Ireland has what is generally regarded to be quite a progressive personal taxation regime. In other words, those who earn most pay the most, while the taxation burden on those with average incomes and below is considered to be relatively low.
Some would like to see an even greater contribution from the wealthiest, but there appears to be broad agreement that workers here go from paying tax on their income at a rate of 20% to paying 40% too quickly.
It’s an issue that has been championed by Tánaiste Leo Varadkar and one that he would like to see addressed in the upcoming 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 tailored that approach, suggesting a ‘middle way’ of sorts – the introduction of a 30% tax rate.
Ireland has had two income tax bands for many years now, making the regime rather unusual as most countries tend to have three or more. Prior to the 1990s, we had multiple rates and bands – five in the mid-1980s ranging from 35% to 65%. There were up to six rates in the 1970s. Some would argue that when the USC is taken into account, we again have six rates – albeit under different guises.
Although it may be a rather blunt instrument, at least the two-band income tax regime is fairly straightforward and uncomplicated – something that cannot be said for many taxation measures.
When does the 40% kick in?
For a single person, the higher rate of income tax is applied to earnings above €36,800.
For married couples with one earner, the 40% threshold is €45,800.
By international standards, that’s low.
In the UK, for example, the higher 40% rate kicks in at just over £50,000 with an additional 45% rate applied to earnings over £150,000.
The rationale behind an intermediate band is to take the blunt edge off the hit of the 40% rate by moving the threshold out to a higher level of earnings while the taxpayer is still contributing in a progressive manner.
Effectively, it would give workers who currently earn enough to exceed the 20% tax rate an increase in net pay without it being overly expensive for the exchequer and eating up most of the available budgetary spend.
How much are we talking about?
The Government’s Tax Strategy Group (TSG) – which produced its menu of costings of potential budgetary measures this week – looked at a few parameters for the introduction of an intermediate tax band.
The TSG firstly considered a 30% rate for those earning between €36,800 and €41,800.
That would cost the Exchequer €525 million a year and would see individuals and married couples with one earner taking home an extra €500 a year.
The second option examined applying the 30% tax rate to incomes between €36,800 and €46,800.
That would cost €945 million for a full year benefiting single or married one-earner couples to the tune of €1,000 a year. The latter option is expensive and would exhaust the bulk of the €1.05 billion set aside for taxation measures in the budget – a level that the minister has indicated he’s not minded to alter.
So, are we likely to see a 30% rate in next month’s budget?
The TSG papers state that the introduction of an intermediate tax rate would solely benefit middle- and high-income earners. “Low- and modest-income earners would not directly benefit from this proposal, if it was introduced in isolation and without additional compensating measures. From an equity perspective, it may be desirable to introduce other tax measures in tandem that would benefit low earners,” the papers said.
“The papers are sort of steering us away from that,” Peter Vale, Tax Partner with Grant Thornton told RTÉ’s News at One this week, pointing out that the gains would only go to those earning in excess of €37,000.
He suggested that altering credits and a widening of the bands at which people pay different rates of tax was more likely. “Low, middle and high earners would benefit from an increase in the bands so we’d probably see that,” he added. This move, known as indexation, would also be expensive costing up to €1.1 billion, according to the TSG papers, but it would benefit a wider cohort of up to 2 million workers.
The Tánaiste has acknowledged that any move in the direction of a 30% tax rate would have to be accompanied by reliefs for those outside of the proposed threshold, essentially for lower earners and those on welfare.
Dr Tom McDonnell, Co-Director with the Nevin Economic Research Institute, believes a 30% rate is a consideration that should be looked at over the medium term after the Commission on Taxation and Welfare publishes its report in the near future. He said he didn’t believe there was a strong case for the introduction of an intermediate tax band right now.
“All it would do is give a few hundred euro to some households. It’s redistribution upwards,” he argued. He pointed out that the cost-of-living crisis was not affecting everyone evenly, adding that many households still retained very high levels of savings from the pandemic.
Dr McDonnell called for the introduction of measures that targeted the households that were getting hit hardest by the cost-of-living crisis – mainly those on lower, mainly fixed incomes and those reliant on welfare.
“There are things you can do for everyone like reducing the cost of public transport, education, healthcare and especially childcare. These are all the things the government can do. That would be a better approach for now,” he said.
At the Finance Minister’s discretion
Paschal Donohoe told RTÉ’s Morning Ireland this week that the 30% rate was still “technically possible” and would be considered in the context of next month’s budget.
However, he’s thought to favour a movement in the bands so that workers who get a pay increase don’t end up paying more of that in tax at a time when the cost of living is on the increase.
“We believe we should be doing what we can to help workers to keep as much money as they are earning. It can be done through 30% tax rate, or an alternative way is to move existing tax rates, credits and bands,” he said.
“What the Government will have to do is consider not just what is technically possible but what are the merits of it and who we can help at a time of rising cost of living,” the minister explained.
In short, the 30% rate is an expensive move and one that, in isolation, would benefit few households.
It 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 seen as unlikely – in Budget 2023 at least.