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Personal Income Tax and Fiscal Drag Across The Distribution in Ireland

Author

Listed:
  • Boyd, Laura

    (Central Bank of Ireland)

  • McIndoe-Calder, Tara

    (Central Bank of Ireland)

Abstract

Fiscal drag occurs when incomes rise but tax bands and reliefs increase by less, such that more income becomes subject to tax. We show that fiscal drag varies across the distribution and has the potential to more adversely impact lower income taxpayers relative to higher income taxpayers. The mechanisms driving fiscal drag vary across the distribution too – with loss of tax credits the key driver for the bottom, while progressivity of tax brackets is most important at the top. We also find variation by income source, highlighting that income composition is a relevant factor too. However, over 2019 to 2023, we estimate actual policy changes offset up to four fifths of the potential fiscal drag that could have occurred if no tax changes were made.

Suggested Citation

  • Boyd, Laura & McIndoe-Calder, Tara, 2025. "Personal Income Tax and Fiscal Drag Across The Distribution in Ireland," Central Bank Staff Insights 4/SI/25, Central Bank of Ireland.
    • Handle: RePEc:cbi:stafin:4/si/25
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    File URL: https://www.centralbank.ie/publication/research-publications/staff-insights/fiscal-drag-across-the-distribution
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