Tax code review to weigh indexation and Taoiseach’s 30% rate proposal

The Government’s review of the personal tax system in Ireland will look at the cost and feasibility of indexing tax bands and credits in line with inflation while also examining Taoiseach Leo Varadkar’s proposal for a new middle rate of income tax.

Minister for Finance Michael McGrath on Wednesday started a public consultation “seeking stakeholder views” to feed into the review.

His department later confirmed that the review would focus primarily on possible changes relating to income tax and Universal Social Charge (USC) while changes to PRSI (Pay Related Social Insurance) would be examined separately as part of the Department for Public Expenditure’s “PRSI roadmap” process.

The review’s terms of reference indicates there will be a “strong focus” on commitments in the Programme for Government relating to income tax and USC, “such as indexation”.

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[ Personal tax credits and rate bands should be indexed to inflation, KPMG says ]

Several countries have a tax indexation system linked to wage growth to ensure workers do not lose additional pay through higher rates of tax. The Government’s high-level tax strategy group last year estimated that indexation, while benefiting two million workers, would cost the Government between €630 million and €1.1 billion a year to implement.

The review will also look at Mr Varadkar’s controversial proposal for the middle 30 per cent rate of income tax. The Fine Gael leader claims a new rate would ease the burden on middle-income earners but other Government ministers are said to believe that such a move would involve too much upheaval of an already complex tax system.

The review will also assess the relative competitiveness of Ireland’s personal tax code by comparing the marginal tax rates paid by workers here compared to their counterparts in other jurisdictions.

The review will also consider recommendations by the Commission on Taxation and Welfare.

In a report last year, the commission warned that the Government faced a significant funding shortfall as age-related spending rose over the next decade and in the context of an increasingly concentrated corporate tax base. It strongly recommended increasing PRSI as a way of broadening the tax base here.

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“Overall level of revenues raised from taxation and PRSI, as a share of national income, will have to increase materially over the coming years,” it said.

In its own programme for Government, the Coalition said it would “consider increasing all classes of PRSI over time to replenish the social insurance fund”.

The Government estimates that age-related expenditure could cost an additional 3.4 percentage points of national income by 2030, compared to 2019, the equivalent of an extra €7 billion a year.

“As signalled in Budget 2023, the Government is committed to a review of the personal tax system, having regard to the medium-term,” Minister McGrath said on Wednesday while opening the public consultation. “As the largest annual source of revenue for the exchequer, income taxes make a significant contribution to our public finances,” he said.

“Equally, the personal tax system has an important role in supporting a competitive economy. Interested stakeholders are invited to give their views on the questions detailed in the public consultation document and as always I would welcome all feedback,” he said.

The consultation period runs until April 4th. Contributors are being asked to give their views on specific questions while referring – where appropriate – to the exchequer costs/yields of their proposals.