INCOME TAX:To raise an additional €2 billion from income tax, raising both rates will be required

FIGURES FROM the Revenue Commissioners showing the categories of earners who pay the most income tax illustrate the extent to which lower earners have been taken out of the tax net in the recent past.

The figures indicate that, if the Government is to get substantially more revenue from income taxes, it will have to reverse its policies of the past decade and begin returning the low paid to the income tax net.

Because of the marked inequality in the distribution of income in the State, the low paid constitute a high percentage of all income earners.

The highest earners in the State, though they constitute a very small group in percentage terms, earn a significant amount of the total income given their numerical size. However, income tax hikes directed at the State’s highest earners are unlikely to raise all the extra tax the State appears to need.

The Revenue’s best estimate for 2008 is that the 764,615 earners who earned less than €20,000 paid no income tax at all. These earners represent 32.31 per cent of all income earners.

When credits are taken into account, PAYE workers do not start paying tax until they have earned €18,300.

The equivalent figure in the UK is less than £7,000 (€7,827).

The next 30.34 per cent of all earners, who earned between €20,000 and 40,000 in 2008, paid 7 per cent of all income tax in 2008.

Those who earned between €40,000 and €60,000 paid 15.7 per cent of all income tax.

Further up the scale, the 5.13 per cent of earners who earned between €100,000 and €200,000 paid 15.5 per cent of all income tax in 2008.

At the top of the scale, the 1,447 earners (0.06 per cent of the total) who earned more than €1 million paid 7.4 per cent of all income tax collected.

The Revenue estimates are determined by using real figures from 2005 tax returns and applying certain average economic presumptions to them.

They are based on gross income figures. Revenue gross income figures do not include employee pension contributions but do include income against which allowances such as capital allowances are later claimed.

Taxpayers move from the 20 per cent standard rate to the higher 41 per cent rate when their income reaches €36,400.

It is estimated that increasing the standard rate by 2 percentage points would bring in an extra €1,075 million in a full year.

A similar increase in the higher rate would bring in an extra €440 million.

A 3 per cent increase in the higher rate would bring in €650 million in a full year.

Of course, with the economy contracting, incomes falling and the numbers in employment dropping, estimates based on 2008 figures are now an overstatement of what would be raised from particular percentage increases.

An option open to the Government would be to create a third rate of income tax, targeting the significantly better off.

As well as raising rates, the Government could reduce or abolish various tax measures that have cost it hundreds of millions of euro each year in lost revenue.

The better off in particular benefit from significant savings by way of tax-subsidised pension arrangements, tax reliefs for landlords, and general capital allowances arising from property investments.

Studies by the Organisation for Economic Co-operation and Development show that average earners with children can be net beneficiaries from the State, when taxes paid are set off against allowances received.

Reductions in payments such as child benefit, or the taxing of such benefits, could also help restore some semblance of sustainability to the public finances.