No cut for high earners but they are better off than most in EU

 

WITH the passing of Wednesday's Budget, five full years have last now gone by since the reduction in the top rate of income tax. Given that every 1 per cent cut in the 48 per cent tax rate costs considerably less than a corresponding reduction in the standard income tax rate, one could be forgiven for expecting some shaving of the top tax rate in a £490 million tax give away.

Instead, the Minister continued to focus his tax cuts on the first £13,600 of income of a single person and the first £26,500 of income of a married couple. All additional income of mid and higher income earners continues to attract aggregate taxes and levies of 50.25 per cent.

Given the apparent reluctance from all quarters to reduce the higher tax rate we would appear to be some way from meeting the aim alluded to in the Forfas report Shaping our Future (May 1996) of achieving a 40 per cent top rate of income tax by 2010.

Despite the five year standstill, a review of the last 10 years presents things in a warmer light. In 1987/88 a single person earning more than £10,200 and married couples earning over £20,400 faced a marginal income tax rate of 58 per cent.

Even allowing for inflation based indexation of personal, allowances and the lower rate bands, the 10 year experience has seen a 10 percentage point reduction in the top income tax rate. In that context, the Forfas aim appears less daunting.

Despite common perception, higher income earners do not fare that badly in the income tax stakes relative to their counterparts in other EU countries. A KPMG survey following Wednesday's Budget, reveals that a couple with income of £50,000, a company car valued at £20,000, two children and annual mortgage interest of £5,000:

- will pay a total of £19,495 in tax and social insurance in 1997/98;

- that this is less than the EU average in similar cases.

As seen from the table, although Ireland's tax imposition is high for this couple relative to their fellow Europeans, this is compensated for by the lower level of social insurance.

These findings are consistent with a recent study by the Adam Smith Institute, a free market think tank, which calculates how many days average Europeans must work to earn sufficient income to pay their annual tax bill.

The institute calculated that European workers on average will work until June 5th (i.e. 156 days) in 1997 to pay their taxes. The study showed that an average Irish person will earn enough to pay his or her taxes within 147 days in 1997 (i.e. until May 27th).

The figures suggest that the discontent with the level of taxation in Ireland is related to its absolute level rather than its comparative level which on the face of it appears to be an EU wide concern.

David Kennedy is a tax partner in KPMG. KPMG's Budget analysis is available at http//www.kpmg.ie