new research article, written by economist Professor David Cronin, an adviser in the Central Bank’s economic analysis division.
According to the research, there has been little change in the average tax rates for single-person taxpayers at both ends of a €10,000 to €300,000 annual earnings range since 2013.
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Most average tax rates have changed by less than one percentage point in that time, which covers the tail-end of the post-2008 recession as well as the Irish economy’s subsequent recovery.
The Central Bank found that “in the round” Irish budgetary policy since the 2008 financial crisis has not undermined income tax receipts, a sharp fall in which was a “contributing factor to the deterioration in the Irish public finances” during the late 2000s.
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“In particular, average tax rates at higher incomes, from where a large share of income tax is collected, have seen little change,” it said.
Income tax here is also “highly progressive”, the Central Bank said, and is higher relative to gross wage earnings than the OECD average and that of its 22 European Union members, indicating “that Irish taxpayers pay a relatively high average rate of income tax”.
However, the report concludes that recent changes to income taxes aimed at reducing the tax burden on lower and middle-income earners “seem to echo the motivations of budgets from 1999 to 2007″.
The Central Bank warned that “past experience” in recent Irish economic history “highlights the risks of discretionary reductions to the tax base and effective income tax rates in general, or to readjusting the tax code excessively across the income distribution in favour of the lower paid”.
Actions such as these can “weaken the robustness of income tax revenues,” it said, adding that tax policy generally needs to take account of the “strong growth” in government expenditure in recent years.
