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OVER THE WEEKEND, Ryanair boss Michael O’Leary took a stand on income taxes. He had two main points. Firstly, he said that high marginal rates (above 60 per cent) encourage people like him to become tax exiles and so hurt, rather than help, the Exchequer. Secondly, he said that the income tax system should be simple.
On the latter, he gave some more specifics. According to the Irish Independent, O’Leary said: “Anybody earning under €50,000 should pay 10 per cent tax. If you’re earning under €100,000, you pay 25 per cent and anybody earning over €100,000 pays 50 per cent. I’m one of the largest taxpayers in the country and I have no problem paying 50 per cent of my income in tax.” So how do his suggestions stack up?
What’s not clear from that is whether he means a flat rate (i.e. someone earning €250,000 would pay 50 per cent on all their income) or three marginal rates (i.e. that person would only pay 50 per cent on income over €100,000). I’m going to assume he meant the latter, otherwise you would have the odd situation where workers earning €48,000 a year dread overtime or even worse a promotion as their tax bill would rise from €5,000 to €12,500 a year.
A Twitter connection of mine pondered out loud about what sort of impact such a system would have on the Government coffers. I’ll do my best to answer, using the Revenue Commissioners figures for 2008 on who earned what and how much income tax they paid. (As before, PRSI may look like a tax, but it’s actually an insurance premium you pay, so the Revenue does not include these figures in their totals. Health and income levies were not included but now – as the revamped Universal Social Charge – are part of the income tax system so I’ve included them below.)
One thing that is worth noting in passing is that even though we rightly think of housing bubble having come to an end in 2007 (or even late 2006), there is scant evidence of any hit in incomes as of 2008. There were 757,000 people earning €40,000 or more in 2008, compared to 640,000 in 2006 – indeed, the number earning more than €100,000 rose by 25% in the same period. It’s difficult, in that context, to be certain about what an income tax in 2011 (or realistically 2012) would raise, as we don’t know yet who’s been hit and by how much.
Given all that, let’s compare instead the income tax system we had in 2008 with what Michael O’Leary’s three-band taxation system would have raised in 2008. First things first, the biggest change to the tax system is the abolition of tax credits. Anyone earning under €50,000 would pay 10% of their income over in tax – including, one would assume, those earning less than €15,000 who are currently paying only the Universal Social Charge.
This would be a big culture shock for the vast majority of earners. Two years ago, I wrote about how the median earner in the country in 2006, earning €25,000, paid just four per cent in income tax, compared to 20 per cent in most other developed countries. By 2008, the median earner was taking home about €27,500 and still paying just four per cent in income tax (this excludes PRSI, remember, which is insurance not tax).
Even taking account of the health levy or, to make it more relevant to today’s earners, the Universal Social Charge, as is shown in the graph below, the average tax rates enjoyed by Irish earners up to about €50,000 are still well below the international benchmark of about 20 per cent.
Average tax rates by 2008 income bands, according to various schemes
What about Michael O’Leary’s system? That’s shown in red in the graph above. There are effectively three significant changes under such a system. Firstly, all those earning €30,000 or less would pay a flat 10 per cent of their income over in tax, compared to five per cent or less under the 2008 system and anything from zero to ten per cent under the current system. Secondly, those earning more than €200,000 would see their average tax rate increase from about 34 per cent now (including the USC) to 43-51 per cent. Lastly, those earning from €40,000 to about €150,000 would see relatively significant falls in their average tax rate. For example, the average amount of tax paid by those earning €60k-€75k is currently 22 per cent (including USC) but this would fall to 14 per cent under the O’Leary system.
But would the Government be interested in such a scheme? It’s safe to say that the Government would only be interested if it resulted in more income tax coming in to the coffers. The 2008 system of income tax (and health levies) brought in about €13.9billion. Applying the 2011 system to the incomes earned in 2008 would have brought in €18.4billion, which is the benchmark for any new suggestions to beat.
The straightforward “three marginal rates” system (with no USC) would have brought in €15.6billion in 2008. So it’s safe to say, for all its simplicity (and the unknown impact of that in creating new jobs), it’s not a runner. The reason so much tax revenue is lost is because of what happens to the €40,000 to €100,000. Suppose O’Leary’s proposal was adjusted so that people paid 25 per cent on everything earned between €25,000 and €100,000 (and 50 per cent above that). Such a system would have brought in €18.6billion, based on what was earned then.
I’ll suggest one more tweak. This would be to include all social welfare as taxable income – they are the people marked “LR” (Live Register) in the graph above. The primary aim of this measure is reduce the barriers to returning to work. Like every other developed country in the world, in Ireland someone who earns €10,000 should make some direct contribution in income tax. However, it’s simply not fair that someone earning €10,000 working has to pay tax while someone who receives €10,000 for not working doesn’t. And that lack of fairness affects people’s decisions.
Such a revised system of income tax would face stiff political resistance, as although high earners would pay significantly more in tax, so would those who earn less than €25,000. Nonetheless, there are three principal benefits. Firstly, it would increase revenue to the Government. Secondly, it would create a simple and fair tax system, where everyone contributes and those who earn most contribute proportionately more. Lastly, it would demolish the artificial boundaries between money earned through various sources including social welfare.
Ronan Lyons is an Irish economist based at Oxford University, and runs the Economic Research unit at Daft.ie. You can read more articles on his blog, where this originally appeared.
Really interesting article and a nice alternative to an over-complicated system the average person doesn’t understand.
Also agree. Quality piece Ronan. Great read!
A flatter, simpler tax code and a universal benefit to replace welfare would be a huge step forward.
What’s a universal benifet?
Given that most of the countries that are bailing us have strong growth, strong welfare systems, strong indigenous companies and manufacturing etc etc and are further left than even the shinners, then we have to wonder why we have parties like FF/FG who between them have broken the economy 4 times in 90 years. An European Record. They have also set record for debt growth etc etc but lets not look to the countries that work, that are still wealthy and growing, lets continue to do the opposite.
Universal benefit would be a regular payment to every citizen over a certain age (16, 18?) that would be just enough to ensure basic needs. Nobody would be “on welfare”, everyone can work without losing the benefit. For workers, the benefit would replace tax credits. More of the population could be productive, as it gets rid of the welfare trap.
There are over 3.6 million people aged 20 or over in the state. If each of those was given €50 a week for basic needs (my electricity and gas combined in summer time comes to about €25 a week) this would cost the state almost €10,000,000,000 a year. That’s about half the current welfare bill.
What would be the point in such an exercise?
A universal benefit would REPLACE most current welfare payments (there would be some exceptions, e.g. for those unable to work due to disability). It would do away with means testing and the need for a huge administrative bureaucracy. It would allow those who want to work to do so and be rewarded for working. My apologies, I have not done the math, but I am sure people would require more than 50 euro per week to survive – basic needs extend to food and shelter. So the overall tax burden might not be less. But I believe that this system would be a more humane and fairer one than the present system. A system which is transparent and seen to be fair would go a long way to improving social harmony. I would be really interested in seeing an economist work out the feasibility of such a proposal, as Ronan Lyons has done above.
if M.O.L becomes minister for finance or some junk like that: IM MOVING
Great piece and as the above poster said, very clear to the average Joe Soap!
Can we stop indulging MO’L and just go ahead and charge him with crimes against humanity?
Crimes like making air travel accessible to all?
That air travel is accessible to all is nothing to do with Michael O Leary. It has to do with the deregulation of the airline industry and that was done by the EU.
Low cost airline are also nothing to do with Michael O Leary. Southwest Airlines in the USA had been doing it long before Ryanair came along. In fact Tony Ryan saw it in the US and copied their model for Ryanair.
There are lots of budget airlines in Europe, but living in Ireland we hear most about Ryanair becauseO’Leary is never out of the media
Cheap air travel in Europe comes directly from Tony Ryan and Southwest Airlines(US). Tony used SWs’ model in Europe with huge success. The addition of M O’Leary came much later in a deal which Tony said was the best he ever made. Can we just for once step back and say, "Fair Fucks to Ya Ryanair"!
No! No! No! We shouldn’t let him run anything. A sneering, ignorant B@%#@%D!!!
Funny how an ‘ignorant’ man like MOL has turned Ryanair into the most successful Irish Company of all time!
What a country we live in… Always knocking our own…
Not ALWAYS – only when I feel it’s correct to do so. Stand over EVERY word in my original comment. As for Ryanair being the most successful Irish company of all time – what an exaggeration! The most successful low cost, low pay, low morale airline in Irish history – perhaps!
Ronan is deliberately avoiding the obvious, the question is not how much income tax you pay, it is how much net pay you take home after tax and the other deductions like pensions levy, prsi, universal heath charges etc. Then the question is how much is that worth to you with a VAT rate of 21%, bin charges, bank charges, credit card charges, cost of living charges by the private sector (ie it costs 25% more to live in ireland than in germany in 2011)
In other words all the extra earned by irish workers is stripped from them by irish businesses.
Govt wont do anything because higher prices means higher VAT returns.
Consumer Prices in Germany are 19.64% lower than in Ireland
Consumer Prices Including Rent in Germany are 20.31% lower than in Ireland
Rent Prices in Germany are 23.09% lower than in Ireland
Restaurant Prices in Germany are 29.22% lower than in Ireland
Groceries Prices in Germany are 27.29% lower than in Ireland
Local Purchasing Power in Germany is 24.67% higher than in Ireland
http://www.numbeo.com/cost-of-living/compare_countries_result.jsp?country1=Ireland&country2=Germany
No….Micheal O’L is simply taking Brian Lenihans line in his budget speech 2010…where Lenihan stated….the tax system was incredibly complex and unbalanced and he was going to make it simple…..but the tax system is complicated…because it should be…we live in societies with lots of different pple with different needs…..
it makes no sense to apply the one measure to all according to their income alone…of course other factors are considered…that’s why they were introduced in the first place….
going by O’Learys above suggestions the middle – lower earners will be pay even more tax….i do agree…by all means let the highest earners pay more taxes though not so much as to encourage them to leave the country….
I don’t think it’s the tax system that’s at fault for the countries problems…..all FF’s simplifying the tax system brought was the USC…hmmmmm…enough said.
Whatever we think of Micheal O’Leary I have do doubt as to his honesty, so please do not compare him to Brian Lenihan.
Tony, Em I was commenting on the article…. not on M O’L ….simply when he takes a line previously mooted by Lenihan and FF a comparison will be drawn…..I can’t credit him… without thinking about what he’s saying…when I do the sums…..it doesn’t make any sense to me…. I just have a different opinion…nothing whatsoever personal toward the man.
Fiona, even a broken clock is right twice a day, and just because FF were wrong about most things, Lenihan was right in SAYING that our tax code is overly complex and unbalanced. Unfortunately saying and doing are two completely different things, and they’ve only succeeded in making it more complex and less balanced to date.
Cillian,…. I think it’s an insult to our intelligence to say it’s overly complex…
it’s complex as it should be…….roughly 4% pple earn 25% all income……46% pple earn 58% all income….50% pple earn 17% all income….. each paying taxes at 45%…52%…3% respectively…..
to say it’s unbalanced is taking an overly simplistic approach……because simply analysed it’s unbalanced not toward middle or low earners….but toward the 4% paying 45% of taxes …..
but it’s not unfair……a progressive tax system should mean those best able to pay make a greater contribution……increased taxes for those who earn 17% of all income (@ earnings €11,500p.a.) in the grander scheme of things will never net a huge amt of taxes…they don’t pay more because they don’t earn enough & any increase is just plain wrong……..
O’Leary made a sweeping statement with some substance…but without the correct analysis required….& maybe technically in barrister speak Lenihan was right……but analyse it logically and the tax system makes sense.
who cares about MOL or his tax , bono worth twice of him and pays sweet fuckall , the problem is with the dodgers not the payers
That’s the point. If the tax rate is fair, people won’t try to become non-resident for tax purposes. The tax system could be further reformed so habitual residence criteria applies in determining who has a tax liability (i.e. ties to the country: family ties, place of birth, number of visits during the year, bank accounts), rather than simply how many days they spend in the country.
Do people not remember before ryanair how expensive flying was?? flights to england could cost up to £300. They don’t try to be posh and fancy, they try to be as cheap as possible. And even with all these secret/extra charges theyre still the cheapest airline.
And id rather have a listen to his advice than some of the clowns running the place atm.
Flying to London next week to see my new nephew, â
Yes
yeah great article, no mention of FIS, Single People, Married People, Child Allowances,etc maybe you and Michael should try and live on 193 euro pw before reccomending taxing them at 10% , btw where were all the economists between 2001 and 2007? surely prevention is better than a cure !!!
Well the problem is that people can live on 193 plus whatever else benefits.. go to the north and you get 50 a week. lots of work there but Irish people seem to be above McDonald s and shelf stacking now.
I love what I’m reading here. Someone tell Noonan.
I would like the author for shortening this years budget speech to a 15 minute reproduction of this article.
raising more than was required
and in my case pointing out that I’d have more cash if it came in.
cheers to the author and to mol
Any tax overhaul needs to be done hand on hand with overhaul of social welfare and public sector pay.
Also, indirect taxes which the private sector exclusively pay. Did you know some public servants have full pay for sick days, free doctors, free parking in Dublin city centre, 14 weeks holidays every year, free pension worth up to 50% of salary, paid time off if they get married, extra holidays at Easter and Christmas,
I and many like me already pay more tax than the EU average, doctors fees, dentists, opticians, no pension on retirement, huge school costs for my children.
Fair? no.
Will the middle class put up with much more? No way.
One thing that is left out of the analysis that I would be interested in, would be the potential for middle-income immigrants from other EU states to avail of lower tax band. I would imagine 20% would be a significantly lower rate for many middle income Europeans.
A similar scenario can be seen in the U.S., for instance in New Hampshire.. New Hampshire has no income tax or sales tax.. which makes it a haven for workers from nearby states such as Massachusetts. But also makes it attractive for organisations to set up because their workers get to keep their incomes.
I would like to see solid facts/figures on what might happen on the possible immigration front. Favourable/Unfavourable.
I heard a Republican on CNN yesterday make a very valid point, tax increases on the rich are pointless unless loopholes are phased out.
True, and interesting coming from somebody whom I’m going to assume was opposed to the idea of tax increases anyway. Maybe I shouldn’t assume anything, but it ties in nicely with another assumption – that they’re in the Republican party for a reason.
Fiona, at the height of the boom unemployment was at 4%, therefore it’s fair to say that 4% won’t work. These people should get no state payments.
Oil,…. No, it might seem so but…… before it could be fair to say…. the 4% on social welfare during the boom years won’t work…..certain factors need consideration…to work out how many of % fall into that category.
Like how many …with physical / mental disability…are carers…are lone parents with young children…come from disadvantaged areas/regions…were genuinely between jobs…and so on.
Hazarding a guess….say 75% fall into to the above valid criteria…..leaving 25% of the 4%….. in the won’t work camp.
Translating that into todays figures…. with 13.4% of the working pop, on social welfare….. (note this fig. doesn’t include those in the working pop. unemployed but not claiming any benefits…dependant on what yr you consider)…. taking this 25% of the original 4% ….& work it into the current 13.4%…….about 7% of the current amount of pple signing on…. fall into this category that won’t work…..even say with allowing maybe another 3% extra….that gives us 90% genuine social welfare recipients…. & a small minority 10% won’t work. For every 9 genuine persons….there’s one feckless thief.
Who’s who…. can only be established following proper investigation procedure….& then it’s into a whole separate issue as to how to deal with them…..as these too fall into different categories.
Those working on the side…maybe, stop their payments & demand they repay the money they stole….those that haven’t worked for so long they’re unemployable……..maybe force them to upskill or do community service until they’re intergrated into the working world.
And, imo…. all of them that might imagine they’ve a right to screw the government….. be educated to understand clearly…….they themselves are every bit as bad as the government/ bankers they give out about…….. the only pple they’re screwing is the hard working taxpayer….not to mention how difficult they make life for those with genuine social welfare claims.
Atm…there is new measures being adopted to weed out these pples and hopefully they’ll go some way to resolving this issue….in the meantime it’s important not to tar all social welfare recipients with the same brush.
I see no reason why we couldn’t have one rate of tax, provided that all the tax dodgers pay their share. It would be simple and it wouldn’t punish success. We could also look at where our tax is spent. The majority goes on paying interest on the currency in circulation. Once we wake up and realise that every euro in circulation is a debt to the ECB, and that we have to pay interest on that debt in the form of a percentage of our work (tax), and that in return the ECB (and any other private central bank) do little else in return than run fancy printing presses, then we’ll be off to a flying start. The euro is doomed anyway, so why not replace it with a value-based as opposed to debt-based currency and halve the required tax take in one fell swoop.
Putting aside my general dislike of Michael O’Leary (a man incapable of seeing that human endeavour can include things that don’t involve making money), I have to admit, as populist suggestions go, it’s rather ingenious.
The general effect of his proposal would be to shift the burden of paying tax from the middle classes (which would obviously please them) to those on low income (which will please the not particularly bright Thatcherite crowd) and those on high income (which will please everybody, except, obviously rich people).
My only concern is the effect it will have on those on lower incomes. As Ronan rightly points out, we need to be careful to avoid anything that will push people out of work and back onto the dole, but by the same token, we cannot afford not to provide a safety net for those truly on the margins. It’s a tricky balance to strike and I have a concern that O’Leary’s suggestion could be detrimental in that area.
Otherwise, given that the middle classes are the ones who decide elections and who generally dictate public policy, I’ll (begrudgingly) admit, it’s rather brilliant.
The barrier to reentry back to work is that it’s better on the social, so the concept of taxing people on the live register is really appealing as an alternative..
Most of the pple on Social Welfare signed on due to the recession & can’t find work…..a very small minority see it as an alternative to work…….that barrier you speak of applies only to this small minority….idk what’s appealing about watching pple in desperate situations struggle further……. unless as some do………. you feel smug about watching others in distress.
Anyway…….why give a social welfare payment ……….& then waste money on administrative costs taking some back……any reduction in social welfare payment can be taken at source…..as was done when it was reduced in the last budget.
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