Income tax relief?
By Sean Whelan, Economics Correspondent
“ My officials constantly model and examine potential options for changes to the tax system for my consideration as part of the overall Budget package”, said Michael Noonan in a written reply to Sinn Féin TD Pearse Doherty in February.
I have been told that one of those potential options – modeled and examined – is to raise money through an increase in the Universal Social Charge to “compensate” for a change to the income tax bands to provide relief for those taxpayers who enter the top 41% income tax band with earnings that are below the average industrial wage.
So how much would have to be raised under such a scheme?
An indication of the amounts involved came in a written parliamentary question from Eoghan Murphy TD, who asked the Minister for Finance about the revenue loss that would come from raising the threshold for the top rate of tax by €10,000 (and pushing on in 10k increments up to an income of €82,800).
The answer: a ten grand increase in the band would cost €1.3 billion to implement.
The Revenue Commissioners annual report, published this week, tells us that last year USC raised €3.95 billion.
So using USC to fund an easing to the income tax burden for people on the average industrial wage implies a pretty hefty hike to an unpopular (but very effective) tax.
So why not just take the hit and raise the bands anyway? The publication earlier this week of the Stability Programme Update suggests that’s not possible.
The Department of Finance is sticking to its guns over the need for a €2bn adjustment (€1.3bn spending cuts, €0.7bn revenue, mostly water charges).
Even the ESRI, which suggests the Government may have cope to do little more than water charges in the next Budget, are not talking about tax cuts.
Yet the Government is (and its backbenchers and local election candidates) are talking almost non-stop abut tax cuts.
The Minster for Finance in particular wants to deliver relief to that difficult transition point between the 20% and the 41% tax bands.
Here is what he said on the topic on Wednesday night (15 April) in the Finance Committee discussion on the stability programme update:
“One of the aspects of the tax code that is most jobs unfriendly is that people on relatively small incomes have to go on the high rate of tax – for a single person they go on at €32,800. My next move on tax is to address that. Now if I don’t have some resources what I can do is very small, but I am pledged to doing something, and if there is a lot of movement there then that is where I will have the emphasis in the Budget.
“But that’s not inconsistent with the correction we have to make, I am saying we will continue to make the correction along with tax cuts that are jobs friendly and growth friendly because our objective is to grow the economy and create more jobs.”
Fianna Fail’s Michael McGrath asked:
“If the numbers pan out as anticipated by the department in this document (the stability programme update) will there be scope for some reductions in income tax in the next Budget?”
“There will be some scope for income tax reductions if we make a correction in excess of €2bn”.
“So a case of giving on the one hand and taking on the other hand?”
“That’s not the best way of putting it – You take from areas that don’t hurt job creation and you give to areas which help to create jobs – but let’s travel in hope, we may have scope.”
The scope he spoke of comes in the possible form of a revenue outperformance.
The first quarter Exchequer returns showed revenues were about €250m ahead of where the Government expected them to be at that time.
Multiply that performance four times and Mr Noonan has an extra billion to play with for 2015.
Trouble is, it’s very difficult – indeed reckless – to base next year’s tax plans on three months of date data, which can (and often does) change for the worse as the year goes on.
And as officials from the Department of Finance have pointed out, under EU budget rules, any country that has not reached its Medium Term Objective (MTO) of a balanced budget has to compensate any tax cuts it makes with a corresponding tax rise or spending cut elsewhere.
As Ireland won’t reach its MTO until 2018, that appears to narrow the options for paying for tax relief around the entry point to the 41% income tax band.
Add to that the commitments in the Programme for Government not to increase tax rates or bands, and the room for manoeuvre narrows further.
The USC option becomes attractive because a) it is a great source or revenue as virtually no form of income escapes from it and b) it’s a charge, not a tax! So the political promise remains intact.
But still, finding a billion or so, even from USC, could be tricky.
Maybe the economy will outperform expectations, producing more jobs and more tax into the Exchequer.
This would ease the competition for resources between those who want to grant some tax relief and those who don’t want any more spending cuts. And stopping austerity would help economic growth.
But it is quite early in the year to make a definitive call on this.
Employers and the Revenue would like early guidance on this – they would have to change payroll and tax systems to be able to cope with any changes, so for them the earlier the better.
The call can’t be made soon, but the hints are pretty clear.
For the sake of completion, below are the full answers to Pearse Doherty and Eoghan Murphy:
Deputy Eoghan Murphy asked the Minister for Finance if he will provide figures on the expected loss to the Exchequer in income tax if the entry point to the marginal rate of tax is increased by €10,000; if he will provide figures on the way the potential increase in person’s disposable income as a result of such a change might be distributed within the economy for example the amount that might be returned to the Exchequer through indirect taxation, and at what amount; the anticipated impact on employment might be; the expected changes in the national deficit, and in the general Government debt position; and if he will provide these forecasts at every additional hypothetical increase of €10,000 in the entry point to the marginal rate until that entry point is €82,800.
Minister for Finance (Deputy Michael Noonan):
I assume that the Deputy refers to an extension of the standard rate income tax band, which would apply similarly to single and widowed persons, as well as to single person child carers. The proposed extension to the standard rate band is assumed to also apply to married couples and civil partnerships. On this basis, I am informed by the Revenue Commissioners that the full year cost to the Exchequer, estimated by reference to 2014 incomes, of increasing the standard rate tax band by €10,000, €20,000, €30,000, €40,000 and €50,000, while also maintaining the current monetary differences between the single persons standard rate band and the various other classes of tax bands, is as follows:
Increase of €10,000 = estimated cost of €1.3bn
Increase of €20,000 = estimated cost of €2bn
Increase of €30,000 = estimated cost of €2.5bn
Increase of €40,000 = estimated cost of €2.8bn
Increase of €50,000 = estimated cost of €3bn
These figures are estimates for 2014, using the latest actual data for the year 2011 adjusted as necessary for income and employment trends in the interim. They are provisional and may be revised. A married couple or civil partners who have elected or have been deemed to have elected for joint assessment are counted as one tax unit.
In assessing the potential impact on the economy of such a measure, research produced by the ESRI as part of the Medium-Term Review: 2013-2020 of July 2013 (p 117-118) in informative. Using the HERMES macroeconomic model, the ESRI tested the economic impact of an adjustment in income tax rates such that it would yield an additional €1 billion income tax in the first year of the adjustment, with the rate unchanged thereafter. The results of the research suggest an income tax multiplier of 0.4 that is, a €1 billion change in income tax effects GDP by about €400m million. Employment would be impacted by about 0.1 per cent in the first year and 0.5 per cent over the forecast horizon.
The relatively low multiplier likely reflects the open nature of Ireland’s economy and the fact that increased demand would ‘leak out’ through imports to a certain extent. The simulations also include the assumption that some part of a reduced tax burden would be saved rather than spend by households. The simulations suggest that the annual deficit would increase by 0.5 percentage points of GDP and general government debt by just over 2 per cent of GDP, over a six-year horizon.
Pearse Doherty asked the Minister for Finance the way he will lift the tax burden of lower and middle income families in such a way that the most vulnerable are given a break from the tax burden.
Minister for Finance (Michael Noonan):
The Deputy will be aware that I am on record for stating my belief that the income tax burden is currently too high in Ireland and that I believe it needs to be reduced. However, I have also said that although it is my intention to alleviate the burden, I can only do so when the public finances allow it. Lest it has escaped anybody’s attention, the general government debt at end 2013 is estimated to be just over €200 billion and each year where we incur an annual deficit, that figure grows. It is imperative that we at the very least are able to meet the interest costs on this debt if this is not to spiral ever upwards. Interest payments are the least productive area of government expenditure and what we currently spend on interest could be put to better use elsewhere.
Although we have successfully exited the EU/IMF bailout this does not mean that we will ever allow a return to past practices where expenditure grew to unsustainable levels while the tax base was simultaneously hollowed out.
The Government remains committed to returning the public finances to sustainability. Under the terms of the Stability and Growth Pact, until Ireland has reached its objective of a balanced budget in structural terms, we may not introduce discretionary revenue reductions unless they are matched by other revenue increases or expenditure reductions. This means that Government must consider carefully any tax changes as any reductions will have to be offset elsewhere.
Having said this, it should be acknowledged that Ireland has a progressive taxation system which ensures that the burden of taxation falls most heavily on those with a higher ability to pay. The latest data from the OECD’s 2013 Tax Wages Report shows that Ireland has one of the most progressive income tax systems in the developed world. It is in this context that the Government has committed in the Programme for Government not to increase the marginal rate of income tax.
The Programme for Government also contains a commitment not to change tax credits which at current levels ensure that an estimated 856,000 workers are excluded from the charge to income tax entirely. The low effective tax rates for low income workers ensures that work pays and is a growth friendly aspect of Ireland’s tax system. However against this Ireland has one of the highest top marginal tax rates in the OECD, whilst also having a very low entry point to the application of the top marginal rates. These aspects are less growth friendly due to their negative labour supply incentives.
Recent research from my Department has indicated that growth and employment prospects can be enhanced through a careful rebalancing of the tax system away from labour taxation towards greater use of capital and consumption taxes. Research by the OECD and the European Commission would also support such a rebalancing. These insights are useful given the fiscal constraints that I have already referred to.
As is normal practice for the Minister for Finance I have no intention of setting out planned changes to the tax system in advance of the Budget, which is almost eight months away. My officials constantly model and examine potential options for changes to the tax system for my consideration as part of the overall Budget package.