Budget 2013: what's in store for you

The children may have already started counting down the days to Christmas, but for their parents and grandparents, a less benign countdown is on the agenda. Next Wednesday marks Minister for Finance Michael Noonan’s second budget, and with it a host of spending cuts and tax increases that are expected to total €3.5 billion.

Before we get weighed down contemplating what surprises might be in store, it might be time for some reflection. Since 2007, a series of benefit cuts and tax rises have taken big chunks out of incomes.

Eight new taxes have been introduced (income levy, the universal social charge, carbon tax, second property charge, household levy, domicile levy, pension levy, insurance levy). Budget 2013 is likely to herald at least one more, in the form of the property tax. The impact of these changes has hit taxpayers hard. Take the example of one of our budget families, Elaine and Arthur. On a joint income of €120,000, they have seen net income fall by €545 a month, or €6,540 a year.

Effective tax rates have soared, largely due to the introduction of the universal social charge (USC) in 2009. In 2008, if you were a single person earning €120,000 a year, the average rate of taxation on your earnings was 35.4 per cent – now it’s 42.7 per cent. For a married couple with a dual income earning the same amount, they would have paid tax at 28 per cent in 2007 – now it has jumped up to 33.4 per cent.

Public sector workers have also been hit, as the example of Amelia shows. A nurse, she earns €37,000 a year, but a combination of the USC, tax rises and pension contributions means that her income has fallen by €137 a month, or €1,644 a year.

Cumulatively, the effect of these increases means Ireland now has the 10th highest marginal tax rate on wages (at 52 per cent) of 34 OECD countries. This puts “low tax” Ireland ahead of the likes of France, the Netherlands and the US for taxes on employment. If the rumoured 3 per cent surcharge on incomes over €100,000 comes in, it will raise the top rate to 55 per cent.

In terms of the progressive nature of the changes, the austerity budgets would appear to have hit the nail on the head; those earning more pay more in tax.

However, one major anomaly remains – the level at which taxpayers start paying tax at the higher rate. Thanks to the USC, those earning more than €32,841 now effectively pay tax at the top rate of 52 per cent. That’s a low income threshold compared with other countries. If you lived in the US, for example, you wouldn’t start paying the top rate of 43.2 per cent until you earned €304,714, while our neighbours across the water won’t pay tax at 52 per cent until they earn €186,394.

But to really assess the import of recent income tax changes, it’s worth looking at the total tax mix. A standout statistic since 2007 is how much the Government now relies on one cohort – income tax payers – to fund itself. In 2007, income tax accounted for 29 per cent of total tax revenues; this year, combined with the universal social charge, taxes on employment are expected to hit 42 per cent. This does not compare well when looked at beside corporate taxes. In 2007, businesses contributed 13 per cent of revenues in the form of corporation tax; it has since slid to 11 per cent