10 key points from experts' tax assessment
Irish Tax Institute raises issues for debate ahead of Budget 2017
Finance Minister Michael Noonan has confirmed that the 'fiscal space' – the amount available to the Government for tax cuts or new spending measures – will be €1 billion.
He told the Oireachtas Budget Oversight Committee today that this would be split 2-1 between spending and tax measures. He added, however, that it would not be possible to phase out the Universal Social Charge (USC) over three years, but it could be done over five budgets.
Noonan told the committee the Irish economy was performing strongly, but the international outlook illustrated a need for caution, with the recent Brexit vote adding to those concerns. He said the Department of Finance was currently preparing a full macroeconomic projection, in advance of the Budget, which would take accounts of Brexit and other international developments.
The Minister said that, because of these risks, a contingency reserve or rainy day fund would bet set up, with €1 billion a year going into this fund 2019 onwards "to deal with any unforeseen circumstances that may arise".
His appearance came as the Irish Tax Institute published an analysis of Ireland's personal tax system ahead of Budget 2017. It looks at how the various tax changes introduced in nine budgets between 2009 and 2016 have affected levels of personal taxation. The institute - which is the representative body for tax advisers in Ireland - asks if we currently have a personal tax system that meets our social needs but is also suitable for a small open economy and calls for an open and informed discussion on the issue.
10 key points raised by the report:
1)Complexity: Nine budgets between 2009 and 2016 involved more than 50 different changes which affected the personal tax system. The Irish Tax Institute calculates that the overall system now has 53 'moving parts' – three charges (income tax, USC and PRSI) with three different entry points, 10 rates, 15 bands and 22 tax credits.
2)The tax net: The institute estimates that 29 per cent – or 703,800 – of just over 2.4 million income earners have now been taken entirely out of the tax net. This figure has increased from 12 per cent in 2011, as the entry point to the USC has risen from €4,005 in 2011 to €13,001 in 2016. An individual's first point of entry into the tax system is via the USC. It asks if this narrowing of the tax base is sustainable.
3)The USC: In 2015,the USC yielded just under €4.2 billion for the Exchequer, less than a quarter of the total tax yield and 9 per cent of total tax receipts. More than a million people – or 44 per cent of income earners – paid USC at the 5.5 per cent rate, which covers those earning from €18,669 to €70,044 a year.
4)Marginal rates: The tax body says Ireland is among 13 of 34 OECD countries with a marginal tax rate above 50 per cent (the marginal tax rate is the rate paid on every extra euro earned). Irish employees hit a marginal rate of 52 per cent at a salary of €70,045, compared with €300,000 for Spain, while French employees hit their 55 per cent marginal rate at €152,000. The institute also says the those earning €33,800 a year are already close to 50 per cent, paying a 49.5 per cent marginal rate. It asks if these rates are affecting competitiveness andIreland's ability to attract skilled workers.
5)Effective rates: The institute compares Ireland with nine other 'competitor countries' at five different income levels. It finds that Ireland climbs the rankings asincome levels move up. At €18,000, an Irish earner pays €600 in tax, the lowest of the ten countries. At €35,800, Ireland is 8th. By €55,000, Ireland has moved up to fourth-highest – behind Germany, the Netherlands and France. At the highest level – €100,000 – Ireland's effective tax rate is just under 39.5 per cent, again fourth behind the Netherlands, Germany and Sweden.
6)Bands: It would cost the Exchequer €188m to raise the threshold for paying the higher rate of income tax by just €1,000 from the current €33,800.
7)Share: The Irish Tax Institute estimates that the top 1 per cent of income earners paid 22 per cent of all personal taxes in 2016. In 2017, it estimates that the bottom 50 per cent of income earners will pay 3.6 per cent of all personal taxes.
8)Progressive?: The institute argues that Budget changes over recent years have been progressive and that people's personal tax bills now multiply as their salary increases. For example, a person on €25,000 earns 1.4 times the salary of a person on €18,000, but pays 5.6 times the amount of tax. At the other extreme, someone on €100,000 earns 6.7 times the amount of the person on €18,000 but pays 83.1 times more personal tax. The organisation warns that we should not lose sight of the total euro amount paid by people at different levels when judging tax changes on a Budget-by-Budget basis.
9)The self-employed: The institute says the self-employed lose out in three ways compared with PAYE workers in the tax code: once they earn more than €100,000, they pay a 3 per cent USC surcharge; their earned income credit is less than the PAYE tax credit – thoughthe Government has committed itself to matching these by 2018; and their PRSI entry point is €4,000 – much lower than the PAYE figure of €18,304.
10)Importance: In 2007 and 2008, VAT was the highest contributor to the Exchequer, but the contribution from personal tax outstripped VAT in 2009 and the gap has continued to widen. Personal taxes now account for 40 per cent of the total tax paid.
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