Progressive tax explained

Under the Irish tax system, income is taxed progressively with increasing tax rates. Higher income earners pay higher tax. To understand the types of taxes that you may be subject to, it’s important to first have a look at progressive taxes, progressive vs regressive tax, and the impact progressive tax has on income earners. 

Ireland has a progressive tax system. A progressive tax system is one in which the rate of taxation increases with a rise in income. 

In Ireland, the progressive income tax rates are structured into several bands that progressively get higher. The higher your income, the higher your tax bracket and the more tax you pay.

Progressive tax in Ireland is a way of balancing finances. It ensures that people with lower incomes can keep more money for essential things like food and housing. Even if you earn more, you pay more in taxes, but you should still have enough for basic needs. 

However, for higher earners, it might impact their ability to invest in savings accounts, add to a retirement fund, or indulge in luxury purchases. 

The way progressive tax works is to make sure everyone can afford the basics while making the tax system fair for all.

Income tax rates in Ireland follow a progressive structure, where the amount you pay depends on the tax band you fall into. The tax bands for 2024 are as follows:

Standard rate band: Taxed at 20%

Higher rate band: Taxed at 40%

These rates determine the proportion of your income allocated to income tax, reflecting a progressive tax system.

USC is another component of the progressive tax system in Ireland. It is applied at different rates to income, with higher rates for higher income levels. USC is applied to a broad range of income sources, including salaries, wages, bonuses, self-employed income, rental income, and certain social welfare payments.

Capital gains tax in Ireland is also progressive. Individuals pay a higher rate on the gains they make from the sale of assets, depending on the total amount of gains realised.

Inheritance tax may also be considered a type of progressive tax once the tax-free threshold is crossed. Once the tax-free threshold is exceeded, the remaining taxable inheritance is subject to progressive tax rates, currently at 33%. However, these rates are often fixed for specific values rather than increasing continuously.

Progressive taxation in Ireland helps in income redistribution by taxing higher incomes at higher rates. This also helps lower income earners meet their basic needs, promoting economic stability and well-being.

However, some experts argue that progressive tax may impact the incentive for high-income earners to work and earn more due to higher tax rates. Additionally, some feel that progressive tax is a penalty for working hard. 

Progressive tax and regressive tax are two opposing topics as the latter disproportionately impacts lower income earners.

Here’s an example illustrating progressive vs regressive tax:

Income tax rates for an individual under a progressive tax system in Ireland:

• Up to €42,000: 20% tax rate

• Balance: 40% tax rate

If someone earns €50,000, they pay 20% on the first €42,000 and 40% on the remaining €8,000. Hence, higher earners pay a higher percentage.

Under the regressive tax system in Ireland, there is a flat VAT at 23% on goods and services.

Whether someone earns €30,000 or €100,000, both pay 23% on their purchases. This is regressive as lower earners spend a larger portion of their income on this tax.