Will the 30% income tax rate be incorporated into the budget 23?
We have what is generally considered to be a fairly progressive personal income tax system in Ireland.
In other words, those who earn the most pay the most, while the tax burden on those with middle and lower incomes is considered relatively low.
Some would like to see an even bigger contribution from the richest, but there seems to be a broad consensus that workers here are moving from taxing their income at a rate of 20% to paying 40% too rapidly.
This is an issue that has been defended by the Tánaiste Leo Varadkar and that he would like to see addressed in the next budget.
In the past he had suggested moving the threshold at which PAYE workers start paying the higher 40% rate, but more recently he has adapted this approach, suggesting a sort of “middle way” – the introduction of a tax rate of 30%.
Multiple tax brackets are not unprecedented
Ireland has had two income tax brackets for many years now, which makes the scheme rather unusual as most countries tend to have three or more.
Prior to the 1990s, we had several rates and brackets – five in the mid-1980s ranging from 35% to 65%.
There were up to six rates in the 1970s.
Some would say that when USC is factored in, we have six rates again – albeit in different forms.
Although it can be a rather brutal instrument, the two-bracket tax system is at least quite simple and simple – something that cannot be said for many tax measures.
When does the 40% take effect?
For a single person, the increased rate of income tax applies to income over €36,800.
For married couples with one income, the 40% threshold is €45,800.
By international standards, this is little.
In the UK, for example, the higher rate of 40% amounts to just over £50,000, with an additional rate of 45% applied to income above £150,000.
The rationale for an intermediate bracket is to abruptly reduce the 40% rate by moving the threshold to a higher income level while the taxpayer is still contributing progressively.
Indeed, it would give workers who currently earn enough to exceed the 20% tax rate an increase in their take-home pay without being too costly for the public treasury and absorbing most of the budgetary expenditure available.
How much are we talking about?
The Government’s Tax Strategy Group (TSG) – which this week produced its cost menu of potential budget measures – has looked at a few parameters for the introduction of an intermediate tax bracket.
The TSG initially considered a 30% rate for those earning between €36,800 and €41,800.
It would cost the public purse €525 million a year and see single income married individuals and couples bring home an additional €500 a year.
The second option considered applying the 30% tax rate to income between €36,800 and €46,800.
This would cost 945 million euros for a full year to benefit single or married couples on one income up to 1,000 euros per year.
The latter option is costly and would eat up most of the €1.05bn earmarked for tax measures in the budget – a level the minister has indicated he is unwilling to change.
So, are we likely to see a 30% rate in next month’s budget?
The TSG documents indicate that the introduction of an intermediate tax rate would only benefit those with middle and high incomes.
“People with low and modest incomes would not benefit directly from this proposal, if it were introduced in isolation and without additional compensatory measures. From an equity perspective, it may be desirable to introduce other tax measures in parallel that would benefit low-income people,” the papers said.
“The newspapers kind of take us away from that,” Peter Vale, Grant Thornton’s tax partner, told The News at One this week, pointing out that the winnings would only go to those earning more than €37,000.
He suggested it was more likely to tweak the credits and expand the brackets at which people pay different tax rates.
“Low, middle and high earners would benefit from an increase in the brackets, so we would probably see that,” he added.
The move, known as indexation, would also be costly and cost up to €1.1 billion, according to TSG documents, but would benefit a wider cohort of up to 2 million workers.
The Tánaiste acknowledged that any move to a 30% tax rate should come with relief for those outside the proposed threshold, primarily for low-income earners and welfare recipients.
Dr Tom McDonnell, co-director of the Nevin Economic Research Institute, believes a 30% rate is a consideration that should be looked at in the medium term after the Commission on Tax and Welfare publishes its report in the near future .
He said he does not believe there is a strong case for introducing a middle tax bracket at this time.
“It would only give a few hundred euros to some households. It’s an upward redistribution,” he argued.
He pointed out that the cost of living crisis did not affect everyone equally, adding that many households still maintained very high levels of savings thanks to the pandemic.
Dr McDonnell called for the introduction of measures targeting the households hardest hit by the cost of living crisis – mainly those on low, mostly fixed incomes and those on welfare.
“There are things you can do for everyone, like reducing the cost of public transport, education, health care and especially childcare. These are all things the government can do. That would be a better approach for now,” he said.
At the discretion of the Minister of Finance
Paschal Donohoe told Morning Ireland this week the 30% rate was still “technically possible” and would be considered as part of next month’s budget.
However, he thinks he’s fostering a movement in the bands so that workers who get a raise don’t end up paying more in taxes at a time when the cost of living is rising.
“We think we should do what we can to help workers keep as much money as they earn. This can be done through a 30% tax rate, or an alternative is to move existing tax rates, credits and brackets,” he said. said.
“What the government will have to do is consider not only what is technically possible, but also what the merits are and who we can help at a time when the cost of living is rising,” explained the minister.
In short, the 30% rate is a costly measure which, taken in isolation, would only benefit a few households.
This could technically be countered by tax increases in other areas, but given the political pressure on the government to spend more on services, the introduction of an intermediate tax rate is considered. as unlikely – at least in the 2023 budget.