Indexing the entire personal tax system to ensure workers’ rising wages are not eroded by an additional tax burden could cost the exchequer over €1 billion a year.
That is according to a paper from the Department of Finance’s Tax Strategy Group (TSG), which outlines the possible cost of potential income tax changes ahead of Budget 2025.
The paper finds that if the income tax system, including both universal and non-universal tax credits, standard rate bands, USC bands and age exemption limits were to account for a 4.5% increase in wages, the first-year cost would be €1.015 billion.
This would rise to €1.17 billion in a full-year.
The Government has already stated that the entire value of tax cuts in October’s budget will amount to no more than €1.4 billion.
It has said that it intends to prioritise the indexation of credits and bands to ensure that the value of workers’ rising wages is not eroded by the need to pay additional tax on that income.
The TSG paper shows that increasing primary universal tax credits by 4.5% or €85 would cost €415m in the first year and €485m a year after that.
The cost of increasing the standard rate cut-off point by 4.5%, in line with wage growth, would be €410m in the first year and €465m in subsequent full years.
The paper also details how a one percentage point reduction in the 20% lower rate of income tax would cost €870m in the first year and €995m after that.
Reducing the higher 40% rate by a percentage point would cost €440m in the first year and €525m after that.
The Government has not given any indication, however, that it plans to cut the basic tax rates.
The paper also suggests that given the upward trend in macroeconomic factors such as numbers in employment and wage growth, total income tax receipts are expected to increase by 5.6% or €1.9 billion this year.
This means they are expected to account for just under 38% of the total exchequer tax receipts at €34.8 billion.
The largest component, income tax, is expected to yield €26.8 billion this year, while USC and the other smaller components will contribute €5.6 billion and €2.4 billion respectively.
The TSG says that overall, comparative international data show that Ireland has one of the most progressive tax and welfare systems across EU and OECD countries.
This is despite latest estimates for this year indicating that higher earners contribute almost one quarter of all income tax and USC receipts.
Data in the report shows the top 10% of earners here account for 63% of income tax and USC, while the top 20% contribute 79% of the total income tax and USC yield.
Those earning less than €69,000, which represents the bottom 80% of income earners, contribute 21% of total income tax and USC receipts.
“This raises the question, from an economic and fiscal perspective, as to whether this level of progressivity is appropriate or whether it places an excessive burden on other income earners,” the authors say.
“The risk is that high marginal tax rates may have adverse consequences inter alia for work incentives and competitiveness including the ability to attract inward investment linked to the availability of high-skilled workers,” they added.
The paper also shows that this year, 7% of all taxpayer units will be exempt from income tax and almost two thirds will pay the standard rate.
However, a significant portion of around one million of these taxpayers’ income tax liability will be fully covered by their tax credits.
29% of taxpayers will pay the higher rate of income tax, it says.
The report also details how more than 40% of all income tax and USC receipts generated in the State come from those working for the multinational sector, both Irish and foreign-owned.
Others, including public sector employees and the self-employed, account for around 40% of total receipts.
“A shock to one or more of the small number of high-income sectors could also represent a significant vulnerability for the public finances and one whose impact may not be gradual,” the paper says.
The TSG also says that abolishing or reducing the 3% surcharge on individuals whose non-PAYE income exceeds €100,000 a year would represent a further step in levelling the playing field between PAYE and self-employed income earners.
“In addition, it would also reduce the top marginal tax rate on self-employed income, which is currently 55% and may be considered high by international standards,” it says.
“The Commission on Taxation and Welfare (COTW) recommended that the USC surcharge on non-PAYE income above €100,000 does not comply with the principle of horizontal equity and the tax treatment for all income earners should be aligned,” it states.
“However, abolishing or reducing the USC surcharge on non-PAYE income would result in a reduction in tax yield that would need to be factored into the Budgetary arithmetic and/or replaced with an alternative revenue stream,” it concludes.
