Your tax bill is set to rise: what is likely to change?

Did you notice? Minister for Finance Paschal Donohoe is establishing a new commission on tax and welfare, chaired by LSE academic Professor Niamh Moloney. It is due to report by summer 2022 and has a far-reaching remit to recommend changes in the taxes we pay and the entitlements we receive. Its terms of reference are far-reaching – the signals are that post-pandemic big changes may be on the way. They won't come in next year's budget, but after that everything will be on the table. So what might this mean?

1. PRSI and a new social contract

There is one area where changes look to be a nailed-on certainty. Social entitlements in areas such as sick pay, paternity leave and supports for people out of work are going to increase. And higher PRSI is going to be the key way of paying for it. This was signalled in the programme for government and the emergency supports during the pandemic – while many will be unwound in their current form – have added fuel to the debate.

The terms of reference of the new commission refer to a major report by the National Economic and Social Council (Nesc) on welfare, which discusses new measures to address poverty, improved child income payments and more supports in areas such as childcare and education. There is a lot of complexity here and a lot of ideas in areas such as a living wage and a basic income for the commission to examine.

Paying for all this is likely to focus on PRSI. Employers’ PRSI, low here by international levels, looks certain to rise. The Nesc report also refers to the low level of self-employed PRSI here – this group generally pays at a rate of 4 per cent, but unlike those in employment, there is no employer’s contribution. Given the extension of more benefits to this group in recent years, pre-budget papers by government officials have consistently called for increased PRSI here. The issue with raising this is that many self-employed people were hit very hard by the pandemic.

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The big question is whether PRSI on employees in general will rise. The programme for government said increases in all areas of PRSI would be examined.This won’t happen for 2021, but from 2022 on will the Government try to sell the idea of more payments in return for more entitlements? This looks likely – the commission will have to look at how is it structured.

The other big social welfare issue will be pensions, with the commission asked to assess what a separate pensions commission, established last year, says on the sustainability of state pensions. You will remember that the Government delayed the plan to increase the retirement age for the State pension beyond its current level of 66 to allow this study. This is costly – it will cost more than €400 million a year from 2022 on so this is a big ticket item.

2. Income tax drag

For many years Irish governments have not indexed tax credits and the standard rate band fully for inflation. This means that people getting wage increases often end up paying a slightly higher proportion of their income in tax, generating around €400 million for the exchequer in years when no changes to credits and bands are made. This is a stealth tax with a real impact on people’s pockets. The programme for government said that credits and bands would not be changed in 2021, but would be indexed for inflation from 2022 on. But the pandemic has landed in the meantime. So this will be a decision first for the 2022 budget, which will be presented before the commission reports. But the commission will surely have something to say about how tax – and welfare – is indexed for inflation in the long term.

3. Tax on the better off

A key international theme is increasing tax on the better off, many of whom have been largely financially unaffected by the pandemic. In terms of income tax, the Nesc report pointed out that there are options here, including more income tax rates, designed to get a bigger take from higher incomes. Sinn Féin has also supported a bigger income tax take from higher earners. The programme for government said there would be no increases in income tax or USC rates, however. This limits room for manoeuvre in the years ahead, unless the Government uses the pandemic as a reason to change tack. Tax on income can also be increased by cutting allowances – for example restricting tax relief on pensions or health insurance to the standard rate of tax. The commission has been asked to look at tax allowances and reliefs and is sure to look at these.

4. Taxes on capital and property

This will be interesting. The commission may examine the idea of a wealth tax, a concept which has come and gone in some EU countries such as France as administrations changed. A Department of Finance report on the issue in 2016 did point out that to raise any significant revenue, this would need to cover a lot of the population – and not just apply to the super-rich.Given that the family home is the main source of wealth for the vast bulk of families, how this would be handled by a wealth tax would be crucial.

Of course the family home is caught by the local property tax, where bills have remained the same since 2013 as successive governments kicked to touch the issue of updating the base for this tax. Recommending increases, or reform, here is an option for the commission – though this is politically charged, with Sinn Féin calling for the tax to be abolished altogether.

Interestingly, the terms of reference of the commission specifically ask it to study a land value tax – a tax charged each year on the value of the land holding and not what it built on it. This is often viewed as a way of encouraging developers not to hoard land – but it could also apply as a new basis for local property tax changes for households, basing the charge on the value of the site, not the house. Finally, there is the issue of capital taxes, particularly inheritance tax (CAT). This is another way of taxing wealth, though again, a hugely politically sensitive one.

5.Environmental taxes

This will be a big one for the commission. And the challenge is likely to be underlined by the first carbon budget to be produced by the Government this year, highlighting the gap between where we are on emissions and where we need to go. As well as getting people to change their behaviour –for example moving from diesel cars – there is a need to consider the impact on the exchequer in the long term of people switching to electric cars. Government officials estimated that by 2030 this would leave a hole of €1.5 billion in the exchequer finances from lower motor and fuel taxes.

So the commission is likely to examine increases in taxes on polluting activities above and beyond the planned increase in carbon tax – a rise in diesel excise to the same level as petrol would be one simple measure. The carbon budget is likely to underline how far-reaching these change need to be. Tax incentives currently in place in agriculture and industry encouraging polluting activity may be phased out and some new green incentives introduced, including a campaign relating to retrofitting homes. And to replace lost revenue from motor tax – and push people out of their cars – the commission is likely to examine daily congestion charges on motorists entering busy city centres, such as those that exist in London. More sophisticated charging systems based on car use are also being discussed internationally, though some do raise privacy issues.

But the debate over the planned increase in carbon tax in the years ahead, as now set down in Government policy, only represents the foothills of the debate on green taxation.