Ireland's income tax system hurts middle-income earners, creates welfare traps and puts high-skilled foreign workers off coming here, the International Monetary Fund (IMF) has said.

Hitting middle-income families hardest in the tax system also undermines female participation in the workforce, the Washington-based fund added, in a strongly worded criticism.

In its latest post-programme report, the IMF said that while previous budgets had reduced the high rate of marginal tax to below 50pc, the tax base had been narrowed as the threshold for the Universal Social Charge had been increased.

"This places a large tax burden on middle-income households, undermines female labor force participation, creates welfare traps for low-skilled worker, and discourages high-skilled worker migration to Ireland," the report said.

The IMF said the Irish tax system relied more on direct taxes and less on charges such as property tax and wealth taxes, than other European countries. Indirect taxes are around average, it found.

The Government has promised to do more to ease the tax burden on middle-income earners, which is out of kilter with the UK.

Finance Minister Michael Noonan has said he favoured scrapping the USC over time, especially for lower income earners.

Read more: State considers 'menu' of taxes if they want to scrap USC by 2020

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However, the IMF, which is headed by Christine Lagarde has warned against the trend of taking lower income workers out of the tax net altogether, because it leaves those left in the net carrying too much of the total tax burden.

"Personal income taxation (PIT and Universal Social Charge-USC) has a relatively narrow base (about 30pc of households are exempted) and a relatively rapid progressivity (the top marginal rates are among the highest in the OECD)," the IMF said.

Its report said the Government should consider merging the USC into a more comprehensive personal income taxation system, with lower rates below the median wage but retaining a broad base.

The IMF report also said that Ireland's growth had been "exceptional", but that the recovery was incomplete.

It said the impact on Ireland from the vote in the UK to leave the EU was a "cause for concern", and it warned that the vote could affect Ireland's banks. "More than many other EU economies, Ireland's medium-to-long term outlook will be affected by the nature of the future relationship between the UK and EU, especially regarding trade, financial flows, and labour movement," the report said.

Economic growth this year was expected to be just below 5pc on the back of less vigorous domestic demand, mainly due to investment, the report said.

Growth forecasts were revised down for this year and next year. To protect State finances, Ireland should go further in cutting spending than EU fiscal rules demand, the IMF said. But it admitted the public wants budget relief.

"Reform fatigue combined with strong growth are fuelling expectations of a recovery dividend among the Irish public, which together with political fragmentation could lead to some policy reversals."

Irish Independent