Ireland income tax: What would Sinn Féin’s policies mean for you?

After recently hosting a series of meetings with Sinn Féin party figures and investors in London, Davy Stockbrokers described the party as more “New Labour” under Tony Blair than left-wing Labour under Jeremy Corbyn.

The point was that the party’s policies were moving back to the middle ground, a reasonable analysis given what has been announced over the past few years. But Sinn Féin policies would still mean significant change – and there has been focus on a few key areas, among them income tax.

Sinn Féin’s Robin Hood tax policies make political sense to the extent that they help large numbers of people, while penalising the relatively small number of higher earners. And the detail of what we know so far is well worth looking at.

1. The giveaways: It costs a lot to give money back to lower and middle-income earners, due to the large number of people in these categories. It can also be technically tricky, as the income tax burden on lower earners in Ireland is already limited. For this reason, Sinn Féin has concentrated its proposed reliefs on the Universal Social Charge (USC), which – though the burden has been reduced in recent years – still kicks in at a lower earning levels than income tax.

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The party, in its alternative budget for this year, said it wants to eliminate the USC entirely on incomes up to around €12,000 (on which a charge of 0.5 per cent currently applies), cut the second rate from 2 to 1 per cent, and increase the level at which people enter the main 4 per cent USC rate. It also proposed a rise in tax credits which would deliver around €100 to an employee or self-employed person.

This would have delivered around €375 a year for those earning enough to fully benefit, which would be most people at work (note that the Government made some changes in its own budget to USC for this year, so this figure is a comparison with the regime applying in 2023). But while the gains in cash terms are not huge, the cost is significant enough at €766 million.

The phased removal of the main income tax credits is complicated and has received less attention, but it would be financially significant for those hit

2. The takeaways: Tax increases for those earning over €100,000 would raise more than €700 million for the exchequer under the Sinn Féin plan, paying for most of the concessions to lower earnings. But seeing as there are much fewer people in this earnings bracket, the increases have to be fairly hefty to raise this kind of money. These higher earners would of course benefit from the USC changes too, but these gains would be quickly offset by increases elsewhere.

In terms of Sinn Féin income tax policy, a lot of focus has gone on a proposed levy on higher earners. It is worth noting that the current proposal (a levy of 3 per cent on the portion of income over €140,000) is, even allowing for wage inflation in the meantime, a long way back from party policy as recently as 2017, which proposed a 7 per cent levy on earnings over €100,000.

However, there is another wing of its policy which would start to kick in at incomes over €100,000: the phased removal of the main income tax credits. Because this is complicated, it has received less attention but it would be financially significant for those hit, and for most higher earners it is much more relevant than the levy.

Most people at work, whether on PAYE or self-employed, qualify for two main income tax credits of €1,875 each. That’s a total of €3,750. Under the Sinn Féin plan, the benefit of these would gradually be phased out on incomes between €101,000 and €140,000.

The Coalition parties will accuse Sinn Féin of having a plan to hike taxes on better earners to the detriment of inward investment and growth

So, for every €1,000 that the single person earns over €100,000, the value of credits will fall by 2.5 per cent (the UK does a similar phasing out of credits on incomes between £100,000 and around £125,000). As part of its manifestom Sinn Féin will also presumably outline how the phasing-out of credits will work for jointly assessed married couples, who currently have some options on how credits are allocated in cases where both are earning.

Credits are basically cash amounts deducted from your tax bill. So, due to the credit phasing out, someone on €120,000 would be paying €1,875 more in tax each year, and someone on €140,000 would be paying €3,750 extra. Add in the 3 per cent surcharge on income over €140,000, and high earners on, say, €180,000 would be paying close to €5,000 extra annually due to these two measures. In net terms, taking in the cuts in USC rates, the additional income tax and USC would be about €4,650.

3. Other tax changes: There are other important tax measures proposed by the party, the impact of which would depend on individual circumstances. For example, it proposes to phase out the local property tax and its alternative budget included a 20 per cent cut in this payment in 2024. Elsewhere, its proposals again focus on helping lower earners and the “squeezed middle” via measures such as lower childcare costs and assisting renters, who are promised a tax credit equal to one month’s rent. Other revenue-raising measures are also aimed at higher earners, for example via a 3 point rise in the capital acquisitions tax rate, which applies to gifts and inheritances, to 36 per cent and a charge of €400 annually on second homes.

4. The economics of taxing the rich: There are a few ways to assess tax policy – fairness, simplicity, and efficiency. Sustainability is also important, and has formed a key debate in Ireland.

From the point of view of fairness, the argument comes down to a value judgment. It is generally accepted that in terms of income tax, the better off should pay more and this is the case in Ireland, with tax “units” (married couples who are jointed assessed, one income couples and single people) earning over €100,000 already paying nearly €2 out of every €3 in income tax and USC.

Ireland’s income tax system is progressive by international standards. In other words, compared to other systems it already hits higher-income people and favours lower earners. There is no “right” or “wrong” answer on the fairness issue – it is first and foremost a value judgment and a central issue in a country’s politics.

Another notable distributional aspect of the Sinn Féin plan is its decision to lower the tax burden further on lower earners. A rationale of the original introduction of USC was that even low earners would pay a little, thus ensuring a wider tax base, though successive governments, including the current one, have eaten away at this through budget changes. A recommendation of the Commission on Tax and Welfare was that this should not be further eroded, to stop the income tax base from narrowing even more.

Tax also affects people’s decisions too, and traditional economic theory is that taxes in areas such as labour are more costly than those on fixed assets like property. Increasing income tax on better-off people will affect their behaviour and could have an impact on mobile individuals, people’s decisions on how much to work and also inward investment. Sinn Féin is also proposing to increase employers’ PRSI on incomes over €100,000, so to absorb this and maintain the take-home pay of higher-earning employees would become more expensive.

It costs a lot to give money back to lower and middle-income earners, due to the large number of people in these categories

Largely for this reason, the Commission on Tax and Welfare recommended that increased tax on better-off people should be levied not through higher income taxes but via higher capital taxes – which catch wealth – and by a rise in the local property tax. This avoids the distorting impact of raising income tax further.

Sinn Féin has said it would hike capital taxes and set up a commission to look at the idea of a wealth tax, but previous Department of Finance work has decided that it is not likely to yield enough tax to justify the trouble, and the commission agreed. However, the party has said it would phase out the local property tax, despite the family home being the main source of wealth for Irish people.

5. The election debate. We can already see the shape of the general election debate appearing. The Coalition parties will accuse Sinn Féin of having a plan to hike taxes on better earners to the detriment of inward investment and growth. The main Opposition party will say that its proposals are fairer and offer a basis to help lower and middle earners who need it most. It will be interesting to see the costed plans from the different sides and where the Coalition parties say they might raise taxes, as well as offering relief.

And it remains to be seen to what extent all parties will take on board the advice from the Fiscal Council, the Commission on Tax and Welfare and pretty much every forecasting body, all of which have cautioned that in the years ahead taxes overall will have to rise, not fall, in order to pay for an ageing population and the costs of climate change. Soaring corporation tax has bailed out Irish politics from having to face up to this question, but starting to do so is likely to fall within the term of the next administration.