Third rate of income tax 'has merit' but only if tax on labour remains low

INCOME TAX:A THIRD rate of income tax "has merit" but should "have regard to the need to keep taxation on labour low and marginal rates competitive", the commission said.

The body said the ceiling on income to which pay related social insurance (PRSI) is applied should be abolished on a phased basis. This measure would increase the amount of PRSI paid by higher-income earners.

The commission also said that the health levy, which it said did not “confer any entitlement to benefit”, should be integrated into the main income tax system as part of a simplification of the ways in which tax is charged on income.

Workers on the minimum wage should continue to be exempt from income tax and PRSI, it said.

The commission’s chairman, Frank Daly, declined to specify whether a third rate should apply above the current marginal rate of 41 per cent or in between the current standard rate of 20 per cent and the marginal rate. However, he said a three-rate structure would allow for greater equity and flexibility. “We’re not prescribing what the third rate should be, we’re simply saying that the Government has options there.”

The commission’s report cites a paper by the Organisation for Economic Co-operation and Development which found that a flatter income tax structure – one with fewer allowances and credits – was more likely to spur economic growth. However, the commission concluded that “a balance must be struck between flatness and progressivity or, to put it another way, between growth and fairness”.

The existence of a ceiling above which PRSI ceases to be paid was “regressive”, the commission said, because it meant that those who earn more than the ceiling – currently €75,036 – pay a smaller proportion of their income in PRSI than those who earn less than the ceiling. The abolition of the ceiling would also yield about €150 million a year for the exchequer.

The commission recommended that the PRSI system should be examined in a separate study. However, it did say a single rate of PRSI should be charged to employees and the self-employed, and that as part of the broadening of the PRSI base people should be subject to PRSI on unearned income such as investment income, rental income and share-based pay.

For equity reasons, a “modest” earned-income tax credit should be phased in for company directors and the self-employed. These workers do not receive the PAYE tax credit, which is worth €1,930 per annum.

The commission said the family rather than individuals should continue to be the unit of taxation for all direct taxes, and it endorsed existing arrangements with regard to the tax bands and credits that apply to single-income and dual-income married couples.

Mr Daly said they struck a balance between the desire to provide incentives to women to participate in the workforce and the “very strong views in this country with regard to childcare choices”.

Mr Daly said the individualisation of tax bands and credits was a topic that had “got a lot of airing” during the discussions held by the commission, but it had decided to “leave it as it is”.

Completing the individualisation process, which would require giving a single person the same tax bands and credits as a single-income married couple, would be “hugely costly”. At the same time, reversing the steps made toward partial individualisation during the early part of the decade would also be hugely costly.

The restrictions on the use of tax reliefs and exemptions by high-earners introduced in 2007 should remain part of the tax code. They should apply to individuals with income of €250,000 or more, rather than the existing threshold of €500,000. Restrictions should apply on a graduated basis to individuals earning more than €200,000.

Although it recommends further integration of the tax and welfare systems in general, only the health levy should be fully subsumed into income tax. This should only happen when the economy recovers. Mr Daly said if the recommendations on property taxes, carbon taxes and the abolition of certain tax reliefs were implemented, this could be offset by lower income tax bills.