Agreeing on terminology

Brian Lenihan has claimed that the Irish income tax system is progressive.   This is incorrect, and for the simple reason that he’s not applying the right definition of progressivity –

Mr Lenihan pointed out the most recent data from the Revenue Commissioners showed that the top 20 per cent of income earners paid 77 per cent of all income tax, the top 12.5 per cent paid two-thirds of the total and the top 6.5 per cent of earners paid half of all income tax.

At the other end of the income scale, 38 per cent of income earners were exempt from income tax. “That data shows how progressive the income tax system in the State is,” said Mr Lenihan, who also reaffirmed the Government’s commitment to the 12.5 per cent rate of corporation tax.

The concept of progressivity refers to whether additions to income incur higher rates of income taxation.  On paper, the Irish income tax is progressive, because it has higher rates of taxation as taxable income gets higher.  

But actual progressivity is an empirical matter that can only be resolved by establishing the actual rate of income tax paid on various levels of income.  To cite an obvious problem, people on high total income can use credits, deductions, and sources (e.g. capital gains vs wage income) to reduce their effective tax rate far below that paid by an average earner.  

Lenihan’s statistics relate only to the share of total income tax revenue paid by each group.  This share depends on income inequality as well as the tax system.  To take an extreme example, suppose that one person in the economy had all the income and no-one else had any.  Suppose also that the one rich person pays income tax.  By Lenihan’s definition, that’s progressive!

UPDATE: In his post pension levy news conference, Brian Cowen repeatedly referred to the income tax system as progressive, without ever supplying the necessary inflation to evaluate this claim. Rates alone do not make progressivity.