Analysis: While they would be politically popular, income tax cuts would not be economically prudent, eroding our narrow tax base and risking increased inflation.
The conflict in the Middle East has led to yet another spike in inflation. The latest estimates from the CSO indicate an annual inflation rate of 3.6% for April, and energy prices increasing 15.5%. A new report from the ESRI estimates that just over one in seven households in Ireland could not afford their utility bills or to adequately heat their homes in 2024. Given the recent additional increases in energy costs, those figures are undoubtably even higher today, and many households are struggling with the cumulative impact of price increases over the past five years.
Speculation as to what measures might be introduced in Budget 2027 has begun even earlier than usual this year, with both the Minister for Finance and Public Expenditure signalling that income tax cuts are likely. Many argue that this approach supports workers by cushioning the costs of high inflation. Moreover, the Government's recent Spring Economic Forecast revised the expected budget surplus upwards, from €5.1bn to €9.2bn, increasing pressure from the opposition and stakeholders to grow spending.
But such headline figures mask underlying economic vulnerabilities in the public finances. The surplus is based on risky, highly concentrated corporation tax receipts paid by a handful of foreign multinational firms. Given they could be much lower in the medium term, they should not be used to fund permanent tax cuts or spending measures. Consequently, the trade-offs of different policy options need to be carefully considered. Although it is clear that many vulnerable households will need additional supports in Budget 2027, are income tax cuts the best way to support them?
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From RTÉ Radio 1's Morning Ireland, almost half of corporation tax paid by three multinationals
Taxation of income in Ireland is complex, with different rates of USC and income tax charged at different levels of income. Tax credits and exemptions also vary across household characteristics. Our system is also highly progressive, meaning that it reduces pre-tax wage inequality by taxing those who earn more at a much higher rate. One commonly used measure of income equality is the Gini coefficient. It ranges from zero, indicating that one person earns all the income (perfect inequality), to 100, indicating perfect equality, where everyone earns exactly the same amount.
In 2024, the Gini coefficient for pre-tax incomes in Ireland was 56.5, reflecting a high level of inequality. For example, the top 10% of earners were paid 40% of all income earned, while the bottom 10% of earners were paid just 0.2% of total income. However, this inequality is greatly reduced by progressive taxation and social transfers. For example, if we look at the same measure of inequality for disposable income, it falls to 26.4, below the EU average of 29.4. We have higher levels of take-home pay equality than countries such as France, Germany or Spain.
However, one consequence of this progressive tax system is that our income tax base is also very narrow. The vast majority of income tax, almost 80%, is paid by the top 20% of earners. This concentration may feed into perceptions that taxation on income in Ireland is high. An EU survey last year on attitudes towards taxation found an even split between citizens who thought taxes in Ireland were too high (35%) and those who would willingly pay higher taxes for better public services (34%).
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From RTÉ Radio 1's Morning Ireland, a strong economy has boosted tax receipts by 3.4% for the first three months of 2026
Among those who thought taxes were too high, more than two in three said taxes on wages should be reduced first. This proportion was far higher than the average across other EU countries, despite the fact that average tax rates in Ireland are actually lower for average earners compared to our EU counterparts. For example, a typical household with two average income earners and two children in Ireland pays an average tax rate of 25.7%, far below the rate paid by a comparable household in France (41%), Belgium (44.8%) or the OECD-EU average (35.2%).
Although the average tax rate in Ireland is relatively low, perceptions are influenced by what people focus on when simplifying a complex tax system. The tendency is to use mental shortcuts, known as heuristics, to simplify nonlinear systems. Rather than figuring out the rates across the entire tax system, people either use the 'ironing heuristic’ and focus on the average amount of tax paid, or the ‘spotlight heuristic’, and focus on the marginal tax rate - the amount of tax paid on additional income earned.
In the Irish context, focusing on the latter will lead to a higher perceived level of taxation. Unlike the average tax rate, the marginal tax rate in Ireland at 52.5% for the average two earner two child household is above the OECD-EU average, because of our progressive system.
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From RTÉ Radio 1's Morning Ireland, how can the Government help people struggling with rising prices?
Another consequence of this progressivity is that the full benefits accrue to higher earners when income tax cuts are implemented, either in the form of lower rates or changes to the income thresholds for higher rates of taxation. For example, if the Government were to increase the income level at which the higher rate of tax kicks in for a single worker, currently at €44,000, low income workers earning below this level of income would receive no benefit, while someone earning over €100,000 would feel the full benefit of the change.
Tax cuts that provide bigger monetary benefits to higher earners are an inefficient way to help those that need targeted supports. While many are struggling, households are still saving €1 out of every €7 of disposable income on average, indicating that many others do not need additional supports. ESRI research has shown that lower income households face higher inflation rates than the headline figures because they spend a higher proportion of their income on food and energy. By contrast, the highest income households face lower than average increases in their cost of living so tax cuts in Ireland will disproportionally benefit those facing lower levels of inflation.
Without increasing tax revenue from elsewhere, income tax cuts would further erode our narrow tax base and risk adding to inflation. While they would undoubtedly be politically popular, such income tax cuts would not be economically prudent. Recent budgets have demonstrated which of these competing considerations factor more in government decisions. Let’s see what happens in October.
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The views expressed here are those of the author and do not represent or reflect the views of RTÉ
