PRSI and income levies will offset gains for many, writes Cliff Taylor, Economics Editor.

In terms of personal tax, Budget 2004 needs to be judged by its deeds, rather than its words. The Minister, Mr McCreevy, gave a stout defence of the concept of a low tax burden in his Budget speech.

Unemployment fell along with tax rates in recent years, he said, and "this lesson should be learned by those who mistakenly call for us to increase our tax burden towards the level of some other states in Europe".

The irony, of course, is that Budget 2004 will increase the tax burden on many earners. In cash terms, all PAYE employees will get a small gain from the increase in the employee tax credit. However, for some, the imposition of PRSI and the income levies on benefit-in-kind payments will offset this gain. And while wage and salary increases next year will leave employees a bit better off in cash terms, many will pay a higher percentage of their total income in tax.

To fully adjust the tax system for inflation would have required all tax credits and the standard rate band to rise to compensate for wage inflation. As it was, the employee tax credit rose by €240 to €1,040, a move designed to protect those on lower earnings. In particular, the measure was designed to ensure that 90 per cent of the new minimum wage - which rises to €7 an hour in February - remains outside the tax net. However, other credits were left untouched.

This was the only plus for taxpayers in the Budget and will remove 39,200 people from the tax net altogether. It will also deliver income gains to lower paid workers - albeit a modest enough €20 a month assuming their 2004 income is the same as 2003. For employees earning above €40,000, the increase in the employee PRSI ceiling to €42,160 will offset some of the cash gain from the employee credit rise.

The rise in the PRSI ceiling - announced in the Estimates but not alluded to in the Budget - was one of the hidden hits of the package. Another is the imposition of PRSI and the 2 per cent income levy on benefit-in-kind payments. This was announced in Budget 2003 but not referred to last Wednesday. Nonetheless, it comes in from January.

This measure will particularly hit those earning below the PRSI ceiling, as they will face the 4 per cent PRSI charge and the 2 per cent income levy on the value of their benefits. A 6 per cent charge on benefits valued at €4,000 a year would wipe out the gain from the increase of the employee credit to those whose earnings are below the PRSI ceiling.

The new benefit-in-kind regime will be less onerous on higher earners. Those earning above the new €42,160 PRSI ceiling will only have to pay the 2 per cent income levy on the value of their benefits. In this way, the new regime is regressive and provides an argument for PRSI reform in future years.

However, the biggest hit for taxpayers comes from what the Minister did not do - which was to adjust the system for inflation. By not doing so - and particularly by not widening the standard rate band - Mr McCreevy ensured that more taxpayers will get caught in the higher 42 per cent rate.

The tables above illustrate this. When presented in our Budget supplement - which calculated the impact of the tax changes on static incomes - the two couples featured both saw a decrease in deductions as a percentage of gross income. Add a 5 per cent salary increase, however, and while they are still better off in cash terms, deductions rise as a percentage of income.

The experience of "Kate" illustrated the impact of PRSI on BIK on relatively low-paid workers with perks such as cars.

She found herself worse off after Budget Day in cash terms and will find that all extra income from a pay rise is taxed at 42 per cent.

Department of Finance figures show that 62,000 more people will be liable at the higher rate next year, more than a third of all earners. As Mr Pat Rabbitte pointed out in the Dáil, when the third of earners who do not pay enough to be included in the tax net at all are excluded, more than half of those who actually pay tax now do so at the higher rate. Naturally some of the increase is due to the rise in the number of people at work.

However, the entry point to the 42 per cent rate - €28,000 for a single worker - is now around the level of the average industrial wage.

The key argument for lower tax rates - the mantra continually repeated by this Government - is that they reduce the marginal rate of tax, in other words the rate people face on an extra euro of income. Low marginal rates are meant to encourage enterprise.

The last two budgets, by increasing the marginal rate for many people, have chipped away at the gains from the era of tax cuts.