The Houses of the Oireachtas Parliamentary Budget Office (PBO) develops microsimulation model that estimates the effect of indirect taxes on Irish households

Annette Connolly, Director of the Parliamentary Budget Office said, “the EVE model is a detailed, innovative product developed by the PBO. It allows for detailed analysis of the cost and distributional implications of indirect tax reforms for Irish households- with analysis of VAT, carbon taxes and a range of excises facilitated within the model.”

Some of the key findings from the report describing the EVE model are:

1. Indirect taxes are regressive and consume a larger share of low-income households’ resources

• Irish households pay an average of €151 per week in indirect taxes. On average, this amounts to 13.0 per cent of household expenditure or 12.6 per cent of household income.
• Low-income households – the poorest ten per cent of households – pay an average of €88 per week in indirect taxes. On average, this amounts to 14.3 per cent of household expenditure or 29.2 per cent of household income.
• High-income households- the richest ten per cent of households- pay an average of €216 per week in indirect taxes. On average, this amounts to 10.5 per cent of household expenditure or 7.9 per cent of household income.

1. VAT is the largest and most regressive element of the indirect tax system

• On average, VAT paid by Irish households amounts to €113 per week- this is equivalent to 8.7 per cent of household income or 8.9 per cent to household expenditure.
• Low-income households- the poorest ten per cent of households – pay €58 per week in VAT, equivalent to 19.4 per cent of income or 9.5 per cent of expenditure.
• High-income households- the richest ten per cent of households – pay €159 per week in VAT, equivalent to 5.8 per cent of income or 7.7 per cent of expenditure.

3.Scheduled carbon tax rises are regressive

• The carbon tax is scheduled to increase annually to tax carbon at €100 per tonne by 2030.
• The analysis simulates the effect that a €100 per tonne carbon tax would have on Irish households, were it in place in 2023, at current household energy usage levels.
• The results show the tax increase would yield €716.1 million from households on a full-year basis after accounting for the VAT implications of a carbon tax rise.
• The poorest ten per cent of households face an increase in indirect taxes (carbon tax plus VAT) of €4.6 per week- equivalent to 1.5 per cent of household income. The richest ten per cent of households incur an increase in indirect taxes of €11.2 per week- equivalent to 0.4 per cent of income.

The author of the report, Dr. Mark Regan, Senior Economist in the Houses of the Oireachtas and the Director of the Parliamentary Budget Office, Annette Connolly are both available to provide more information. Please contact Stephen.higgins@oireachtas.ie

Read more on the work carried out by the Parliamentary Budget Office  

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Notes to the Editor:

• The Parliamentary Budget Office provides independent and impartial information, analysis, and advice to the Houses of the Oireachtas.
• The EVE model is a new product developed by the Parliamentary Budget Office and is available as a tool to Members of the Oireachtas to aid in any analysis of indirect taxes.
• The report uses the PBO’s EVE model to model indirect tax incidence for a sample of Irish households. SWITCH, the ESRI’s tax-benefit microsimulation model, is also used in examining revenue recycling from carbon tax increases in Budget 2024.

More detailed information on the key findings:

Indirect taxes are regressive and consume a larger share of low-income households’ resources

• Indirect taxes are particularly burdensome on low-income households as they tend to spend a greater share of their expenditure on energy products such as electricity, home-heating oil and natural gas. These represent 12 per cent of expenditure among the poorest ten per cent of households compared to 6 per cent among the richest ten per cent of households.
• Higher relative expenditure by low-income households on highly taxed products such as alcohol and tobacco also contribute to this regressive pattern. Alcohol and tobacco expenditure represents 9 per cent of all expenditure by the poorest ten per cent of households, compared to 6 per cent for the richest ten per cent of households.

Scheduled carbon tax rises are regressive

• Revenues collected from increases to the carbon tax are allocated to the Carbon Tax Fund. A portion of these revenues are then recycled directly to households to offset the regressive nature of carbon tax increases.
• In Budget 2024, this revenue recycling occurred through the social welfare system- with a €4 increase to Increased Qualified Child Payments and a €54 increase to the Working Family Payment weekly income limits.
• The report estimates that these policies were progressive, but concentrated, with revenues recycled nearly exclusively to low-income lone parents and couples with children.
• This concentration in revenue recycling means that many low-income households were not compensated for rising carbon taxes. The report estimates that just under 1 in 3 of the poorest ten per cent of households benefitted from measures to directly offset carbon tax regressivity.