How will State slice €750m tax pie?

The Government has set aside up to €750 million for tax cuts in the budget next month, an endeavour which will concentrate heavily on income tax reductions. But what exactly is in play?

At issue primarily are cuts in the universal social charge (USC) on income up to €70,000, the removal of a further 90,000 low-paid workers from the tax net altogether and measures to begin bringing the tax treatment of self-employed people into line with employees.

Quite how the Government divides up the pie remains under discussion. We know, however, that the key political priority is to weigh the benefit of tax cuts in favour of “middle Ireland”. In the Coalition’s assessment, this the cohort which earns up to €70,000. The main benefit of the tax package will be directed at such income with a cap maintained to limit gains on income above that level.

The prevailing USC rate is the 7 per cent which applies to earnings up to €70,044 and brings the total tax on such income to 51 per cent when added to PRSI and the higher PAYE rate. Last week, Taoiseach Enda Kenny reiterated his promise to bring the overall tax rate for this group “below” 50 per cent by cutting the 7 per cent.

Cost of change

In a new report, the Irish Tax Institute assumes that a one-percentage point decrease in the 7 per cent USC rate would cost €364 million.

That would bring the overall rate to 50 per cent, yet Kenny’s pledge, of course, is to go below that level. Such figures suggest a two percentage point cut from the 7 per cent rate and would swallow virtually all the money reserved for tax measures.

Under discussion, therefore, is a 1.5 percentage point cut from the 7 per cent USC rate, bringing the total under 50 per cent and leaving scope for other measures.

For a single person on the average wage of €36,271, the Irish Tax Institute calculates that the annual gain from bringing the 7 per cent USC to 6 per cent would be €187. The gain in a year for a single person on €75,000 would be €525. Based on these figures, the annual gain from a 1.5 percentage cut would in the region of €280 on the €36,271 wage and some €787 on a €75,000 wage.

Other budget possibilities centre on an increase to the income bands at which the higher 40 per cent PAYE band kicks in, long a source of controversy as such thresholds are very low by international standards.

Increasing the single person 40 per cent band by €1,000 to €34,800 would cost €72.4 million, says the Irish Tax Institute. The annual gain would be €200 for people earning €36,271 and, indeed, people on €75,000.

Increasing the relevant band for a married single-income household by €1,000 to €43,800 would cost another €26.7 million. A similar increase for married two-income households would cost another €74.3 million. Total cost: €173 million.

The Government has also pledged to take another 90,000 workers from the tax base. The Irish Tax Institute says increasing the €12,012 USC entry point to €14,000 without also realigning the relevant 1.5 per cent USC band would benefit 80,000 taxpayers currently in that band and cost €22 million.

A €1,000 increase in the entry point and a simultaneous realignment of the 1.5 per cent USC band would benefit all people who pay the USC, but the cost would be €49.7 million.

Then there are the self-employed: 220,000 people who work for themselves and another 83,000 proprietary directors. These people do not benefit from the €1,650 PAYE tax credit for employees. They also pay a three percentage point USC surcharge on income above €100,000.

Phased measure

The Irish Tax Institute says the the introduction of an “earned income tax credit” to equal the €1,650 PAYE credit in one step would cost a total of €470 million. This is considered too expensive to do in one go, so a credit of this kind is likely to be phased in. Doing that in three equal steps, however, would still prove costly in

Budget 2016

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Business leaders have also pressed for the elimination of the 11 per cent USC charge on self-employed earnings above €100,000. This would cost €125 million but the benefit would be limited to some 28,700 taxpayers. As the introduction of a credit like the PAYE credit would help more than 10 times as many people, it is considered to be the more likely lever.