The squeezed middle – myth or reality? There is much talk of a group of middle earners who find their finances “squeezed” by the high cost of living. They don’t earn enough to be well off, but earn too much to qualify for many State supports. Does this stand up to scrutiny? New reports this week cast some light on how some people can, indeed, be stuck in the middle.
Income taxes
Few areas are more amenable to presenting the evidence to suit a particular case than taxes. Tax systems are complicated, they interact with social security charges such as PRSI and cross-country comparisons are notoriously tricky. We have had some interesting new research this week.
A report by the Irish Fiscal Advisory Council (IFAC), the budget watchdog, breaks down who pays income taxes in Ireland. We know the system effectively exempts many low earners due to the interplay of credits and the income tax, USC and PRSI bands. Around a third pay no income tax. At the top end the report also looks at the fast-rising contribution from higher earners, which has underpinned the surge in income tax receipts as we emerge from Covid.
But what about the middle earners – the public servants, health workers and those in sectors such as administration and manufacturing typically on €22 to €28 an hour? The report shows that this group earns 42 per cent of the wages and salaries in the economy and pays 38 per cent of the income taxes and PRSI. Given the progressive nature of the tax system and the big take from higher earners, this shows that middle earners are paying a significant amount of income tax and PRSI.
The data also shows that, like other groups, the effective tax rate paid by middle earners rose in 2021, possibly reflecting a bump up in wages. The relatively low level at which the higher 40 per cent income tax rate kicks in is a key part of the Irish tax system and ensures that for many middle earners any additional income is taxed at the higher rate.
The IFAC report also shows that it is the higher-earning groups who have done best in the years since the financial crash, with earnings rising in the largely multinational-dominated sectors much more rapidly than for middle- and lower-income groups.
Middle-income earnings have risen, just not anything like as quickly as those for higher earners. The higher-earning sectors account for just over a fifth of employees, but raked in half the total increase in wages and salaries last year.
What of the international position of middle earners? The latest OECD international comparisons show overall tax and PRSI contributions of an average Irish employee at 26.7 per cent of gross earnings, ahead of the OECD 24.6 per cent average, but slightly below the average of European countries.
But for single people on two-thirds above the average the tax take rises to 36 per cent, compared to an EU average of just under 30 per cent. Families with children do comparatively a bit better but two average earners with two children still pay 26.7 per cent of income in taxes and PRSI compared with an OECD average of 23.2 per cent.
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Interestingly, the OECD research shows that the amount employees keep from higher wages at average income levels is less in Ireland at 70 per cent than the OECD average of 86 per cent. Again this is a result of the higher income tax rate kicking in at relatively low income levels.
As a recent report from the Irish Congress of Trade Unions pointed out, the actual income tax burden – before PRSI – is a good deal heavier in Ireland. The latest figures show it at 22.7 per cent last year versus a European Union average of 14.9 per cent. Of course for employees the PRSI must be paid too – but the benefits received in return for this vary from country to country.
The ICTU argument is that the benefits in Ireland are lower than in a lot of other richer EU countries in areas such as health and childcare. And certainly big bills in these areas – notably childcare – are a significant issue for many families.
Rental supports
A new ESRI report underlines one of the key issues in Government supports – where to set income levels. If these are too low it can close off supports for many lower- to middle-income earners – on the other hand universal supports or ones set at high income levels can cost large amounts of money and not be well targeted.
The ESRI report shows that both issues apply in different parts of the rental system. Overall it does find that the system offers vital supports for many lower-income earners and greatly increases the affordability for them of renting a home. In general the affordability for those supported is thus better than those who are in the private rental markets with no supports.
However, many households have found themselves excluded from supports, despite being on modest enough incomes. A freeze on the household income limits to qualify for most State or supported housing schemes since 2011 means the share of households eligible to apply for these schemes fell from close to one half in 2011 to about a third now.
Likewise the limits on rents which are met for housing assistance payments (HAP), an increasingly important support mechanism which helps people renting in the private market, were last revised in 2017. This means HAP supports are available only for a small portion of Dublin rentals – about 7 per cent on ESRI estimates.
To complicate this, a system of rental charging for tenants which local authorities levy on those in their accommodation or receiving HAP payments varies significantly from one local authority to the next. These so-called differential rents mean that the value of the total support package varies significantly across the country, in contrast to the normal single rules which apply in most areas of the welfare system.
This has left some better-off households receiving supports and some lower-income ones not qualifying at all. And many middle earners are left unable to find a rental property either because so few are available, they do not qualify or because the rental levels do not meet HAP support levels.
The bottom line: Ireland is one of the most expensive countries in the EU to live in and so many on average incomes still find it hard to make ends meet. Targeting support at this large group is difficult, especially in relation to qualifying rules for support in areas such as housing and healthcare. Universal supports in some areas such as childcare are helping, but soaring inflation is now a real problem. It all points to big pressure on the Government in the public pay talks getting under way and in the October budget. The squeeze in the middle is getting a lot tighter.
