Income tax rates, bands and credits remain unchanged next year, as the Government concentrates on raising additional sums from VAT, the household charge, carbon tax, capital gains tax, motor tax and other measures.
Defending the Government’s preference for indirect taxation, Minister for Finance Michael Noonan cited marginal tax rates of 52 per cent for PAYE workers and 55 per cent for the self-employed and said when marginal rates of tax were “very high”, jobs were lost.
“That is why in this Budget, indirect taxes rather than taxes on income are being increased.”
The main change to the personal taxation system is an increase in the exemption threshold for the universal social charge (USC). The threshold has been raised from annual income of €4,004 to €10,036, a move that will mean 330,000 people will no longer be eligible for the charge.
Mr Noonan described the raising of the exemption as a “fairness measure” that would help low-paid, part-time and seasonal workers in labour-intensive areas like the farming and hospitality sectors. The measure, which comes into effect from January 1st, will also “assist people to move into the labour market”, he said.
The Revenue Commissioners will change the way the USC is collected to a cumulative basis during the year, which Mr Noonan said would reduce the risks of both over- and underpayment of the charge.
Raising the amount of income that can be earned before becoming liable to the charge is estimated to cost €34 million next year. However, the change in the manner by which the USC is collected is expected to raise €45 million.
Meanwhile, the well-flagged increase in the standard rate of VAT from 21 per cent to 23 per cent will come into effect in January and is expected to raise €560 million in 2012.
Mr Noonan pledged that the Government would not increase the standard rate of VAT beyond 23 per cent in its lifetime.
“Other European countries have tended to place the burden of fiscal correction on indirect taxes rather than income tax,” the Minister said. Some 20 of the 27 EU member states have increased VAT in the last four years, he added.
The increase in the standard rate of VAT will leave the Republic’s rate 3 points higher than that of the United Kingdom. “I do not expect an increase in cross-Border shopping as a result of the VAT increase,” the Minister said.
The VAT hike has been criticised by several groups because it disproportionately affects those on low incomes.
Mr Noonan said the use of indirect taxation to raise revenues did not mean that the wealthy should avoid carrying “the principal burden” of tax. He cited the minimum effective tax restriction on high earners, which imposes a minimum effective income tax rate of 30 per cent in some cases.
He also signalled that the Government will abolish the citizenship condition for payment of the domicile levy so that tax exiles cannot avoid it by renouncing their citizenship. “I intend to keep the contentious issue of the tax treatment of tax exiles under constant review.”
