Tax Measure Analysis: The Increase In The Income Level

The proposed tax measure I will discuss is the increase in the income level at which the higher rate (40%) of income tax is charged. In the 2018 budget the band for the higher rate of tax was increased by €750 to €34,550. It is hoped that we will see a similar increase, most likely by the same amount of €750 bringing the band to €35,300, this year. This measure is being sought by full time middle income earners i. e. the average person in Ireland excluding part time workers and students, over 2 million people. Income tax is a direct tax (a tax assigned directly on the individual or entity at whom or which they are targeted) charged on the basis of a person’s yearly income.

The main purpose of income tax is to generate revenue for the Government. It is a progressive tax as the rate of tax is increased as the amount of the tax base increases, a progressive tax system seeks to collect proportionately more tax from those on higher income. A very progressive income tax system would aim to reduce disparity in after-tax income but we are quite a way from that in Ireland. Smith’s canons of taxation are clearly defined criteria used to evaluate systems of taxation. They are Equity, efficiency, certainty and convenience. They are still very relevant today as Pascal Donohoe commented in 2016 about ‘how fairness is about the relative distribution of income in society and about improving services for our people’, his use of the word fairness is in reference to the canon of equity. We can use these Canons to analyse income tax and any changes the proposed measure may have. Income tax is indeed a fair tax as the rates increase as you earn more money, even if the tax bands are quite prohibiting to the middle income earning class, which satisfies the canon of Equity.

The proposed increase will aim to slightly increase consumer spending without affecting the overall market, the canon of efficiency. The criteria of efficiency has been expanded in recent times to encompass the issue of incentives. That is to say that the additional revenue from this measure would aim to incentivise consumer spending. The tax will be no easier or harder to collect and should cause no disruption to either the taxpayer or the government, the canon of convenience. Lastly the canon of certainty, the tax will be determined the same way as before although the government will obviously receive slightly less revenue from it. The aforementioned increase in the tax band has been welcomed. A revenue report published in August detailed how up to 64,200 workers could end up paying tax at a rate of 40 per cent on some of their income for the first time due to recent inflation. This would mean that workers paying the top band of tax would then account for up 22% of all people paying tax in this country. An increase in the tax band is seen as very likely by tax experts, as I mentioned previously most likely in the range of €750 - €1000. An increase of €1000 would cost the exchequer approximately €213 million and would be worth about €200 yearly to the average person. According to an opinion poll of over 1,000 people, carried out by Ámarach Research for Claire Byrne Live, 64% of people would prefer income tax cuts, while 34% would favour spending increases. Conversely the finance minister could face a battle with Fianna Fáil which remains unconvinced that the public wants tax cuts. The State’s economic think-tank warned there is “little or no scope” for cutting income taxes in October’s Budget. ESRI officials raised concerns that a big increase in capital spending under Project Ireland 2040, combined with tax reductions, could push the economy towards the point of overheating.

As was predicted by many, the band at which the higher rate of income tax is charged was increased from €34,550 to €34,550, a modest increase of €750. This means that a single person will pay tax at the lower rate of 20 per cent on €750 more a year from January 1st, 2019. This brings the level almost back to 2008, when the lower rate band stood at €35,400. This increase is worth approximately €150 yearly to the average Irish worker i. e. 20% of the €750. While it’s positive that there were no personal tax increases, the competitiveness of our personal tax rates is still a concern according to an article on Pwc’s website. With Brexit on the horizon, Ireland needs to ensure it is an attractive place to work and for international talent to relocate to. Our tax rate and the point at which people begin to pay it is quite high in comparison to other countries in Europe such as the Netherlands, Germany and Luxembourg. We’ve already seen a number of financial institutions move their operations from London. New locations are often a choice between Dublin, Amsterdam, Frankfurt and Luxembourg.

The article alludes that Ireland needs to signal to the rest of the world that it is serious about attracting talent if it wishes to compete with the locations mentioned above. Paschal Donohoe, the minister for finance, said the country's competitiveness in a post-Brexit era will depend on his ability to reduce income tax. Looking at the two budgets he has introduced during his time as minster for finance, he said he had done what he said he would do in relation to income tax. "I've continued to stand by my view that it's not sustainable and increasingly won't be competitive to say that you can be on a normal, average wage here in Ireland and already be on a higher rate of income tax," he said. In the UK, the higher rate of income tax is paid by workers earning more than £45,000 (€51,300). The minister said in the past two budgets he had raised the point at which people began paying the higher rate of income tax by €1,500 and signalled that he would continue this trend in future budgets. "I have done that because we have to address this issue over time," the minister said. An Irish Times article by Cliff Taylor dated the 11th of October calls the above into question though.

If we take the example of the single PAYE employee – and the PAYE couple with no children – their gains in total from the last three budgets come to €821 per annum. The article states that the main factor driving the overall small level of the tax package in Budget 2019 is that most of the cash went on higher spending. The small amount allocated to tax cuts meant that the “something for everyone in the audience” approach limited the gains for most and led to tiny increases for some. One must understand that wages are now rising and to ensure that a higher proportion of people’s income is not taken as a result, tax credits and bands should be adjusted for this. So whether income tax has in fact been cut at all in the last couple of budgets in real terms is debatable. Then there has been the decision to devote resources to the home carer and earned income credits. Concentrating scarce resources on these gains obviously favours those who qualify for them as opposed to, for example, married couples with no children. Fairness in tax is a contentious subject. Because the gains in the last few years have been so small, the increase in the two credits has meant those who qualify have gained a lot more than the average person. Were the overall gains greater, the disparity would be less.

The article draws attention to a letter in which the Taoiseach, Leo Varadkar, recently indicated to Fianna Fáil leader Micheál Martin that he wanted to see the income tax level increase by €3,000 over the next two budgets. This would have implied a €1,500 rise in this budget and the next one, but what was delivered this week was only half this. Again, when you factor in wage inflation, this is not really a policy change. The article alleges that as a result of this the government is delivering little via tax reductions to younger people in particular, who are more likely to be single or, if they are a couple, to have no children. Arguably the groups being hit hardest by rising rents and the rising cost of buying a home.

In my opinion the likely increase in spending arising from the measure along with Ireland trying to remain competitive with other countries in regards to tax rates makes this a somewhat successful measure especially when the trend of increasing this rate marginally each year is taken into account. It is worth noting that the measure is much needed targeted relief for those on lower and middle incomes and is sustainable as it doesn’t erode our tax base. We must however take into account that the budget could have achieved more and that inflation will most likely account for much of the supposed extra €150 in people’s pockets. Also with regard to Brexit, it seems unanimously agreed that lower income tax would benefit Ireland in attracting businesses here and yet there was no additional increase in the tax band to account for this. As such the increase in the tax band was badly needed but is not large enough to truly benefit many people.