In a system of both direct and indirect taxation, just how much tax will I pay?

The Republic of Ireland has a progressive income tax system and a VAT system for spending tax. The income tax system has two tax rates (writing in November of 2023): 20% and 40%. The first part of the income, up to a certain amount, is taxed at 20%. This is known as the standard rate of tax and the amount that it applies to is known as the standard rate tax band. The rest of the income is taxed at 40%. The amount that one can earn before paying the higher rate of tax is known as the standard rate cut-off point. The standard rate tax band and the standard rate cut-off point vary depending on one’s personal circumstances, such as marital status, number of children, or age. The VAT system (again writing in 2023) has three tax rates: 23%, 13.5%, and 9%. The standard rate of 23% applies to most goods and services, while the reduced rate of 13.5% applies to certain goods and services, such as fuel, electricity, or construction. The second reduced rate of 9% applies to certain goods and services, such as tourism, hospitality, or entertainment.

To illustrate how income tax and spending tax work in the Irish context, let us consider an example of a single person earning €50,000 per year and spending €30,000 per year on goods and services subject to the standard VAT rate of 23%. The income tax calculation for this person is as follows:

• The standard rate tax band for a single person in 2023 is €40,000, so the first €40,000 of income is taxed at 20%, resulting in a tax liability of €8,000.
• The remaining €10,000 of income is taxed at 40%, resulting in a tax liability of €4,000.
• The total income tax liability is €12,000, which is 24% of the gross income of €50,000.

The spending tax calculation for this person is as follows:

• The gross spending of €30,000 includes the VAT of 23%, so the net spending (excluding VAT) is €24,390.
• The VAT paid on the gross spending is €5,610, which is 23% of the net spending of €24,390.

The total tax liability for this person is €17,610, which is the sum of the income tax liability of €12,000 and the spending tax liability of €5,610. This is 35.2% of the gross income of €50,000, or 58.7% of the net income of €30,000 (after deducting income tax).

This example shows that taxation can have a significant impact on one’s income and spending, and that the effective tax rate depends on various factors, such as the level and source of income, the type and amount of spending, and the applicable tax rates and bands. 

Therefore, it is important to remember that all money earned in Ireland has already been subject to taxation, and is then taxed again when spent on goods and services. At this point it might be worth reminding ourselves of the Canons of Taxation.