Fergus O'Dowd
Question:64. Deputy Fergus O'Dowd asked the Minister for Finance his views on correspondence (details supplied) regarding a tax query in County Meath; and if he will make a statement on the matter. [10671/15]
View answerWednesday, 11 March 2015
Questions (64)
Written answers
A fair, efficient and competitive income tax system is essential for economic growth and job creation. While the figures submitted by the Deputy are accurate, it is important to understand that PAYE workers and the self-employed are taxed in different ways to reflect their differing circumstances.
As the Deputy will be aware, employees in the PAYE system benefit from a PAYE income tax credit worth €1,650 per annum, to which the self-assessed are not entitled. The PAYE allowance, as it was then, was introduced in 1980 to improve the tax progression of PAYE taxpayers and to take account of the fact that the self-employed generally then had the advantage of paying tax on a preceding year basis. The argument was also made at the time that the general scheme of allowances for expenses discriminated against employees and in favour of other taxpayers.
There have been some changes since 1980. For example, the self-employed now pay tax on a current year basis. In addition, the PAYE allowance has become a tax credit. However, there are other aspects to how the self-assessed are taxed which can be beneficial to them. For instance, there are significant timing benefits, depending on the accounting period used by the taxpayer, which are available to the self-assessed but which are not available to PAYE workers. In addition, the expenses regime for self-assessed taxpayers remains somewhat more liberal than that afforded to employees and therefore the self-employed can actually pay less tax when compared to a PAYE worker on the same income.
Notwithstanding the above, I am of the view that the tax position should be standardised for PAYE workers and for the self-employed, bearing in mind the need to encourage enterprise. I have stated that the position will be kept under review such that policy change can be considered when resources allow.
Turning to PRSI, it is true that employees are exempt from the charge to PRSI if their income does not exceed €18,304. However, once PAYE income exceeds this threshold they are liable to pay PRSI on the full amount at 4%, thus equalising the treatment of personal PRSI contributions, on all of the income, for PAYE and self-assessed workers on incomes above that level.
In the case of employees, their employers are required to pay a PRSI charge in respect of each employee. Thus the contribution made to the Social Insurance Fund in respect of employees is usually higher than that made by a self-assessed individual. For instance, at an income level of €100,000, an employer would typically be required to pay PRSI of €10,750 in respect of the employee, in addition to the €4,000 payable by the employee. Total PRSI of €4,000 is payable in respect of a self-employed individual with the same income. Entitlement to social welfare benefits is primarily a matter for the Minister for Social Protection. However, it is worth pointing out that for individuals with incomes in excess of €18,304 the total PRSI payable in respect of an employee is 14.75% of salary, while the total payable by a self-employed individual is 4%.
I must reject the charge that the income tax system is regressive. A progressive taxation system means that those on higher incomes pay proportionately higher rates of tax on their income than those on lower incomes. This is clearly the case in Ireland and is widely acknowledged to be so. The European Commission compares progressivity of taxation by taking the OECD tax wedge for an individual earning 167% of the average wage and dividing it by the tax wedge for an individual earning 67% of the average wage. On a rating system where less than 100 is regressive and above 100 is progressive, most EU countries have a progressivity rate of between 120 and 140. Ireland, in comparison, has a progressivity rate of 183, making it considerably more progressive than any other EU member of the OECD.
Finally, it is important to note that the changes to the Income Tax system introduced in Budget 2015 benefit all those who pay income tax and/or USC equally, regardless of whether they are PAYE or self-assessed taxpayers. These measures are the first stage of a three year plan to reduce the income tax burden on low and middle income earners.