Personal taxation

Ireland has an income tax system which looks like that of no other developed economy. This system is characterised by a narrow base and both very low and very high effective tax rates at each end of the income distribution. More workers in Ireland pay no income tax at all than any comparable country while, conversely, 50% of workers face losing 49.5c out of every €1 they get in a pay rise. This represents the worst of both worlds when it comes to building an efficient tax system.

Ibec supports the international evidence which shows tax systems with a broad base and low marginal rates provide the best outcomes for employers, employees and the economy. The following sections outline our recommendations for how steps towards this can be achieved in Budget 2017.


Issue 1: Entry point to the marginal rate of tax

Ibec recommends


Irish workers currently hit the 49.5% rate of tax at less than the average wage, which is €36,500. The same figure for the 40% rate in the UK is now equivalent to €55,000. This is partly a result of their long-standing policy of automatic indexation of tax bands. In a similar fashion, Budget 2017 should see the entry point to the top rate of tax indexed to the rate of wage growth in the economy.


How Ireland will benefit

Half of Irish employees pay at the marginal tax rate handing over half of the benefits of any pay increase to the exchequer. Indexing the entry point to the top rate of tax to wage growth will prevent more employees from falling into the top rate over the coming years. This will make it easier for employers to give pay increases, increase real incomes for average earners and prevent Ireland’s labour market from suffering from fiscal drag. Failure to do so would represent a tax increase in real terms.



Issue 2: Taxation of stock options

Ibec recommends

In line with our recent submission to the consultation on the taxation on stock options, Ibec has a number of recommendations:

1. Reform of the operational constraints in revenue-approved schemes to be more flexible to companies’ reward structures.

2. Reduction of the income tax liability on unapproved schemes to the ordinary rate of tax along

with averaging it out over five years.

3. Removal of the USC and PRSI liability from revenue-approved schemes.

4. Introduction of an enterprise management incentive scheme for smaller firms.



How Ireland will benefit

These steps would encourage greater use of employee share ownership in Ireland which until now has been comparatively low and falling. The 2014 review by the European Commission’s DG Internal Market concluded comprehensively that “thirty years of research have confirmed that companies partly or entirely owned by their employees are more profitable, create more jobs and pay more taxes than their competitors”. There are also clear benefits from an employee point of view – the 2015 report of the Commission on Inclusive Prosperity, chaired by Larry Summers and Ed Balls, argued that profit sharing and employee share ownership were win-win policies given that they benefit employees at the same time as producing better outcomes for business.



Issue 3: Private sector pensions

Ibec recommends

Budget 2017 should see an increase in the standard fund threshold (SFT) for pensions from €2 million to €2.15 million and an increase in the earnings limit on tax relief from €115,000 to €125,000. There should be a commitment to indexation of these two measures to wages in future years.


How Ireland will benefit


Ireland’s record of pension coverage is demonstrably poor. In addition, recent years have seen the attractiveness of pensions reduce significantly as a result of a number of tax changes. It was the long-term practice that the tax treatment of pensions was indexed to wages. Since the reduction in the SFT in 2010 this has ceased. Given the return to wage growth in the economy this practice must return in Budget 2017 and future budgets.



Issue 4: Tax credit removal for higher earners

Ibec recommends

Using this policy lever in order to pay for the USC may work in a static analysis but it is unlikely to raise much money and will further damage companies’ ability to attract and retain highly skilled employees. No action should be taken in Budget 2017.


How Ireland will benefit

Ireland, despite being an outlier in terms of its low taxation on low income earners, surpasses the OECD average effective income tax rate at earnings of 120% of the average wage or just above €39,000. By 250% of average wage (€81,500) Ireland has the sixth highest average income tax rate in the OECD at 34.6%, five percentage points higher than the OECD average. Recent research in Denmark has provided clear evidence that mobile skilled workers are affected by marginal tax rates at the top of the earnings distribution (Kleven, et al, 2013). These high marginal and effective rates for similar workers in Ireland are making it increasingly difficult for companies to attract and retain highly skilled staff. If Ireland gets a reputation for an inability to deliver projects because of this, the negative implications for investment would be difficult to reverse.





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