Income tax revenue elasticities in Ireland: an analytical approach

Over the last decade, Irish tax revenue has been subject to significant fluctuations, especially during the financial crisis, when total Exchequer tax receipts declined by over 30 per cent. As income tax is the largest individual source of tax revenue in Ireland, accounting for over 30 per cent of the total, fluctuations in this source of revenue have a significant bearing on the total tax revenue. The purpose of this paper is to analyse the responsiveness of income tax revenue to changes in income and how this is related to the structure of the tax system and the distribution of income. The lower the responsiveness of revenue to a change in income, the less volatile the tax revenue from this source becomes, but this also implies lower progressivity of the income tax system. This trade-off between responsiveness and progressivity is of particular importance in an Irish context as the income tax system is highly affected by the existence of tax credits, which by construction drive the size of the elasticity upwards. Using readily available administrative data and parameters from the Irish income tax system, income tax revenue elasticities are calculated for the period 2003–13, and for different income levels and types of taxpayer.1 An unusual feature of the Irish tax system, compared to other European ones, is the existence of the tax credits for the main income tax, while a more conventional system applies to the Universal Social Charge (USC). The tax credit structure provides a unique opportunity to assess whether a tax credit system is more or less progressive than the traditional multiple threshold ones. The estimates complement other current ESRI research on revenue elasticities (see Deli et al., 2016) but provide a more granular level of detail, which should prove useful for tax forecasting and policymaking.