Budget 2018: Tax savings for middle income earners might be as little as €200

Raising the standard rate tax band in this October's budget would benefit some 550,400 taxpayers; however a €1,000 increase in the band would see the average earner save less than €200 a year and would cost the exchequer more than €200 million, the Irish Tax Institute has said.

Meanwhile the Nevin Economic Institute has warned that tax cuts should not be on the agenda this October, as it would limit the country’s capacity to “pursue social objectives”.

Taoiseach Leo Varadkar has committed to reducing the tax burden on middle income earners in this year's budget, but as figures from the Irish Tax Institute in a pre-budget briefing show, given the number of tax payers it would benefit, the cost of any changes will be substantial, thereby limiting the potential for hefty gains.

Entry point

Currently the entry point for a single person is €33,800, but raising the threshold by € 1,000 would cost the Exchequer some € 202 million.

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However, while the cost is substantial, the savings to a taxpayer are not; a single person earning €40,000 would save just €200 a year for example, while a married couple with two incomes, would save €400, according to the Institute.

If the Government does go ahead and raise the entry point for the 20 per cent tax band, it could help reduce the entry point for the higher rate of tax, which is considerably lower than other OECD countries.

“This is a very low entry point by international standards to a tax rate of this magnitude,” the Institute says.

Fianna Fáil has suggested that a better approach to alleviate middle income earners would be to cut the 5 per cent rate of USC to 4.4 per cent. This would save someone earning €40,000 a year about €106, or about €250 for someone earning €75,000. It would apply to a greater number of tax payers, at about 1.3 million.

Given the tightness of the “fiscal space”, the institute has suggested some potential revenue earners which could allow the Government more breathing space to cut taxes.

These include increasing the national training fund levy from 0.7 per cent to 1 per cent in the three-year period to 2020 (€170 million); taxing sugar sweetened drinks (€40 million); raising excise on “old reliables” (€138 million); increasing carbon tax (€110.4 million); and abolishing the 9 per cent Vat rate (€491 million).

Noting that the Employment Investment Incentive (EII), which replaced the Business Expansion Scheme in 2011, and allows small businesses attract investment from individual investors in a tax efficient manner, is less successful than its predecessor, the institute wants to see a number of changes.

According to the institute, just over half the number of investors are using EII compared to BES when it was most successful. As such, the institute wants the €150,000 annual investment increased; full tax relief to be provided in year one and extended to USC and PRSI; and the scheme be extended to the founder shareholder.

The institute also wants the Government to consider introducing a share-based employee scheme along the lines of the UK’s Enterprise Management Incentive (EMI), which would enable small and medium sized businesss “attract and retain the best talent”

‘No tax cuts’

While the Government has committed to some degree of tax cuts, the Nevin Economic Research Institute (Neri) says that Ireland needs to “learn from the mistakes of the past” and shore up its finances, increase its spend on education, childcare, housing and infrastructure, and avoid cutting taxes on labour further.

The trade union-backed economic institute says that the case to cut taxes is “extremely weak” as it found that on a per person basis, combined taxes and social contributions in Ireland are significantly lower than in comparator high-income EU countries.

“Indeed, with the exception of taxes on consumption we find no evidence that the Irish taxation system is onerous in comparison to other high-income European states. In fact, the evidence is clear that Ireland is a low revenue state,” the report said.