So Lucinda Creighton thinks that a 23% flat tax is the answer to Ireland’s ills. In researching this post, I discovered she has fallen victim to a number of other libertarian memes, including that we liberals are ideologically committed to punishing productive people and that unemployed people could totally find a job if they’d just stop being lazy (yeah, tell that to the Dunnes workers who went on strike because they wanted to work longer hours but management wouldn’t let them). You can read their proposal in detail here; interestingly, they apparently want to bring in something akin to a basic income, but aren’t yet quite ready to move us towards a post-work society:
RENUA Ireland recognises that the vulnerable still need to be protected, however. As a result, RENUA Ireland proposes the provision of a basic income payment to households. This provides a tax rebate to lower income households. It is done on a sliding scale and avoids the income cliffs associated with the current system.The poorest households receive the largest payments with more affluent households benefiting through the system of flat taxation rather than direct payments. Child benefit remains untouched. (p6)
The problem with Renua’s proposal is that everyone involved fundamentally misunderstands how tax bands work, and also don’t understand percentages. While a flat tax proposal might possibly put more money in people’s bank accounts, Creighton and Renua are at best mistaken and at worst dishonest as to the extent of the benefits; considering one of their members is Eddie Hobbs, a professional economist, I suspect disingenuousness.
Right, let’s look at tax bands. Ireland currently has two tax bands – a 20% band and a 40% band (the size of each depends on one’s marital status). If you earn less than the amount of the lower band, you pay 20% on your income. If you earn more, you pay 40% on that portion of your income above the lower band – the portion below the cutoff point is still taxed at 20%. PRSI and USC are calculated in a similar manner. The system is set up in this way precisely to avoid a situation where somebody takes home less money as a result of getting a raise that bumps them into a higher tax bracket. Do you know what that means? It means that regardless of how much you currently earn, accepting a raise or working longer hours results in you taking more money home each week! Yes, even if you manage to find a wage-paying job that pays nearly €33,800 per annum. Or, to put it in terms the Internet at large might understand…
Let’s take a more concrete example. In an opinion piece yesterday, Creighton stated that:
When taking account of Universal Social Charge, PRSI and income tax, a single person in Ireland earning just over €33,800 a year pays a marginal tax rate of 51 per cent.
She apparently derived this figure by adding up the highest rates of income tax, employee PRSI, ans USC to come up with 50%. In fact the actual amount paid in tax is only slightly above the 23% which Creighton herself advocates.
Consider a person earning €33,801 per annum – an amount that juuuust pushes them into the higher band. This means that their income tax is
( 20% × €33,800 ) + ( 40% × €1 ) = €6,670 + 40c = €6,670.40
There are four bands of USC rates. The hypothetical person we’re discussing hits the lower three. Thus, their universal social charge works out as:
( 1.5% × €12,012 ) + ( 3.5% × €5,564 ) + ( 7% × €16,225 ) = €180.18 + €194.74 + €1135.75 = €1,510.67
Finally, there is emplyee’s PRSI contribution. PRSI is a bit different, as it is calculated on weekly rather than annual income. Crudely, this person will earn
€33,801 ÷ 52 = €650.02
per week. PRSI is complicated, with all sorts of different categories, each with their own set of tax bands. Let’s say this person works in the public sector, making them class A (which most people are). Their decent salary puts them in subclass A1, but regardless of which subclass they’re in, 4% of their gross income goes on PRSI. This means that in a year, their total PRSI contributions will be:
4% × €33,801 = €1,352.04
Adding these together, we get:
€6.670 .40 + €1,510.67 + €1,352.04 = €9,533.11
which works out to €183.33 a week. If you’ve been following the primary-school level maths so far, you can verify for yourself that this figure represents 28.2% of this person’s gross annual income, far short of the 51% envisaged by Creighton. (They would actually pay less, since they’re entitled to the single person and PAYE tax credits. Renua plans to abolish all tax credits, to be replaced with a rudimentary basic income plan. I’m going to be charitable and assume that the basic income would completely equal whatever tax credits this person is entitled to). At a flat rate of 23%, without USC or PRSI, this person would pay €7,774.23 per year in tax, which works out to €149.50 a week. To be sure, this would welcome an extra €33.83 each week, but this is far short of the thousands Renua envisages.
Where Creighton came up with the figure of 51% eludes me; adding up the total percentage points of the highest tax brackets this person falls under does yield 51, but Renua includes at least one professional economist and several others were consulted for this analysis, so you’d think one of them would have said “Actually, taxes work differently…”. Right? Right?
But that person is just hypothetical. Let’s consider a real person’s salary. This is my payslip (edited to remove identifying information):
As you can see, each week, I pay €45.13 in tax (11.2% of total); if my tax credits are excluded (as they were in the case of our hypothetical person above), my total taxes come out to €108.60, or 26.9%. At a flat tax rate of 23%, I would instead owe €92.92; that extra €15.68 would be nice, but if that’s the difference between eating and not eating, I have bigger problems.
What about somebody on minimum wage? Creighton states:
[A]nybody who’s on the minimum wage, is in a trap. So if they receive a … €10-a-week increase, which amounts to €520 – rather than benefiting from that pay increase, they actually end up being worse off in terms of their net take home pay, so they actually end up being down €8, rather than up €10 or part of the €10. Under our proposal, for every extra euro that that person earns, for every extra hour that they work, they will be rewarded.
A single worker earning €17,992 (i.e. working full-time on minimum wage) in Ireland has a net take-home weekly pay of €332. If they earn €10 euro extra per week (bringing their annual gross earnings to €18,512), their net take-home weekly pay DROPS to €326. This is the minimum wage trap in action. A workers earns less for working more.
Wow! If these numbers are accurate, they are damning indeed!
While minimum wage will be increasing by 50c next year, Creighton appears to have been referring to the current rate, so I will calculate based on that.
Current minimum wage is €8.65 an hour. If someone on minimum wage works 40 hours a week, 52 weeks a year (holidays included in those 52 weeks), they earn:
€8.65/hr × 40 hr/wk × 52 wk/yr = €17,992
So at least Creighton was accurate there. How much does this person pay in tax? (Again, I’m going to ignore tax credits since they’re the same for everybody of the same marital status and Renua plans on replacing them with something that might be equivalent).
20% × €17,992 = €3,598.40
( 1.5% × €12,012 ) + ( 3.5% × €5,564 ) + (7% × €416) = €180.18 + €194.74 + €29.12 = €404.04
Since this person earns less than €352 a week gross, they do not pay PRSI. This makes for a total of €4,002.44 a year, or €76.97 a week (21% of gross income). At 23% flat tax, they would be paying €4,138.16 a year in tax, or €79.58 a week.
OK, now let’s say this person gets a raise so they’re earning an extra €10 a week. (In reality, raises tend to be bigger than this). This person earns €356 a week, and their goss earnings increase by €520 a year.
20% × €18,532 = €3,706.40
( 1.5% × €12,012 ) + ( 3.5% × €5,564 ) + (7% × €956) = €180.18 + €194.74 + €66.92 = €441.84
And since they now earn slightly over €352 a week, they now have to pay PRSI:
4% × €18,532 = €741.28
This brings their total tax payment to:
€3,706.40 + €441.84 + €741.28 = €4,889.52
Huh. That tiny raise means they now owe an extra €887.08 a year in tax. It also means they’re paying out €94.03 a week in tax, so Creighton’s maths actually do hold up this time. I honestly did not expect that, and it makes me fearful of the impact of the small minimum wage increase that is coming. By the way, at a flat rate of 23% tax, they would pay €81.97 a week in tax.
Still, there is a flaw in Creighton’s analysis: this increase only applies if the person gets a tiny raise – specifically, am increase of 25c/hr. What happens if this person gets a raise of 50c/hr, as will happen when the minimum wage increases next year?
€9.15 an hour yields a gross income of €366 per week and €19,032 per annum.
20% × €19,032 = €3,806.40
( 1.5% × €12,012 ) + ( 3.5% × €5,564 ) + (7% × €1,456) = €180.18 + €194.74 + €101.92 = €476.84
4% × €19,03 = €761.28
Total annual payment:
€3,806.40 + €476.84 + €761.28 = €5,044.52
which works out to €97.01 per week. That’s only €3 a week more than if they got a 25c an hour increase. Such an increase means the person is paying €20.04 a week more in tax than someone on current minimum wage, but their gross income is €20 a week more, so at this point they’re just 4c behind; if the increase is any bigger, they take home more money. At a 23% flat tax rate, they would pay €84.18 a week in tax.
From this we learn that without a tweak to PRSI, next year’s minimum wage increase will deliver a negligible loss to minimum wage workers but quite a bit of extra money to government coffers. It also turns out that Creighton is correct about the existence of a minimum wage trap. If someone on minimum wage takes a small raise, they end up taking home less money due to employee’s PRSI kicking in. That said, this only applies at the very bottom of the scale – if someone takes a raise of at least 51c an hour, or if they’re already earning just 50c above minimum wage, then any raise at all means they take home more money.
This also means Lucinda Creighton goes beyond mere libertarianism and into the dizzying realms of wealth worship normally reserved for the US Republican party. The fact that a minimum-wage employee ends up taking home less money if they gain a tiny raise is an irregularity that shouldn’t be there; however, it’s not a serious one, or one likely to ever arise. Still, a tweak to how PRSI is calculated could alleviate this. Creighton, however, extrapolates from this to argue, without basis, that low-paid employees are consistently losing money by accepting raises, and her solution to this loss of money is to take away more money than is already being taken from them. No, seriously. As I calculated above, under Renua’s flat tax regime, somebody on minimum wage would actually pay an extra €2.61 a week in tax. Creighton herself was called out on this and admitted that, well yes, people on minimum wage will take home less, that’s OK because the middle and upper classes will have more money to stimulate the economy, and sure people on minimum wage can just work loner hours!
Ugh, this is going to take a while to unpack. First of all, if a minimum wage worker today works just three hours extra per week, they take home more money even with now having to pay PRSI. So there is certainly an incentive to work longer. But there are problems with this. First of all, why should they have to work longer? Minimum wage jobs are tedious and gruelling; it’s all very well for people who stop by a café for a morning coffee on the way to their office jobs to talk about the benefits of longer and harder working, but for people who work in factories or fast food joints, extra work means time doing unpleasant tasks instead of seeing their families, improving their skills, or just doing things they enjoy, which is the reason why 99% of people bother to work.
Furthermore, even if some people actually enjoy their minimum wage jobs, it’s likely they can’t work any more hours. I already linked to the story about Dunnes workers striking for the right to work longer. Another data point is the factory I work in. Most of the floor staff are on minimum wage, and the factory runs 24/7. As such, there are three 8-hour shifts in a solar day. If someone wants to work an extra hour a day, that means someone else has to give up a precious hour from their own shift, and there’s no way to resolve this short of reducing Earth’s rotational velocity and increasing the average distance from the sun. The only overtime available is on weekends, when a production line has to run long to finish an order that wasn’t done on time.
But hey, my factory is unusual. Most don’t run 24/7. These factories make a specific amount of product to order each week; again, there’s usually no overtime simply because there’s no work to be done beyond what everyone’s rostered for. Overtime is the result of things going wrong.
But, of course, the main beneficiaries of the flat tax regime will be the richest in Ireland. Take a single salaried person earning €100,000 a year. At present rates, they pay €33,240 in income tax, €6,444.16 in USC, and €4,000 in employee’s PRSI (the methods and sources are there, you can verify this for yourself). That works out to €43,684.16 in tax, or 43.7% of gross income – still significantly less than the 51% Creighton was wailing about. At a 23% flat tax, this person pays just €23,000 a year in tax.
To make this texty post more visual, let’s have some graphs!
Oh, and according to their budget proposal, Renua also plan on reducing the capital gains tax:
RENUA Ireland believes the rate of Capital Gains Tax is harming investment in Ireland business. We will positively discriminate in favour of investment in business by bringing the current rate of 33% down to 20% for investments in productive businesses. A rate of 33% will continue to apply on property.
Previously, the amount of tax collected in the first five years of the reduction in the rate of Capital Gains Tax to 20% from 40% increased by 1,200%.
Investments in productive companies for longer than 5 years will be charged at a rate of 15% and for longer than 10 years at a rate of 10%. This is to incentivise the long-term development of strong Irish companies over a current trend where successful start-ups often sell out at a relatively early state of maturity. (p10)
So that person getting €100,000 a year? They’re probably paying even less tax. What Renua plans to do here is have the stockbroker who buys and sells parts of companies to earn a profit without manufacturing any product or provide any service of their own pat a lower rate of tax than the person who made their desk. Can Renua at least be consistent here? If they’re intent on a flat tax, why not have it be truly flat and thus set capital gains tax at 23% so that stockbrokers pay the same rate as their secretaries? Based on what else we’ve seen here, the answer is pretty clear – Renua is less concerned with helping the poor than with increasing the amount of money owned by the 1%.
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