Not indexing income tax for inflation could bring in €300m

Net gain from income tax cuts is smaller if tax bands and thresholds are not increased in line with inflation

Non-indexation is a core principle in the tax-cutting strategy set out in the programme for government of the minority Fine Gael administration

Non-indexation is a core principle in the tax-cutting strategy set out in the programme for government of the minority Fine Gael administration

 

The Government’s decision not to index the income tax system for inflation will provide some €300 million of the €900 million which may be available next year for tax cuts and spending increases, new data shows.

Cuts to income tax rates deliver an upfront benefit to workers and other taxpayers. However, the net gain is smaller if tax bands and thresholds are not increased in line with inflation as a greater proportion of income is subject to tax in such cases.

In a parliamentary reply, Minister for Finance Michael Noonan said his forecast of €900 million for tax and spending measures in 2017 assumes tax bands and credits would not be indexed in the October budget

“I want to stress that this is a work in progress figure and is subject to revision,” Mr Noonan said in response to questions from Fianna Fáil finance spokesman Michael McGrath. “Estimates will be refined for 2017-2021 in the coming weeks.” According to Mr Noonan, the “fiscal space” would be reduced by about €300 million to €600 million next year if indexation proceeds.

However, non-indexation is a core principle in the tax-cutting strategy set out in the programme for government of the minority Fine Gael administration.

The document said personal tax reductions such as the gradual elimination of the universal social charge would be funded through six specific measures, the first among them being “extra revenues from not indexing personal tax credits and bands.”

Official forecast

Mr Noonan’s figures were predicated on a forecast of 2.5 per cent inflation in non-agricultural pay in 2017 and a 1.6 per cent rise in consumer prices. The €33,800 per year single person standard income tax band would rise to €34,640 if indexed for earnings growth, he said. The €33,800 band would rise to €34,340 if indexed for inflation.