(05 Dec 2009)
They might satisfy the begrudgery of some in the commentariat and they certainly pander to the ideological prejudices of a minority. But increases in the marginal rate of income tax have been a complete failure on all fronts. Firstly, they have failed to raise the revenue expected of them. Secondly, they have produced one of the most unfair distributions of the income tax burden anywhere in the world. Thirdly and finally they are arguably destroying jobs, fostering the black economy and driving our brigthest and best to consider emigration. The evidence supporting the first two contentions at least, are incontrovertible. And if Wednesday's budget repeats the mistakes of last April and the previous October, the 
evidence for the third may become depressing unavoidable as well.
The first chart to the the right shows how since October 2008 the marginal rate of tax on income has risen from just under 44 per cent to 52 per cent. Note this is the marginal rate of tax on income, a separate concept from the marginal rate of income tax. The latter refers to the impact of income tax as formally named. As the table below shows, the two measures are now greatly divergent.
Marginal Personal Tax Rates Pre-December 2009| | Rate |
| Income tax over €36,400 | 41% |
| Income Levy | 6% |
| PRSI | 0% |
| Health levy | 5% |
| TOTAL | 52% |
For those earning incomes over €174,980, income levies and health levies turn a 41% income tax rate into a 52% marginal tax on income. Right and proper, say some. But begrudgery aside for a moment, let's ask what higher taxes on higher income earners are designed to achieve? Then, using evidence rather than emotion, let's see whether they actually achieve it.
The objectives of tax increases can probably be put into two categories: For those not motivated by ideology or begrudgery, the objective of tax increases is a practical one: To raise revenue to fund public services. Leaving aside the issue of whether existing revenues are being efficiently allocated, let's assume that tax rises are needed to raise revenue. Did the income levy and health levy increases do the job? The answer is "No".
Between them, the personal tax increases of October 2008 and April 2009 were designed to raise 5.6 billion euro (2 billion in October 2008 and 3.6 billion in April 2009). But instead of doing this, the income tax take (which incorporates standard income taxes but also levies) has fallen by a staggering 700 million euro. Falls in employment have, of course, contributed to this trend. But as the following data - data from a period when the unemployment situation was moderating - makes clear, the April income levy hikes have also had a disastrous impact on the stability of the income tax base. Simply put, incomes have been falling fastest at the top end of the income spectrum as bonuses vanish and executive pay is cut: So - even if raising taxes were justified - the strategy of targetting tax increases at higher earners is destined to fail, build as it is on the part of the tax base that is shrinking the fastest.
The result is clear: As the chart to the right shows,
the rate of annual decline in income tax revenues has continued to worsen since the April income tax levies were implemented. That this has happened against a backdrop of a decline in the rate at which the Live Register is worsening shows that unemployment cannot account for this worsening: The only significant change in underlying circumstances since April - the significant rise in the marginal cost of working - is the only factor that can explain it.
The second reason - advanced by politicians - for income tax increases is "fairness". To be acceptable to social partners, they argue, spending cuts must be accompanied by rises in income taxes. The argument ignores the fact that the bulk of budgetary correction so far has already fallen taxpayers and that tax increases have had disastrous effect on revenue. But even the "fairness" argument flies against the facts: As of last April, almost half of all income tax revenues are paid for by the top 4 per cent of earners while the bottom 50 per cent of earners pay none. Parties like Labour - who wish to raise the higher rate of income tax to 48 per cent (and thereby the marginal rate of tax on income to 59 per cent) and Fine Gael - which wish to abolish the income ceiling for 4 per cent PRSI payments (thereby raising the marginal rate to 56 per cent) owe it to the electorate to explain just how any further increases in marginal taxes can be described as "fair".